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Executives

Jason Chesko - Director, IR

John Floren - President & CEO

Michael MacDonald - SVP, Global Operations

Ian Cameron - SVP, Corporate Development & CFO

Analysts

Jacob Bout - CIBC World Markets

Steve Hansen - Raymond James

Shawn Siddiqui - Scotiabank

Laurence Alexander - Jefferies

Robert Kwan - RBC Capital Markets

Hassan Ahmed - Alembic Global

Paul D'Amico - TD Securities

Ben Isaacson - Scotiabank

Winfried Fruehauf - W Fruehauf Consulting

Max Salk - PPM America

Peter Butler - Glen Hill Investment

Kunal Banerjee - Brigade Capital

Charles Neivert - Dahlman Rose

Methanex Corporation (MEOH) Q4 2012 Earnings Call January 31, 2013 12:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Fourth Quarter Results Conference Call. As a reminder, this call is being recorded on Thursday, January 31, 2013. I would now like to turn the conference call over to Mr. Jason Chesko, Director of Investor Relations. Please go ahead Mr. Chesko.

Jason Chesko

Good morning, ladies and gentlemen. Our 2012 fourth quarter report along with presentation slides summarizing the Q4 results can be accessed at our website, www.methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections which are included in the forward-looking information. Please refer to our latest MD&A to our 2011 annual report for more information.

For clarification any references to EBITDA, cash flow or income made in today's remarks reflect our 60% economic interest in the Egypt project. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and expenses, impairment charges related to our Chile assets and charges related to Louisiana project. We report our results in this way to make a better measure of underlying operating performance and we encourage analysts covering the company to report the results in this manner.

I would now like to turn the call over to Methanex’s President and CEO, Mr. John Floren, for his comments and a question-and-answer period.

John Floren

Thanks Jason and good morning everybody. As you have seen from our results, we delivered a very strong quarter with EBITDA up about 14% from a $104 million to $119 million. Few comments on the market, in 2012, demand grew in the industry; if we exclude the integrated MTO projects by about 3 million tons; with this kind of demand growth the industry would need two to three world scale plants per year just to keep even.

The current markets are relatively snug. We continue to see supply side issues with the operating rates at number of plants lower than expected. This has led to a higher price environment with the Atlantic Basin having a premium of around $60 over the Pacific Basin. By this time, usually when you see these kinds of basin imbalances, you expect the pricing to normalize; we haven't seen that yet. We don't expect to see that in the coming months.

Demand remained solid. I think you will know the Ningbo MTO project is in the process of starting up at full rates. It’s consuming about 5000 tons of methanol per day. There is another project later in the year in the Nanjing area which will consume about 1 million tons of methanol a year at full rates.

Fuel blending continues to grow. Its growing in China and outside China. Israel recently announced trials on methanol 15% blends in gasoline. In addition to gasoline blending, we are seeing methanol now being used in other energy applications. Stena announced recently they plan to convert 25 ships to run on methanol by 2018. So long-term, the industry outlook is very positive with solid demand growth in very limited supply over the coming years.

Just switching to our operations; our plants operated very well in the quarter. We had our highest level of production since 2007 and as you know, we're looking to increase our production capacity by 60% or 3 million tons over the next few years. We are making great progress on our Geismar relocation. This plant will service our North American customers with added production in North America. You noted that we recently signed a 10-year gas deal with Chesapeake underpinning this project. Right now, the project is on time and on budget and we plan to have the first shipment of equipment from Chile in the May-June period of this year.

We will make a decision on relocating a second Chile plant during the first half of this year. We are currently doing some work and spending some money to understand the capital cost. Currently, we believe it will be around $75 million to $100 million less than the first one, but we're doing some work to clarify that number.

You will note that in the December of last year, we had a bond financing and we increased our credit limit and we believe this moves along with our solid balance sheet and liquidity will allow us to move both plants from Chile to Geismar using our existing balance sheet and cash flow.

In New Zealand, we plan to be operating at a rate of around 2.2 million tons by the end of this year. Current operating rate is about 1.5 million tons. In order to get to 2 million tons, we plan to spend about a $130 million in capital and prior to making the investment in the Waitara Valley site we certainly would want to have another gas contract which we believe we are close to settling on and should have something to announce in the coming quarter. In addition, we have an opportunity to secure high CO2 gas in New Zealand and we believe we can add additional capacity in New Zealand by about 200,000 tons by mid-2014 by securing this high CO2 gas.

As you know in Chile, we are most likely going to have to idle our operation there in a few months due to a lock of gas. Remind you, this represents less than 5% of our current capacity. You have noticed in our results we took an impairment charge of $297 million related to the assets in Chile which leave us a carrying value of around $245 million. We are looking right now to put conditions in place to run the plant for an extended period of 12 to 18 months later this year and we will have more to announce on that in the coming months.

Trinidad is operated very well in the quarter. We still continue to see some gas restrictions in the country, but we don’t anticipate the restrictions in 2013 to be as bad as 2012. We have made the decision to go forward on the Medicine Hat debottleneck; we have made good progress on the project and the current plan is to have it up and running and by the end of Q3 2013. Our run rate Medicine Hat after this expansion will be around 580,000 tons per year. As well in Medicine Hat our cash cost will continue to go down during 2013 as we start using cheaper natural gas that we procured in Western Canada. Egypt, the guidance that we have given of 70% operating rates in 2013 is still okay, although we do expect to see some seasonal variability.

I will stop there and start to take some questions.

Question-and-Answer Session

Operator

Thank you. Questions will now be taken from the telephone lines. (Operator Instructions) The first question is from Jacob Bout with CIBC World Markets. Please go ahead.

Jacob Bout - CIBC World Markets

So some questions on the Chile gas supply, how long do you think capacity will be shut down? So I think you made the comments about March and then in the winters can be shut down, where is this gas coming from shorter term and then if we look little longer term, is the plan still to get gas from the non-conventional sources like shale based gas?

John Floren

Yeah, so the current plan Jacob is to bring the facility back up and running later this year; we are working with the upstream to put gas supply in place post the Chile winter, that’ll allow us to run for a period of 12 to 18 months. We have some work to do to get there; all of the gas that we would be using would be gas found in Chile, and all of the gas that we are getting today to run our plants in Chile has been found in the last years. There is a very active drilling program happening in Chile, I think is double the rig count in 2013 than 2012; over 50 wells are being drilled. So gas is being found; its mainly unconventional gas and so we are working on with the upstream to put these conditions in place to be able to take the gas later this year.

Jacob Bout - CIBC World Markets

Because at the Analyst Day in Medicine Hat, I think (inaudible) was talking about they needed gas close to $5 to make themselves (inaudible) on some of the non-conventional supply, is that still the thinking?

John Floren

But we have contracts in place with (inaudible) and others with pricing much lower than that. We are still working with the upstream to understand gas beyond those contracts what those pricing numbers would look like so I think it’s a little early to guess at those numbers.

Jacob Bout - CIBC World Markets

So I guess what I'm really trying to get at, when do we actually switch from the conventional to the non-conventional as far as gas supply?

John Floren

I think its going to be a blend but I would say most of the new gas is coming in would be unconventional.

Operator

The next question is from Steve Hansen with Raymond James. Please go ahead.

Steve Hansen - Raymond James

John, recognizing the sensitivities of the recent Chesapeake contract and the specificity of it all, I'm just trying to get a bit better sense or trying to narrow down the range of the cost that you expect that plant to have. I think in the past you suggested it could have a delivered cost basis somewhere around the $200 per ton range, can you nudge this one way or another off of that number to get a sense of how those economics might lie?

John Floren

Yeah, thanks for the question, I think its commercially sensitive Steve, so I'm not going to nudge you one way or the other. What I will say is that the contract is similar to other contracts at a wide range of methanol pricing. We are competitive. I think depending on what the price of methanol is we have a sharing formula in place. So the cash cost will fluctuate depending on the price of methanol but we think that contract is a real solid one and will underpin that asset for 10 years and the cost associated with it I think at most point of the cycle that we are thinking about now most recently we’ve seen in 2009 prices hit 200, that's the lowest we've seen in the long time. So we are confident we will be able to run that plant for 10 years based on this contract.

Steve Hansen - Raymond James

Okay, that's helpful and just one on the pricing environment of the dichotomy that you mentioned in between the Atlantic and Pacific basins, what's keeping that traditional arbitrage from retracing typically the traders would step in and push products across the water and then just as a follow-on to that as how do you see the Atlantic basin sort of trending throughout the year?

John Floren

I don't have the answer to that question. I think its an interesting phenomenon because when we've seen this happen in the past at $60 difference, most of the middle eastern suppliers that had flex in their system would prefer to get more money and sell into Europe or North America, mainly Europe I guess.

I guess that tells me that maybe they don't have as much flexibility in their system as they used to in years past. So I think maybe what's happening is there has been more contracted methanol and less spot methanol that's able to move between the basins but it’s a bit of a mystery to me as well Steve.

Going forward, I mean, we haven't seen any reaction at this point. Pricing has been remarkably stable on the spot market for the last 30 to 45 days in both the Atlantic and the Pacific basins. So we continue to see suppliers having production issues and that doesn't seem to be abating. So, there's nothing that I see currently that would impact that differential.

Operator

The next question is from Ben Isaacson with Scotiabank.

Shawn Siddiqui - Scotiabank

This is actually Shawn Siddiqui stepping in for Ben. I was hoping if you could provide a bit more insight into what's happening in Egypt in terms of the operating issues you are seeing I mean is it simply gas curtailments or is there something else as well?

John Floren

It’s mainly gas issues in Egypt and I think everybody is watching the news in the Egypt and it's pretty chaotic at this point. I was just there about 10 days ago and visited the plant, visited with the upstream and the Minister of Energy. The plant continues to operate extremely well. The best operating plant from a new build we’ve had, I think in history of the company.

We have outstanding work force there and we're consuming all the gas we get in operating and shipping product. We're a little bit outside the chaos that’s going on but certainly, we're keeping a close eye on how the country unfolds and continue to make methanol and sell methanol.

Shawn Siddiqui - Scotiabank

Thank you. As a follow-up, is there sort of a minimum threshold that you need to reach in terms of operating a plant, for example, 10% utilization or is it really just a matter on economics?

John Floren

I am going to ask Michael MacDonald. He runs our Global Operations to answer that.

Michael MacDonald

Shawn that design of the plant is typically around for the two-thirds minimum operating right. We've obviously demonstrated where I worked to find novel ways of operating low rates within that in Chile but I think the important thing is we’ve got a solid operation there we are consuming all available gas. And I think John was exactly right in his comments that this is the gas supply and demand balance driven issue. There is nothing else in terms of (inaudible) business there in Egypt.

Operator

Thank you. The next question is from Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander - Jefferies

Two quick questions. One, are you seeing any regions where there are signs of demand destruction in response to the recent price increases or do you think that pricing continue to trend higher for the balance of the year?

John Floren

We haven't seen any demand destruction yet. I would say the area to watch the DME industry in China. Most of the DME that’s being consumed in China is a trading at the [factor] of LPG prices. So depending on what you think LPG prices will do? You should watch that DME space. There is still room for pricing to increase in China and keep that DME demand alive based on current LPG prices but that would be the area I would be focused on.

Laurence Alexander - Jefferies

And then in terms of moving the facilities, do you have any latitude to accelerate the pace at which you moved the facilities up from Chile?

John Floren

Well, we are on time for the first one I mentioned so the second half of 2014. I also mentioned, we are doing some work today to look at the cost removing a second one, the plan would be if we decide to move the second one to keep the exact teams in place so they are doing the first one, so it would be somewhat accelerated from the first one because we have learned a lot about cutting a plant top and moving a plant and the plant that we are thinking of doing for the second one is fairly close replica of the first one, keeping the same teams in place. If we make the decision, we would pan to have that one operating by Q1 of 2016.

Laurence Alexander - Jefferies

And just to clarify what you mentioned on some incremental savings if you did it that way, are you already locking in the contract costs for the teams or because we are hearing other companies like cost escalation as a concern in the middle of the decade?

John Floren

No, we haven’t locked in contracting cost for the second one. We haven’t made the decision to move it. So it’s a little premature. The savings that we are looking at is by the learnings that we have done by cutting one up as well as a lot of one-time costs like buying land and some of the facilities don't have to be replicated. In addition, all the people that we hire get charge the project, so it’s about a 130 people total by the time we start up the first one. We do a second one its 30 people, so it’s a lot of one-time cost but we did reconciliation inside the house. We think there is about $75 million to $100 million in savings which we are looking to confirm.

Operator

Thank you. The next question is from Robert Kwan with RBC Capital Markets. Please go ahead.

Robert Kwan - RBC Capital Markets

John, can you just come back and build upon on relocation, everything is going as planned on the first unit. You’ve got the gas contract, economies of scale and looks like cost, pretty good amount lower than the initial relocation. So what are you looking for to see kind of these markers in terms of the second relocation or what additional evaluation really is needed given you got a pretty good cost buffer in place right now with initial estimates?

John Floren

At this time we don't have to make the decision today. So why make a decision you don't have to make, but we are fully focused on doing a good job on the first one and we will make the decision on the second one as we think the team that is working on the first one will start to roll up. So there is nothing really that I can foresee that would not make as positive about moving a second one but the world has a way of changing very quickly. So, we don't have to make the call, why make the call.

Robert Kwan - RBC Capital Markets

Okay, so there is no kind of critical past items, you talked about the world changing, is there anything like what types of things would you be kind of concerned about that might pop up?

John Floren

Well, the banking crisis, I wasn't expecting that, who knows down in Trinidad where there analyst, I think it was August of 2008.

Robert Kwan - RBC Capital Markets

Okay, so you are looking at tail event type stuff, is that fair?

John Floren

That's right, yeah.

Robert Kwan - RBC Capital Markets

And then I just follow-up on, I know you don't want to talk too much about the Chesapeake contract, but can you just talk about the internal way of thinking as you are approaching going into that contract with respect to was there a trade-off of maybe taking a slightly higher kind of gas costs when you think about what the risk mitigation but especially the ability to use the second stranded asset and realize a lot of these economies of scale, and factor into the thought process.

John Floren

Sure, a lot of things factored into the thought process. I think we are looking to hire mention a 130 people and we certainly want to attract the very best talent to that organization and having a 10 year gas contract as opposed to spot gas certainly gives us certainty to our new employee saying we've got a life here for at least 10 years so don't be afraid to join us that we might not be operating, that was a big factor. Second of all, like I mentioned we are hiring a 130 people and there's a first time we've done this. So derisking a plant was part of the strategy so as we look to move a second one and we were very uncomfortable having 2 million tons there exposed to spot gas and in medicine (inaudible) we are running at about 0.5 million tons today on some sort of let's say two to three year strip gas. So it’s a lot of methanol to be exposed to spot markets that we don't expect to be back to where they were at $10 and $11 some years ago but certainly it gives us a lot more comfort to move a second plant now that we have the first plant underpinned by contract.

Operator

The next question is from Hassan Ahmed from Alembic Global.

Hassan Ahmed - Alembic Global

I just wanted to touch on a few different production basins. I mean first and foremost I think you already just said this but barring “a tail event” I mean it seems that the second relocation seems to almost be a done deal, is that fair to assume that.

John Floren

Well we haven't made the decision, we don't need to make the decision today. If you ask me if I had to make that decision today yeah we would go forward with it. But I don't have to so you should to interpret that that's a done deal.

Hassan Ahmed - Alembic Global

Fair enough. Now on the Egyptian side of things, again gas curtailments and the like, but is there any push back that you hear of in terms of the contract itself.

John Floren

The contract at this time is being honored and it continued to deliver gas. I think the issue on the gas is more of a demand issue, demand for electricity has gone up by about 22% in the last year. A lot of reasons for that; the country is going through a big change since the revolution and there's a number of issues with the demand side and the upstream side. We think there are their short term issues, there's are 75 to 80 TCF of gas in Egypt as reserves. I met with all the upstream when I was there 10 days ago. There's lots of gas in the western desert. I think not much has been done in the last couple of years for obvious reasons, so I think the issues in Egypt are short term and we are going to have a really great long term project.

Hassan Ahmed - Alembic Global

And finally if I may on Trinidad, some sort of ups and downs in terms of some gas curtailments and the like, but do you near to medium term foresee some hiccups like that continuing or that's an on issue.

John Floren

Like I said in my opening remarks I think 2013 will experience some curtailments. We don't expect them to be as bad as 2012. Beyond 2013 based on everything we know we expect to be back to a more normal situation. The future is a little hard to predict. I would say in Trinidad the situation with the Shale gas in the US has certainly change the dynamics in the market as well. So we're pretty positive long-term gas availability in Trinidad is going to be positive for us to run our plants for a long time.

Operator

(Operator Instructions). The next question is from Paul D'Amico with TD Securities. Please go ahead.

Paul D'Amico - TD Securities

Hi, John. Sorry to make you repeat yourself a bit, I just wanted to go back a bit. So on Trinidad, if I could, could you quantify from one to one, like in terms of saying, okay, yes there was some challenges on the feedstock for 2012, improving in 2013. Are we talking a very nominal improvement? Is there anyway you can give us some framework on that?

John Floren

I wish I could but I can’t. You know, just to have 30 days under our belt here and we're talking to be upstream in to the government about what we should expect this year. So I can’t really give you specific guidance on percentages.

Paul D'Amico - TD Securities

Okay, how about this? In terms of what the 30 days we’re talking about so far, that is better than say the last 90?

John Floren

It's really just too short of time to give you that much specific guidance. I think our expectation is we will run at higher rates in 2013 and 2012 and I will remind you we had two large outages with our big Atlas plant in 2012, for technical and turnaround reasons. So if you exclude those, we still expect to run at higher rates based on gas availability.

Paul D'Amico - TD Securities

Yeah, I know, I was asking this (inaudible). Only, you mentioned in the earlier remarks, in terms of the high CO2 gas and talking about that increment to 200,000 tons by mid-2014, am I extrapolating too much. You sounded pretty confident on that. Is there any color you can give us with respect to confidence to get that?

John Floren

Yeah, I think we're pretty confident but the gas is there the high CO2 gas is there in the country and it’s certainly got value to us and it’s just a commercial discussion with a couple of potential suppliers. So we are optimistic, we are going to get that high CO2 gas which gets us back to that 2.4 million tons as a sight, but I don’t want to promise something that hasn’t been done.

Paul D'Amico - TD Securities

Okay, and just one last one on the relocation of the potential second plant. I know its been beaten to death, but I am just curious I know you said you don’t have to make the decision but I am just curious what sort of things would need to be shown at this point. Is it a question of showing more progress with respect to the first move or is it something with respect to the infrastructure that you want to see, is there anything in particular or is it just that like you said it’s just not something you need to look at right now.

John Floren

Again, we don’t have to make the decision until people are starting to roll off the first relocation which is not today and not in the next few months. What we are looking at it’s the first time we have done a relocation, we have done it before. We are learning a lot as we do it I mentioned the first ship of the big pieces is being cut into 30 big pieces roll even in the May, June period so we are going to learn a lot between now and then. So it’s just a matter of why make a decision that you don’t have to at this time.

Operator

The next question is from Steve Hansen with Raymond James. Please go ahead.

Steve Hansen - Raymond James

Yeah John I just wanted to circle back on the concept of sort of smaller opportunistic debottleneck type projects I think it was a year and half ago you guys laid out a whole raft of them and you’ve been able to quickly execute on pretty much all of them here at least through into next year, but if you look beyond and that time frame beyond the CO2 [flood] I guess to be the last one, what else is out there from a debottleneck or small incremental improvement capacity growth type opportunity as opposed to the large scale Chile or relocation?

John Floren

I think we are pretty well reaching the limit on those kinds of small projects. We do still have two plants in Chile and depending on what our view on the gas market is there, I think we always going to have production capacity in Chile. Our current view is the two plant operation, but if that changes at some point in the future, we do have the ability to relocate another plant if that's what we decide, but I think we want to get really comfortable with relocating one and then maybe a second one. So I’d say beyond either more production in Chile or relocating, you are looking at a new built for any really additional capacity.

Steve Hansen - Raymond James

Okay, fair enough, and then just back to the broader (inaudible) market if I could for a moment. The growth in demand on this MGO side, the MGP side is quite intriguing and could be potentially disruptive, but do you get a sense for these two plants that you spoke to in your initial remarks whether or not they’ve contracted the methanol that they are going to meet and the timeframe over which they are going to scale up?

John Floren

Yeah, I think the first one we know a little bit better, they put in place contracts for methanol, they have been buying methanol both contracted and spot. I think their plan is to have a combination of local methanol and imported methanol. They are using 5000 tons a day, that's a lot barges and rail cars, so I think they would like to have some imported in large quantities and security supply is the big issue for them as well.

The second one is the company called (inaudible) which does produce methanol today, I think they produce around 300,000 tons per year, so they have some of their own supply and that will be taken away from the merchant market where today they sell that product to other people and they will then look to contract for the balance of 700,000 tons of full rates.

Steve Hansen - Raymond James

I see, okay, that's right. And just on that same line of thought, are you seeing the plants, I mean there has been a dozen or two dozen of these plants that have been proposed and talked about at all different stages, but are you seeing any acceleration or deceleration in sort of the growth of those plants on [M-to-M] side?

John Floren

It’s a little bit hard to predict, but of these two that are right in front of us are happening. Like you mentioned, there has been a lot of announcements both integrated and other merchant plants like any other places in the world, not everything gets built, so we are watching it closely and really focused on things that are happening as opposed to announcements.

Steve Hansen - Raymond James

And then the last one if I may on the supply side as there has been similar to talk about the US, Gulf as an opportunity for new methanol plants and new builds; but getting a sense for weather anyone is actually close to striking out with the new greenfield?

John Floren

Well, a lot of announcements there as well, when we look at the economics based on what's available to contract gas at, the forecasted methanol price and the capital which we are assuming is around $800 to $900 for new build, you know the economics don't work very well. So I am sure we are not, we don't have exclusivity around that type of analysis, so I'm sure others are seeing the same thing. So that tells me that in order for these things to work the methanol prices are going to have to be a lot higher in the future than it has been in the past, but time will tell.

I think we are in a very unique position to be able to relocate and debottleneck sites for very modest capital versus new build in a very compressed time, so within three years adding 3 million tons of capacity, increasing our capacity by 60% in a time where the industry really needs the new supply because of the rapid growth of specialty on the energy applications, these windows don't open that often and we are doing all we can to walk through it as quickly as we can.

Operator

Thank you. The next question is from Ben Isaacson with Scotiabank. Please go ahead.

Ben Isaacson - Scotiabank

I just wanted to go back to your comments about Chile a few minutes ago; I realized its somewhat premature given where you are with the second relocation, but if you were to move a third plant outside of Chile could either of the Geismar or Medicine Hat location support that kind of a move?

John Floren

Again, we are getting way ahead of ourselves here. Our plan is to focus on a two plant operation in Chile if that plan doesn't come to fruition then we have some options. I think when you are relocating plants like I mentioned there in 30 big pieces, so you don't want to be moving those across vast areas of land, so a site that has water where you can unload these big pieces off shift right on to the site makes the most sense from a risk and cost point of view. So if we were to relocate another plant from Chile, it would be somewhere where you could do it by just loading off of ship.

Operator

Thank you. The next question is from Winfried Fruehauf with W Fruehauf Consulting. Please go ahead.

Winfried Fruehauf - W Fruehauf Consulting

Regarding everything Chesapeake contract, is the initial price related to Henry Hub or is it a negotiated price?

John Floren

The contract is very similar to our other contracts where there is a price and then a sharing mechanism with the supplier depending on the methanol price. So it depends on what the methanol price is at the time we’ll determine the price that we pay for gas.

Winfried Fruehauf - W Fruehauf Consulting

And how often would the gas price be adjusted; would it be monthly or annually or…?

John Floren

I think that's commercially sensitive; I am not really prepared to disclose that.

Winfried Fruehauf - W Fruehauf Consulting

Okay. And last part of my question is, if Chesapeake is for some reason unable to supply the contractual quantity of gas, is it required to find a replacement gas?

John Floren

Again, that’s pretty commercially sensitive type of information. What I will say is Chesapeake is the second largest supplier of gas in North America. They have numerous reserves to supply this contract with and this contract is less than 5% of their overall gas supply obligations. So, we're very satisfied that Chesapeake would be able to fulfill its requirements under this contract from a supply point of view.

Operator

Thank you. The next question is from Max Salk with PPM America. Please go ahead.

Max Salk - PPM America

With regards to the possibility of a second or I guess third that’s brought up, which seems a little far on line but the second move, we're talking about financing. Obviously, you guys have talked about keeping pretty conservative balance sheet. So when would you expect CapEx for that, hypothetically to ramp up and would you go back to (inaudible) markets or would you (inaudible) got balance sheet from operations?

John Floren

Yeah, why I don’t ask Ian Cameron to answer that question, our CFO.

Ian Cameron

Thanks for the question. As you know, we went through a financing round in December where we raised $350 million bond and we also extended our bank facility and increased the size of that bank facility and that was all to set us up to make sure that we can, as John jumped through the window of this opportunity that we have in front of us. So we believe that the combination of cash on our balance sheet, cash from our operations and back up liquidity that we have the financial capability to execute New Zealand expansions and also the relocations projects.

Max Salk - PPM America

Right, is that part of a second relocation?

Ian Cameron

That would apply to the second one as well.

Operator

Thank you. The next question is from Peter Butler with Glen Hill Investment. Please go ahead.

Peter Butler - Glen Hill Investment

During your presentation there wasn’t any mention about future earnings and so far the analyst in the Q&A session haven’t brought up the subject and normally earnings are about the most important investment consideration, so can I volunteer to ask how the year is looking?

John Floren

Absolutely, the year is looking quite positive I mean, in the current pricing environment and we continue to produce at the current rate it's going to be a fantastic year.

Peter Butler - Glen Hill Investment

That sounds good and do you have plans to distribute any of the cash to owners?

John Floren

Yeah I think you will see us in our slide deck that we put out with our MD&A. There is a slide at the back that shows the cash generation ability of the company as we execute these projects. So our current focus is to do a good job and execute on these projects in front of us to get us another 2 million to 3 million tonnes of produced molecules if you get to 7 million to 8 million tonnes of produced molecules at current pricing you are well north of $1 billion in EBITDA generation per year.

Our sustaining capital we think at that type of environment was around $100 million tax and interest. We should have free cash of around $700 million to distribute. I would say if our stock price continues to trade a large discount through replacement cost of the industry, why build more new capacity with that money, you might as well buyback your own capacity through share buyback.

So our plan would be to retain our balanced approach to grow the company, have a sustainable growing dividend and return excess cash to shareholders. And we look at that as we execute and deliver on these projects.

Peter Butler - Glen Hill Investment

You folks have had a valuation model for your stock for many years going all way back to [peer] I think and how does that look to you now? How much of a discount are you selling there?

John Floren

I think, there is a lot of ways to value companies and we certainly have our ways and the street has their ways. I look at the chemical industry, companies’ trade typically between five and six times EBITDA. So for trading we are generating $1 billion and you put a five to six multiple on that and we got 95 million shares outstanding, it’s a quite a bit higher than where we at today.

Operator

Thank you. The next question is from Kunal Banerjee with Brigade Capital. Please go ahead.

Kunal Banerjee - Brigade Capital

Yeah, I just had a general broader industry question, and actually one that is relevant to you because you are moving out of Chile potentially up to US Gulf Coast. So I was just wondering what the cost of surveys out of Chile and out of the US Gulf Coast specifically into the Pacific basin? And as a corollary to that with all the capacity that is coming up in the US Gulf Coast, could you see that arbitrage essentially be eliminated overtime and maybe even flip to the point where you see higher Pacific basin price?

John Floren

I'm not really good at predicting the future but I'll give you a little color what could happen. When we relocate plants to the US that product is not going to go anywhere, its going to stay in the US. The US market’s about 6 million tons if you include the Canada and even adding a couple of million tons of relocated you are still going to have an import market in the US. Now overtime if you get to a situation where there's a lot of new builds in the US where the supply outstrips the demand and that product will have to go somewhere else. And obviously most of the growth today is coming in Asia, but again the future’s hard to predict. There's a lot of energy applications that are starting to emerge in the Atlantic basin.

So if for whatever reason the demand in the Atlantic doesn't keep up with the supply, then this is a commodity industry that works on cost curves and freight is part of that cost curve so the market will always be balanced, it will just be a matter of what price you need to have the supply-demand intersect and there’s a ton of assumptions you have to make around that in a few years from now to see where that price and what the relative freight is. So we watch is very closely. We have a good view I would say 12 to 18 months out, beyond that there's just too many variables that change.

Kunal Banerjee - Brigade Capital

So I guess I mean Geismar would be captive or domestic, but Trinidad that would be displaced right so that would have to find - I mean Trinidad in general not just your capacity, but in general would have to ship its products somewhere else. My question was really regarding the net back seem to be higher in the Atlantic basin relative to the Pacific basin so there's obviously a product mix issue that might come into play because if you do see the net backs come off in the Atlantic basin that might be an issue. But anyway I just wanted to know what your thoughts were around that. Thank you.

Operator

The next question is from Charles Neivert with Dahlman Rose.

Charles Neivert - Dahlman Rose

Just a quick question, when you used to move up or I guess you still do a little bit of product coming out of Chile, did it come through the Panama canal when it did or did it come around from the other direction, and then subsequent to that question how big a ship are we talking about moving through there and this is sort of playing on what canal theirs is. The Panama canal is expected to widen in I think about 2015, so is it possible that any Trinidad stuff if that Asia Pacific hit up you would be able to move large enough ships to make it pretty reasonable move Trinidad into the Pacific basin or are they already big enough, is it already big enough to handle that move if that was the way it went.

John Floren

The canal is big enough to handle the moves that we would plan on doing today or in the future. Our preferred size ship today is 45000 ton vessel. We have moved 45000 ton vessels from Trinidad to Asia in the past and I would expect to continue to do so in the future and when we do go from Trinidad to Asia it is through the Panama Canal.

Charles Neivert - Dahlman Rose

So the widening wouldn't make any difference in terms of amount moved, potentially amount moved or size or some of the cost structure that might as you move it there at least as you imagine it now.

John Floren

I think that's accurate.

Operator

The last question is from (inaudible). Please go ahead.

Unidentified Analyst

I just wanted to have what impact would the low level of the Mississippi have on your relocation right now or you don’t think any.

John Floren

Well, the reason we're moving the plants in the May to August time period is the unpredictability of the levels in the Mississippi. Usually, it's the high water level as oppose to a low water level and then you got the hurricane season that starts up in August. So, it's again difficult to predict the weather or the future, but I think we're comfortable we would be able to move that plant on to the site this summer.

Unidentified Analyst

Okay, let me just ask like a contrary question. What can happen for you not to move the second plant from Chile?

John Floren

What can happen?

Unidentified Analyst

Yeah.

John Floren

Again it's difficult to predict the future. But we have to see some sort of major events like we saw in 2008, where at that time credit markets froze and demand for traditional chemical derivatives dropped by 30% overnight and nobody really knew day to day what was going to happen in the near-term. So I think companies at that point in time took a fairly conservative approach to projects and cash. So I think it would have to be some major event that I can’t even imagine at this particular point, but these black swans have a way of coming forward that when you are not expecting them. Does that answer your question?

Unidentified Analyst

Do you believe you have enough capital to do everything? All the capital spend will meet now?

John Floren

As Ian mentioned in his remarks, yes, the current balance sheet, the liquidity as well as the current earnings will allow us to complete all of the projects that we’ve talked about to get to that 8 million tons of productive capacity by early 2016.

Unidentified Analyst

Okay. But you are not disclosing the cost of the second move yet.

John Floren

What we have said is we are doing work at this time to confirm the cost. We are spending some money and our current estimate is 75 to 100 million less than the first one.

Okay, well thanks everybody for the interest. So a few remarks about Q1. We expect Q1 earnings to be higher than Q4 and it’s really as a result of higher sales of produced molecules and a higher realized price. So as Peter mentioned in his comments, we are in a really good spot in the market high price environment of production continues to perform really well and setting up for a really good 2013. So thanks for the interest in the company and look forward to talking to you next quarter.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time thank you for your participation.

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