In reference to our recent addition of Molycorp 5.50% Series A Mandatory Convertible Preferred Stock (MCP-A), we offer the following review, based on research provided by Steve Percoco of Lark Research.

Last week, MCP-A shares traded at $73.18, down significantly as a result of the market selloff in the negative article in the Wall Street Journal about rare earths. the shares then rebounded considerably in the market rally at the beginning of the current week. After trending lower this morning, shares are presently trading at $75.50.

With a $5.50 annual dividend, the effective yield is 7.50%. The dividend is only good until March 1, 2014, at which time the preferred converts into common stock. The formula for conversion is variable. If the common stock is trading at $50 or below, you get two shares. If it is trading at $60 or above, you get 1.667 shares. If the price is somewhere in between, you get 100/current price. ( so, if the stock is at $55, you get 100/55 = 1.82 shares).

With the preferred currently trading at $75.50, the effective conversion price is $37.75 (ie $75.50 divided by two). The common stock is trading at$36.70, so the conversion price represents a $1.15 premium. Times two, this is equal to $2.30. There are 10 dividend payments left on the preferred totaling $13.75, so the dividends more than cover the $2.30 premium. Thus, we think that the preferred is a better deal. One caveat: you will do better owning the two shares of common stock out right ( rather than one share of preferred), if you believe that it will eventually trade above $56.88 per share. That is effectively the breakeven point, calculated by taking the $100 par value of the preferred plus the $13.75 in dividend payments divided by two.