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Synthesis Energy Systems Inc. (NASDAQ:SYMX)

F4Q09 Earnings Call

September 15, 2009 8:00 am ET

Executives

Ann Tanabe - Vice President Investor Relations

Robert Rigdon - President and CEO

Kevin Kelly - Chief Accounting Officer

John Bunnell - President of Asia Pacific

Analysts

Burt Chao - Simmons & Company

Bill Burns - Johnson Rice

Silke Kueck – JP Morgan

Operator

(Operator Instructions) Welcome to the Synthesis Energy Systems Year End Results Conference Call. At this time and I would now like to turn the conference over to Ms. Ann Tanabe for opening remarks.

Ann Tanabe

My name is Ann Tanabe and I'm the Vice President of Investor Relations for SES. Today we will discuss results for the quarter and year ended June 30, 2009, and will provide an update on corporate development.

Following our prepared remarks, we will open the line for a brief question and answer session. Joining me on the call this morning is Mr. Robert Rigdon, our President and CEO, Mr. Kevin Kelly, our Chief Accounting Officer and Mr. John Bunnell, our President of Asia Pacific.

Before we begin, I would like to remind you that during this call, we will be making forward looking statements within the meaning of section 27-A of the Securities Act and Section 21-E of the Exchange Act. All statements other than statements of historical facts are forward looking statements. Forward looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those projected.

Although we believe that in making such forward looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements are based will prove to have been correct. Please refer to our 10-K to be filed for the year ended June 30, 2009, for further discussion on risk factors. A copy of our filings can be found on the Securities and Exchange Commission website at www.sec.gov, or on our website at www.SynthesisEnergy.com.

I would now like to turn the call over to Mr. Robert Rigdon, President and CEO of Synthesis Energy Systems.

Robert Rigdon

Today we are hosing this call from two locations; our China office in Shanghai where Don Bunnell and I are currently located, and our Houston office where Kevin Kelly and Ann are located. I’m hopeful that we can avoid any technical difficulties and that you can hear us all clearly. Moving on to the update.

We’ve made a good deal of progress during the last quarter as well as the past fiscal year both of which ended on June 30th. We have completed several important milestones related to our first operating project Hai Hua and the Yima project. If you have followed our recent press releases you should know that the Yima project is now in the implementation stage and will be our next operating U-GAS plant.

Yima is a knowledgeable gasification owner and operator who today owns a large [lergi] as well as a Shell gasification facility. Yima’s selection of our technology is an important validation of not only our technology but of the business model to implement U-GAS where we can process lower cost coals and be a lost cost producer of syngas products.

At Hai Hua we have seen real and solid performance from our U-GAS technology and this trend has been continuing to date. The plant is operating well as we speak and is selling compliance syngas and oxygen to Hai Hua. There’s been a great deal of interest in the technology, particularly recently, and we have been able to host several potential future project partners through the facility.

Also the local government has brought some of the local industries in to visit us in order to show our clerical operation and the government is strongly encouraging us to expand. We’ll have more to say about all of this in just a few minutes but first I would like to ask Kevin to give us a brief overview of our fourth quarter and fiscal 2009 year end financial results.

Kevin Kelly

For the quarter ended June 30, 2009, we reported revenue of $1.2 million from product sales at the Hai Hua plant which is an increase of $1.1 million from the prior quarter. The plant operated from early May till late July when our customer Hai Hua shut down for scheduled maintenance.

Cost of sales and plant operating expenses were $2.2 million for the quarter an increase of $1.3 million form the prior quarter and reflect the ramp up of the plant during May. Although the plant has incurred losses during fiscal 2009 the cost per unit of syngas produced has decreased significantly and we expect further improvements.

General and administrative expenses were $3.2 million for the quarter which is a reduction of approximately 30% compared to the G&A levels during the first half fiscal 2009 and a reduction of 16% or about $0.6 million compared to the prior quarter.

Project and technical development expenses were $1.4 million for the quarter and included an impairment loss on a $1.25 million royalty to Exxon Mobil under our license rights agreement that was paid during our second quarter. This Exxon Mobil license for methanol to gasoline or MTG remains current and does not expire for nine more years. The impairment stemmed from the slowdown of project development in the US. Although we consider this cost impaired we do see future potential in this multi-project license for MTG and will be seeking opportunities to commercialize projects based on combining U-GAS and Exxon Mobil’s technology.

Our operating loss for the quarter excluding the impairment loss and non-cash expenses was $4.4 million compared to an operating loss of $4.7 million from the prior quarter. At June 30 we had cash and cash equivalents of $90.4 million and working capital of $82.1 million. We subsequently invested $29.3 million of our cash into the Yima project in August 2009.

Overall we have reduced our cash outflows during 2009 by reducing G&A and project and technical development expenses and we expect further improvement in the cash flows at the Hai Hua plant.

Robert Rigdon

During fiscal 2009 we focused heavily on becoming a more operationally capable company. This was in large part driven by our desire for achieving operating success at Hai Hua but also to have the capability to follow through with our plans to grow and implement multiple projects. Over the year we expanded our management team with people who have broad industry background and company operations experience.

This included Frances Laue, our Chief Technology Officer who spent most of his career at GTI developing the U-GAS technology. Our most recent addition Foon Lee Leow, who was the leader of Shell gasification business in China during Shell’s big gasification growth years, Kevin Kelly our Chief Accounting Officer and Controller who has over 20 years of financial, accounting and reporting experience for publicly held companies, and myself with an operations and project background from Texaco and GE gasification technology.

Together with Don Bunnell, one of our founders and an experienced project developer in China, we have built real organizational capability at the executive level. In addition, we’ve expanded our team in China with several Chinese nationals who have significant international engineering or manufacturing company experience. We’ve been able to position our talent so we can grow and at the same time we responded to the realities of the global recession by aggressively trimming our employee related and overhead costs.

As Kevin mentioned, across the fiscal year we reduced our G&A costs by about 30%. I believe that not only have we kept the company healthy in its capability to deliver but actually improved its capability. I’m hopeful this will help us grow as the economy appears to now be emerging from the recessionary period and growth returns.

Clearly one of the most significant events during the fiscal 2009 was declaring commercial operations at our Hai Hua plant in December of last year. We had set a goal of achieving this important milestone by the end of the calendar year 2008 and we had succeeded in attaining this goal. This accomplishment clearly demonstrated the growing capability of our engineering and operating teams as well as their determination to succeed. We could learn many lessons at Hai Hua and I believe these lessons have made us much more capable and help make the Yima project successful.

As in all things we had a learning curve implementing our first U-GAS project. I believe we managed this learning process very well and we are now rapidly moving up the learning curve and should see the Yima project start up and reach COD faster then we achieved at Hai Hua.

In the gasification space most technology providers license but seldom have ownership and operating roles. It is through plant operations where you truly learn how to effectively implement the technology. I think this helps to differentiate us and I’m very pleased with our progress in this regard.

Clearing COD at the Hai Hua joint venture was an important step in the growth of the company to improve our ability to move the U-GAS technology into new and larger projects. As I mentioned earlier, much of our business over the last year was impacted in one way or the other by the economic downturn and this extended to our Hai Hua joint venture. Since declaring COD our partner Hai Hua has been operating at very low rates of syngas consumption and has also shut down for maintenance several times.

Hai Hua’s current operating mode has reduced is syngas consumption from the joint venture by about 65% of design. Because the plant was designed to operate most efficiently at full production rates our unit energy costs have been higher then what the original energy fee structure could recover. In addition, the need to improve our energy recovery we found that we had a different view then Hai Hua with regards to the contract requirements related to the quality of the syngas. Specifically this was regarding the amount of nitrogen in the syngas.

As I explained during our last call we addressed these issues in a cooperative manner with our partner and subsequently we entered into a supplementary agreement with Hai Hua that provided more clarity regarding the required syngas quality and volumes. At the same time we took steps that reduced our nitrogen content in our syngas by over 50% which is now well within the threshold required by Hai Hua.

Shortly after this we entered into an ASU sharing agreement which was a creative solution to help us recovery energy costs through selling our excess oxygen to Hai Hua. These were very important steps towards further improving the financial performance of the plant.

We previously indicated that selling oxygen to Hai Hua would require certain piping system modifications which were to be completed this summer. I’m pleased to report that we did complete these modifications as planned. The new systems were commissioned in August and oxygen sales to Hai Hua started on September 1. This system is performing very well and we have seen a marked improvement in the plants overall power consumption.

Our plant availability for production the last quarter was 95% while operating for 60% of the quarter due to Hai Hua not requiring syngas until early May. Overall plant availability for the last quarter to current date has also been over 95% and has met Hai Hua’s syngas demand and quality requirements over 98% of the time.

Our recent operating results at the Hai Hua facility have been very encouraging and have demonstrated our growing capability as well as the reliability of the U-GAS technology. In fact, one point of interest I’d like to mention is that prior to shutting down in late July for Hai Hua’s most recent maintenance cycle, we performed a single gas fire maximum capacity test and were able to demonstrate over 20% additional syngas production capacity beyond the designed production rate.

The reason we decided to make this test run ties into my next discussion point for the Hai Hua joint venture. In order to improve the financial performance at the Hai Hua plant we are exploring the possibility of expanding the plant. We tested our gas fire maximum capability to have a better understanding of our gasification capacity for such an expansion. An expansion of the plant was always part of the projects initial concept and we are currently exploring alternative products and partnership structures.

Additionally, the government has expressed strong support for an expansion project and in July this year we received a letter of intent from the local government which describes their willingness to allow a new local coal mine to be used as the debt guarantee for the expansion project. The letter of intent also contemplates providing discounted coal to the expanded project.

Currently we do not believe any additional SES equity would be required for an expansion as we expect to contribute a portion of our 95% equity stake in Phase 1 towards the Phase 2 expansion with third parties contributing all the required equity to expand the project. The scope of the expansion is still under evaluation and we expect to make a decision on moving forward with Phase 2 hopefully within the next six months.

Moving on to Yima I would like to turn the call over to Don Bunnell who will now discuss the fiscal 2009 milestones related to the Yima project and provide an update on its current status.

Don Bunnell

During the year we celebrated several significant events related to our joint venture project with the Yima Coal Industry Group. In November of 2008 we performed a rigorous test of Yima’s coal at our Hai Hua facility. This coal demonstrated the U-GAS technologies ability to efficiently process this other large very difficult to gasify 35% ash subbituminous coal from Yima’s UAG mine. We successfully converted this coal into commercial quality syngas with high carbon conversion rates of over 90%.

Yima sent 16 coal gasification and coal chemical experts to witness the test. Yima’s representatives were at the plant for about 12 days were eventually joined by Yima’s president. Results from the coal test so impressed our partner that we began to make very quick progress on moving the project forward. Yima’s enthusiasm for the project was evident as they planned a ceremonial ground breaking for the plant within weeks of the coal testing.

Executives from SES and Yima as well as top level provincial and government officials including Henan’s Vice Governor, head of provincial land bureau, head of the provincial environmental bureau, local presidents of china’s leading banks and other dignitaries participated in this ceremony along with over 1,000 other people from the community.

The project is strategically positioned as a first phase of a series of projects which will form the Mazhuang coal chemical industrial park, a planned $4.4 billion investment located in China’s Hunan province. Yima has agreed to supply coal to the project at a preferential price through a definitive agreement from a mine that is located in close proximity to the Mazhuang Industrial Park.

Based on our current estimate the total required capital for the project is $250 million which includes all project facilities and some infrastructure facilities in support of the planned phase 2 expansion. When completed the project is expected to have an annual capacity of 300,000 tons on refined methanol. Two future coal gasification projects are planned for this location. The second project is expected to add 300,000 tons on refined methanol or methanol equivalent products and the third is expected to add 600,000 tons of refined methanol or methanol equivalent products. SES and Yima have begun discussions regarding the possible phase 2 products.

The projects most significant milestone was achieved in August when SES and Yima executed revised joint venture agreements and the subsequent funding earlier this month with both SES and Yima funding their entire equity for the project, accounting for approximately 50% of the projects total investment. Yima has agreed to guarantee the project debt and we expect this guarantee will allow debt financing to be obtained from Chinese banks.

In the event the debt financing is not attained Yima has also agreed, and this is one of the key changes in the revised JV contracts we signed last month, to provide a loan to the joint ventures to satisfy the remaining capital needs of the project on terms comparable to market rates. Yima’s loan would be repaid as soon as third party debt financing is available for the project. We believe this illustrates Yima’s commitment to the project and their belief in the value of our U-GAS technology.

During our last quarterly call we mentioned that we were actively pursuing alternative sources of equity which would reduce our equity obligation in this project. We were successful in achieving this and SES now owns 25% of the project and Yima owns 75% which is a reduction from the prior agreement where we owned 49% of the project and Yima 51%. Under this new arrangement SES negotiated an option to increase our equity interest back up to 49% upon expansion of the project. This is another example of the strong relationship we have with our partner.

The financing commitments made by Yima will allow the project to immediately move into the implementation phase which includes the release of detailed engineering and procurement of the major equipment. Work on major foundations is expected to begin later this year with the mechanical completion expected in the first half of 2012. Commercial operations are estimated to begin approximately six months later.

As we mentioned during our last conference call we’re exploring the possibility of acquiring UAG coal mine which will supply coal to the project. This is one of Yima’s operating coal mines and as I mentioned earlier we tested coal from this mine at our Hai Hua facility last November. As part of the evaluation process SES and Yima have entered into a preliminary agreement related to SES potential acquisition of 25% of UAG coal mine. The agreement paves the way for due diligence to begin. It’s important to note that we are investigating the possibility of requiring this coal mine will only invest if there are compelling reasons to do so.

Significant progress has been made on this project in the last year and I’m excited about the opportunities ahead. Having a partner like Yima who has a strong balance sheet, a strong operating history and who values the advantages of our technology will help us as we grow our business.

Before I turn the call back to Robert I would like to take a moment to say a few words about our newest member of our China team, Mr. Foon Lee Leow. Foon Lee is now our managing director for China and brings over 20 years of management experience in power infrastructure sales, business development, gasification technology licensing, M&A and management of joint ventures in the industrial, energy, oil and gas sectors. He has spent most of his career covering greater China.

Prior to joining us Foon Lee served as world Shell’s director of clean coal energy in China and was very successful in selling multiple gasification licenses in China for Shell. Foon Lee’s experience will really benefit us as we continue to grow our business and I’m glad to welcome him to our team.

I will now turn the call back to Robert.

Robert Rigdon

Looking ahead to fiscal 2010 we’ll focus on continuing to improve our financial performance at the Hai Hua joint venture along with the execution of our first project with Yima. We also see new growth opportunities on the horizon, for example, the potential expansion of our Hai Hua plant and the next project with Yima. The shared vision we have with Yima has always been around a multiple phase build out of the industrial park and we see our current project as the first step. This vision is shared by the local government and government planning has been underway for some time.

We’re also pursuing several other strategic options in the regions such as that specifically target Inner Mongolia vast low rank and low cost coal reserves. This region is uniquely well suited to U-GAS technology due to the coal type and the coal cost which creates a cost of production advantage for projects using U-GAS. Today we have a variety of cooperation agreements in place with regional governments and coal companies, down stream up takers for potential projects here in China that are interested in utilizing U-GAS as a platform for products such as substitute natural gas called SNG, chemicals such as glycol and fuel such as methanol and DME.

It’s also important to note that the Chinese government has approved new standards for methanol to be used in methanol blended with gasoline. Although these standards do not mandate the use of methanol these recent development were positive for the long term outlook for methanol demand.

As these project develop they may include a combination of equity and/or debt from third parties and carried interest with selected SES equity investments or may be non-equity technology licenses. Over the last year we’ve been experiencing a growing interest in our technology and believe there is an opportunity to license technology not only in China but in other regions as well. In fact, we are routinely getting inquiries from potential licensees in other regions such as India. India is thought to be a prime area for U-GAS technology due to India’s large high ash coal reserves.

Also in the US we are actively engaged with potential project partners who have opportunities to apply U-GAS biomass capability for generating carbon neutral syngas that can be used for a variety of purposes. We believe that the solid operations at our Hai Hua plant and having an operating plant potential licensees can visit should accelerate our ability to grow a third party licensing business.

I look forward to the next year and I’m excited about the opportunities in front of us. I believe we are positioned well to continue our growth and have met key milestones that we set out to achieve even amidst a very difficult economic downturn.

This concludes our management update and now we would like to give the callers a chance to ask questions. Operator would you please open the line.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Burt Chao - Simmons & Company

Burt Chao - Simmons & Company

You just mentioned licensing in India and perhaps some other markets. Do you have any idea at this point what the economics on that would look like to Synthesis, or is that something that’s too early to tell at this point?

Robert Rigdon

It’s a good question; I think I would say it’s too early for us to tell at this point. We’re still evaluating this. The licensing business is a business that is a low resource, low equity intensity business that has the potential to generate some nice margins, we believe. I think it’s too early to get more specific then that at this point.

Burt Chao - Simmons & Company

You mentioned the difference, obviously it wouldn’t be as capital intensive, you now have an operational facility in Hai Hua and Yima will likely be up pretty soon as well. Does the business model going forward, is that something where you might see a greater shift towards the licensing model or is it something that you probably plan on being an operator first and then licensing opportunistically going forward?

Robert Rigdon

We see both in our future. We see selective investments in good solid projects that fit our strategy, in addition to licensing. One of the things that I think is differentiating us is our operating experience. We take a lot of that from Hai Hua, we’ll continue to get more operating experience from Yima as we will have SES involvement in the Yima project. This is going to be easily translated into the licensing business. I think its going to be all of the above to answer your question.

Burt Chao - Simmons & Company

On Yima, the financing, I know you’ve paid the money out this quarter and you talked about effectively the Chinese bank debt and the guarantee by Yima. Is there an update as to how far that’s progressed? Do you think Yima is going to have to put the money up themselves or do you believe that its imminent that we get the bank debt there?

Kevin Kelly

The bank financing is moving ahead. We have to recognize that the debt markets work a little bit differently in China then they do in the West. The Chinese banks, almost every deal I’ve ever seen, require that you have all your equity in the project before they lend. Now that we put all our equity in there has been acceleration with the banks on processing the loans. The end of the day the CFO belongs to Yima and this project and they have the obligation. We’re really focused on executing that because there’s so much money in the project. There’s nothing holding us back and Yima is very credit worthy. We’re going to get the loan regardless and we’re fairly indifferent if it comes from a Chinese bank or from Yima. We do believe that it will come from a Chinese bank because they have shown real interest in the project.

Burt Chao - Simmons & Company

Congratulations on the mechanical availability that number is obviously impressive. You had a little bit of scheduled maintenance. Will there be scheduled maintenance going forward for modeling period say 2010 or is there something in general do you expect that mechanical availability to be pretty consistent throughout the year?

Robert Rigdon

With the way the plant’s been running here the last several months I’m expecting our availability numbers to be pretty consistent in terms of availability. I think the actual operating time is showing signs of improving now that we’re seeing some strength in the economy returning and Hai Hua is attempting to operate more. As that trend continues we’ll see Hai Hua working to take less maintenance shut downs and to keep their unit online more. I think directionally that’s where we’re going to go. In terms of availability though back to your question is yes I’m expecting that we should stay at the same levels.

Operator

Your next question comes from Bill Burns - Johnson Rice

Bill Burns - Johnson Rice

When you say maintain operations are you talking about at the levels of 60% at Hai Hua?

Robert Rigdon

Actually we’re hoping to see these improve. These lower operating levels at Hai Hua have been caused by a lot of factors but a lot of this has been related to just the slowdown in the economy, softness in the methanol market today, and then there has been some unexpected maintenance on Hai Hua side on their methanol unit. We’ve actually seen over the last, if you look back at the last couple of quarters, we’ve been seeing that the Hai Hua operation and consumption of syngas is starting to increase. I’m hopeful that we’re going to continue to see that increase over the next quarters as well and not stay at the 60% level.

Bill Burns - Johnson Rice

If we could get up to say hypothetically we’re running 80% or 90% I assume that we would be showing a positive gross profit at that level, maybe guessing $12 million of revenue and maybe 60% margins would those be too high of my expectations?

Robert Rigdon

We’ve taken some really big steps here to improve the financial performance of the plant. The biggest steps that you’re seeing are the plants running really good at staying online. We’re meeting our compliance syngas 98% of the time. The energy recovery that was my other point is a big factor that’s just now starting to kick in for us here in September when we starting selling oxygen. These are all going to drive us closer towards profitability for Hai Hua. I’ll stop short of trying to get into the specific numbers.

Kevin Kelly

The only thing I would add to that is the ASU sharing that starting on September 1st; it’s a big savings for us so that helps us recover our energy costs. It’s also a big savings for Hai Hua in the methanol plant. As they save more money they’re going to operate more. I think that’s an important distinction.

Bill Burns - Johnson Rice

You have the unique perspective of China, could you give this poor boy from Louisiana, what do you see in terms of the economic and especially for Hai Hua obviously in terms of demand returning?

Don Bunnell

The coal business if we go back to January and February their coal business was hurting and their coal business is back and they’re very profitable. What we’ve seen in the methanol business is probably 20% to 25% increases in methanol prices in the last couple of months. That’s all positive. You haven’t seen much of a hiccup in the Chinese economy. Things continue to grow and the growth rates the last quarter were very impressive. China really didn’t slow down very much and it seems to be accelerating again.

The other significant thing with Hai Hua is they were acquired by CNOOC; CNOOC is one of the three major oil companies here in China. I think that the CNOOC acquisition is positive and they will ensure that Hai Hua grows and develops their business. It gives us entrée into a new potential strategic partner. CNOOC may be a great company to work in; it’s too early to say whether or not we’ll do anything with them. It gives us access to a major player here in China so that’s all good news.

Operator

Your next question comes from Silke Kueck – JP Morgan

Silke Kueck – JP Morgan

When do you expect Hai Hua to be at levels where the partner takes 100% or the majority of the syngas is that something that’s just further out is it something that will happen this year?

Robert Rigdon

I don’t foresee that happening this year. I think that that’s further out and I think its going to hinge on continuing strengthening of the economy. Ultimately Hai Hua’s operating mode with their methanol plant. We’re going to see more about how that comes about as we get into next year.

Silke Kueck – JP Morgan

Calendar 2010?

Robert Rigdon

Right. I’m not expecting that to happen this year.

Silke Kueck – JP Morgan

If your joint venture partner gets to the point where they take 100% of the syngas would that mean that the plant or the gross profit margin for the plant would be about break even levels or close to break even levels or what would it take to get the plant to that point?

Robert Rigdon

As Hai Hua increases the gas and as long as we continue to operating well like we are we’ll get to the break even levels. There’s a point in there where the plant is running a lot more efficient now and what we need is to have I think Hai Hua just go ahead and continue to stay online and start easing their rates up like it looks like they’re starting to do.

Silke Kueck – JP Morgan

Who do you sell the oxygen to that’s produced at the plant? Does it all go to the partner or that is sold to somebody else?

Robert Rigdon

It goes back to the partner. The partner has an oxygen generating plant as well and the reason this was such a good solution for both parties is that we had excess oxygen, they were able to shut down their oxygen plant, buy our excess oxygen. It’s saving both of us money. That’s encouraging because it’s helping Hai Hua’s overall economic performance now. That in turn now looks like its going to enable Hai Hua to pick up rates and run this methanol train more then what they have in the last couple of quarters.

Silke Kueck – JP Morgan

You said that Hai Hua was acquired by CNOOC do I understand that correctly?

Don Bunnell

Correct.

Silke Kueck – JP Morgan

Does CNOOC have the power to also shut down the operation if they determine it may not be in the interest to continue this or they cannot do that?

Don Bunnell

I think anything is possible. Our understanding is that they didn’t buy them to shut them down that they bought them to probably grow that business.

Robert Rigdon

This is more then just a sty; this is Hai Hua, the chemical company. We’re not privileged to the specifics of the details of that acquisition.

Silke Kueck – JP Morgan

On the balance sheet, the $90 million cash balance on the balance sheet that does not include $29 million investment estimated in Yima correct?

Kevin Kelly

The $90 million does include so we’re currently net the $29 million we invested in late August.

Silke Kueck – JP Morgan

The $29 million that’s already netted out on the balance sheet that you reported at the end of June?

Kevin Kelly

The $90 million does include. Its prior to making that payment.

Silke Kueck – JP Morgan

The write down on the loss of the Exxon Mobil royalties is that something that’s an annual event?

Kevin Kelly

That was a one time payment toward a license. We don’t contemplate making any further investment in that license until we have a project to use that technology.

Silke Kueck – JP Morgan

In terms of Yima if one were to monitor the progress of building the plant, what does one look for, what is the next step that you’re taking?

Robert Rigdon

The things that we’re looking at next steps we’re moving really towards implementing the project so we’re releasing engineering contracts now. We are actually going beyond just some of the early construction work ongoing with just getting the sight prepared. Now you’ll see before the end of the year that we’ll start moving into actually installation of foundations for equipment, some early equipment purchasing will start to take place, all of this will start moving very quickly now that we’re getting ready to release the engineering. After that we’ll be in full all out construction next year on the project and then we’ll see this project start up here in about 36 months.

Silke Kueck – JP Morgan

Will any of the things that you have to do between now and middle 2012 affect what you have in terms of project and technical development expenses, should that number go up as this progresses?

Robert Rigdon

Not related to this Yima investment. Our investment in Yima is targeted towards building this phase 1 project. We will continue to develop our other opportunities and that will impact what our costs are going to be on our project development costs. The Yima project development is essentially behind us now and we’re into full execution.

Operator

Your last question comes from Burt Chao - Simmons & Company

Burt Chao - Simmons & Company

What’s your outlook for the Chinese methanol market, you mentioned a couple things in the call about the Chinese government increasing mandates on methanol which I would guess would be positive for pricing and volumes. Over maybe the next year or even a little further as far as you think you might have some visibility what are you anticipate being the outlook for that market?

Don Bunnell

We have seen a bit of a rebound in methanol pricing in the last couple months as I mentioned. We’re up to about 2100 RMB a ton right now is the current methanol price that’s roughly $300 US dollars a ton for methanol. We’ve been hearing for at least two years if not longer that the Chinese government was going to put these methanol blending regulations in place.

This year we’ve actually seen some real traction on that. Methanol blending regulations was basically tell you if you’re going to blend methanol with gasoline how you have to do it, what the chemical components need to be, what transportation has to look like, what storage needs to look like, all those kinds of things came out in April. It’s actually the M85 standard so 85% methanol, 15% gasoline came out over the summer. That goes into effect before the end of the year.

The next big step will be M15 so 15% methanol, 85% gasoline and for M15 you don’t need to change anything in the engine it could go into cars today. The best information that we have and it’s not official but the best information we have is that will be promulgated next year. China consumes over 60 million tons of gasoline per year so if they go ahead and put the M15 and M85 has any impact I think that’ll have a significant impact on the methanol marketing going forward.

Obviously as the economy picks up there will be other downstream demands for methanol in China. Overall things are looking better.

Operator

I turn it back to you now for closing remarks.

Robert Rigdon

Thanks everybody to tying in to our call. We look forward to speaking with everybody on our next quarterly update.

Operator

(Operator Instructions) That does conclude our conference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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