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Common vs. Mandatory Convertible Preferred

This is an update on the valuation between Molycorp common stock and the Molycorp Mandatory Convertible Preferred (MCP-PA).

In the May 21st article it was suggested the Molycorp preferred was overvalued versus the common stock. The article contains some history of the mandatory convertible preferred and its conversion features.

The common stock showed a modest gain of 1.12% while the preferred stock showed a more noticeable decline of 6.80%. The common stock outperformed the preferred issue by 792 basis points. The preferred issue was not entitled to the dividend when the original article was published. A few days can make a big difference when it comes to the dividend.

Common Stock

  • $19.64 May 18, 2012
  • $19.86 June 01, 2012
  • 0.22 $Change
  • 1.12 % Change

Preferred (MCPpA)

  • $56.00 May 18, 2012
  • $52.19 June 01, 2012
  • (3.81) $ Change
  • (6.80) % Change

Current Yield June 1, 2012

  • None - Common
  • 10.54% - Preferred
  • $12.47 - Current Conversion Premium: (52.19 - (2*19.86))
  • $9.625 - Income from Preferred

Remaining Dividends on Preferred

Estimated

Record

Date

Estimated

Pay

Date

Div
08/15/201209/01/20121.375
11/15/201212/01/20121.375
02/15/201303/01/20131.375
05/15/201306/01/20131.375
08/15/201309/01/20131.375
11/15/201312/01/20131.375
02/15/201403/01/20141.375
Source data: SEC 424(b) filing

Value of Preferred at various Common Stock prices. Common @ $19.86 and Preferred @ $52.19.

Common Price101519.86253049.99
# shares per Pfd2.02.02.02.02.02.0
Pfd value in Common Stk20.0030.0039.7250.0060.0098.98
Income Pfd9.6259.6259.6259.6259.6259.625
Total Pfd Value29.62539.62549.34559.62569.625109.605

Common $ P/L

(9.86)(4.86)0005.1410.1430.13
Common % P/L(49.6)(24.5)0.025.951.1151.7
Pfd P/L $(22.57)(12.57)(2.85)7.4417.4457.42
Pfd P/L %(43.2)(24.1)(5.5)14.233.4110.0
AdvantagePfdPfdCommonCommonCommonCommon

Conclusion:

At current levels the Molycorp preferred issue appears to be slightly overvalued. It offers modestly better protection to the downside. Given current level of interest rates the discounting of cash flow does not make much of a difference in the valuation.

If you like Molycorp for the longer-term, then the mandatory convertible preferred (MCP-PA) might be the ticket. 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 10.54% at current levels.

The preferred issue would be more attractive at slightly lower prices should the common remain stable or if the common shares moved slightly higher.

Source for price data: Yahoo Finance.

Source: Molycorp Update: Common Vs. Preferred