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Molycorp (MCP): Common vs. Mandatory Convertible Preferred

If you like Molycorp for the longer-term, then the mandatory convertible preferred (MCP-PA) might be of interest. The common stock does not currently pay a dividend, thus investors have no cash-flow. The mandatory convertible preferred pays $5.50 a year, or roughly 9.8% at current levels.

History of the mandatory convertible preferred:

  • On February 16, 2011 1.8 million shares of the mandatory convertible preferred stock was issued at $100.00 per share.
  • Each convertible preferred will automatically convert on March 1, 2014 into between 1.6667 and 2.0000 shares.
  • Preferred dividends are cumulative.
  • The dividend rate is 5.50% on $100.00 or $5.50 per share.
  • The company may declare and pay dividends in cash, common stock or a combination of stock and cash.
  • The convertible preferred stock is not redeemable.

Conversion feature:

  • If the common stock price is greater than $60.00 then converts into 1.6667 shares.
  • If the common stock price is less than $50.00 then converts into 2.000 shares.
  • If the common stock price is equal to or less than $60.00, but greater than or equal to $50.00, then it converts into between 1.6667 and 2.0000 shares.

Source: Sec filing

Current Prices: May 18, 2012

  • $19.64 Common
  • $56.00 Preferred (MCPpA)

Current Yield:

  • None - Common
  • 9.8% - Preferred
  • $16.72 - Current Conversion Premium: (56.00 - (2*19.64))
  • $11.00 - Income from Preferred 2012, 2013 and 2014

Remaining dividends to be paid on 1st of month:

  • June, Sept, Dec 2012
  • Mar, June Sept, Dec 2013
  • Mar 2014

Value of Preferred at various Common Stock prices

Common Price

$10.00

$15.00

$20.00

$25.00

$30.00

$49.99

$60.00

# of shares Pfd

2.0

2.0

2.0

2.0

2.0

2.0

1.6667

Preferred Value

$20.00

$30.00

$40.00

$50

$60

$99.98

$100.00

Income Pfd

$11.00

$11.00

$11.00

$11.00

$11.00

$11.00

$11.00

Total value Pfd

$31.00

$41.00

$51.00

$61.00

$71.00

$110.98

$111.00

Return Common

-9.64

(49.1%)

-4.64

(23.6%)

0.36

1.8%

5.36

27.3%

10.36

52.7%

30.35

154.5%

40.36

205.5%

Return Pfd

-25.00

(-44.6%)

-15.00

(26.8%)

(5.00)

(8.9%)

5.00

8.9%

15.00

26.8%

54.98

98.2%

55.00

98.2%

Conclusion:

The MolyCorp preferred offers an attractive current yield. However, it appears to be overvalued relative to the common stock at current levels. Should the preferred stock price move lower and or the common stock price move higher then it might become more attractive.

The risk-reward does not favor the preferred issue at this time.

Source: MolyCorp: Mandatory Convertible Preferred Looks Overvalued