Methanex's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.30.14 | About: Methanex Corporation (MEOH)

Methanex Corporation (NASDAQ:MEOH)

Q4 2013 Earnings Call

January 30, 2014 12:00 p.m. ET

Executives

Sandra Daycock - Director, IR

John Floren - President & CEO

Dean Richardson - Corporate Controller

Harvey Weake - SVP, Asia Pacific

Analysts

Rob Walker - Jefferies

Jacob Bout - CIBC

Hassan Ahmed - Alembic Global

Shawn Siddiqui - Scotiabank

Steve Hansen - Raymond James

Chris McDougall - Westlake Securities

Robert Kwan - RBC Capital Markets

Charles Neivert - Cowen

Chris Shaw - Monness Crespi

Brian MacArthur - UBS Securities

Laurence Alexander - Jefferies

Kia Lee - Tiger Veda Management

Operator

Welcome to the Methanex Corporation Fourth Quarter Results Conference Call.

I would now like to turn the meeting over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead.

Sandra Daycock

Thanks you. Good morning, ladies and gentlemen. Welcome to our fourth quarter 2013 results conference call. Our 2013 fourth quarter report along with presentation slides summarizing the Q4 results can be accessed at our website at 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 forecasts or projections, which are included in the forward-looking information. Please refer to our latest MD&A and to our 2012 Annual Report for more information.

For clarification, any references to EBITDA, cash flow or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our proportionate economic interest in the Egypt facility. One December 9, 2013, we completed the sale of a 10% equity interest in the Egypt facility. Our proportionate interest in the facility was 60% prior to that date and 50% thereafter. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and other non-operating items. We report our results in this way to make them a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this matter.

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

John Floren

Good morning everybody. I'd like to start off just by reviewing some of the highlights of the quarter. As you can see it was an outstanding quarter with adjusted EBITDA of $245 million and adjusted earnings per share of $1.72. 2013 adjusted net income of $471 million and adjusted earnings per share of $4.88 are the highest in the history of the company.

In Q4, we also had a record sales quarter with 2.127 million tons sold and 2013 was also the best year for sales in the history of the company with almost 8 million tons sold.

Global demand in the quarter was up by about 2% versus Q3 really led by methanol to Olefins demand, as well as a strong global energy and traditional demand. A tight supply environment continues with numerous unresolved planned outages due to a combination of operational issues and gas restrictions. We continue to witness the high methanol price environment well above the current cost curve.

Some of the operational highlights for our company in the quarter include the Medicine Hat plant went down on November 27, with a loss of 50,000 tons in the quarter. The plant resumed operations in early January and is currently operating at high rates. Our Titan plant in Trinidad experienced a small unplanned outage in the quarter where we lost 15,000 tons. Gas curtailments in Trinidad were somewhat lower in Q4 than Q3.

In Egypt, we had available natural gas to run the plant at approximately 95% during the quarter. We also had a technical issue where our share of lost production was about 20,000 tons. We estimate to be able to operate the plant at approximately 75% to 80% operating rates on average during 2014.

We continue receiving natural gas in Chile under a tolling arrangement from Argentina which allowed us to operate at approximately 50% and make a contribution to earnings.

Logistics costs were lower for 2013 versus 2012 by about $38 million as a result of more efficient vessel routes due to higher production, improved backhaul margins, and lower ocean freight as well as some strategic improvements we made in our logistics infrastructure.

During the quarter we settled an insurance claim and this contribute an incremental $14 million to adjusted EBITDA.

Some of the highlights on the corporate development initiatives include we completed the New Zealand production expansions on time and under budget. We completed the sales of 10% of the equity we had in EMethanex to APICORP at a value of around $1200 a metric ton of installed capacity. We ordered six new 50,000 metric ton vessels that we will be able to run on methanol.

We continue to progress our Geismar relocation projects. We reached an important milestone during the fourth quarter and all the major equipment pieces for Geismar 1 are now on the site in Louisiana. We have seen some modest scope and cost creep during the dismantling and shipping of the equipment and are applying our learnings to the second relocation project.

Also, as I mentioned on the last conference call, we are observing schedule and cost pressure in Louisiana particularly related to labor costs. We have focused additional management attention and resources on these projects and are working hard to mitigate the cost and scheduled pressures. These relocations continue to be excellent projects for shareholders and support an increase in our operating capacity to 8 million tons by 2016.

I will stop there and happy to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Laurence Alexander from Jefferies. Please go ahead.

Rob Walker - Jefferies

Hi, John. This is Rob Walker on for Laurence.

John Floren

Hi, Rob.

Rob Walker - Jefferies

I guess first, how has China DME and MTO demand been tracking lately?

John Floren

So Rob, we saw a fairly significant spot price increase in China as you would have noted. Fortunately we didn't see any DME demand destruction. And that was really as a result of two things, higher LPG prices and a shrinking of a discount relative between DME and LPG, so operating rates really weren't impacted by the high prices.

The two large MTO plants that have recently come up we did see them reduce operating rates somewhat as a result of the high prices, but not to shutdown because of the high prices. So we did see some demand go away because of higher prices on MTO, but really this is new demand for 2013 versus 2012. So the net impact was an increase in overall demand MTO regular, traditional, and energy applications.

Rob Walker - Jefferies

And I guess just given the more attractive economics and higher prices I guess around the world and you mentioned that China is increasing its production. How quickly and how much more production do you expect? And are there debottleneck projects that make sense now there?

John Floren

Well, I would expect they've been trying to produce the highest rates they can over the last month. I mean we're well above the cost curve in pricing. So anybody that can produce higher should be looking to do so. So if the current price environment persists, you would expect people to make investments and debottlenecking and trying to get higher operating rates if they have a view that the current price environment is sustainable over the long-term.

Operator

Thank you. The following question is from Jacob Bout from CIBC. Please go ahead.

Jacob Bout - CIBC

Just a question on the -- you're talking a bit about the cost creep at Geismar. What are you thinking currently? Is this 10%, 20%? And then the -- what's the outlook right now for capitalized interest?

John Floren

I will turn the first part of that question over to Dean Richardson, our Corporate Controller -- sorry, the second part of the question.

Dean Richardson

Sure on the capitalized interest, well we don't have a number we can pick that offline if you want, but we will be capitalizing interest throughout the project.

John Floren

And as far as a budget number, we don't have one to share, Jacob.

Jacob Bout - CIBC

Okay. And then on the -- where are you at right now with the gas contract for the second plant?

John Floren

Yes, we're still negotiating. We have had not had success in securing a gas contract for the second plant. We're still very comfortable if we don't secure a gas contract all of the information we're seeing on the shell gas, the availability as well as the cost structure looks really attractive to have a really high quality plant there with the second one.

Jacob Bout - CIBC

But with the recent higher gas prices, does that make the negotiations a little tougher?

John Floren

No, what's interesting, I think the reason our gas prices in a traditional stance, if you had a cold winter like we have had in previous years you would see $15 gas. So the fact that we haven't seen a run up to more than $5, I think reinforces our impression that gas is really available and people can make good profit at $4 to $6, so it's just reinforced what we've been saying all along.

Operator

Thank you. The following question is from Hassan Ahmed from Alembic Global. Please go ahead.

Hassan Ahmed - Alembic Global

John, obviously we saw a reduction in the discount rate going from Q2 to Q3, and in the call last quarter you talked about how there were some possibly legacy contracts that expired and now we've seen a another shift downwards. So I mean is that really a function of a more legacy contracts running off or market tightness? What do you attribute that to?

John Floren

Yes, well there is a number of factors. I think, I've said before that when we have a large run up and spot prices, the way some of our contacts work in Asia, there is a huge benefit to us on the discount rate and that's what we saw in Q4. I've also said as in tight markets, as we renegotiate contracts, we're able to improve conditions and that's what we're continuing to see. So we get benefit quite nicely in Q4, because of this anomaly in the quick run up and spot, probably not repeatable in Q1, Hassan. So I wouldn't take what we did in Q4 and extrapolate that as the new norm. But we will -- you will see over a trend over the next years as markets are tight as well as some of our fixed price contracts roll off, our discounts on average will improve quarter-over-quarter.

Hassan Ahmed - Alembic Global

Fair enough. And as a follow-up as we are obviously marching towards the start up of Geismar 1, could you just give us your latest thought process regarding MLP, filing for an MLP?

John Floren

So we're looking at it, we have a team of people looking at it. We're studying what's going on in the marketplace. We've witnessed the OCI MLP and the interesting multiple they are able to achieve, but the nice thing is we have time. I mean, we are not going to be operating first plant until later this year at the earliest. So we don't have to think about rushing into saying we're going to do an MLP. And then we will work this year on that issue and make a decision later this year if that makes sense for the company and if it's accretive value to shareholders, why wouldn't we do it.

Hassan Ahmed - Alembic Global

Fair enough. And just really quickly, I mean let's say that you start production towards the end of the year. I mean, I don't know the whole sort of filing structure and the like, but is it fair to assume just purely on the legality of it that as soon as you start generating any revenue from Geismar 1 as quickly as that you could file for an MLP status?

John Floren

Well, we're doing that work right now. I think that we understand that to be true, but I think to say definitively it's not a premature, because what we understand as lot of people like to see may be some steady operating rates especially in a plant that's being relocated as opposed to a restart. So I think those are details that we're going to try to cover off in the next six months or so.

Operator

Thank you. (Operator Instructions) The following question is from Ben Isaacson from Scotia Bank. Please go ahead.

Shawn Siddiqui - Scotiabank

Hi, it's actually Shawn Siddiqui stepping in for Ben who is on the road. My question is on Chile, given that you had some improved gas supply in the region, can you give us a sense of if there's a now opportunity to secure gas outside of the tolling agreement?

John Floren

We are continuing to have positive experience in Chile not only with the tolling agreement, but with gas in Chile, both GeoPark and ENAP in Chile are spending around $300 million in drilling this year. There has been success in the hydraulic fracturing programs in Chile. So we are optimistic, we will continue to be able to run in the near term. We're going to have a pinch point here again in their winter time, but we are working hard to be able to run through the winter time.

And at the same time we have negotiations ongoing to monetize the Argentinean gas contracts and we are pursuing those. So I think over time the Argentinean basin for shale gas non-conventional looks quite interesting and as they get developed, there is a good possibility that we could get more gas from Argentina, but I think it's still too early to make certain forecasts around that.

Operator

Thank you. The following question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen - Raymond James

John, you guys have a very strong history in the past of returning cash to shareholder to -- capital to shareholders through different forms and means, and one obviously has been stock buybacks in the past. We haven't seen those in sometime; you've alluded to them perhaps coming back as the Geismar spend works itself through. Any updated thoughts on when we might see a stock buyback program kick back in?

John Floren

Hi Steve, yes so we have always taken a balanced approach to cash distributions. First, I will say is we are not looking to diversify so we're going to stay in methanol. You don't have to worry about uses of cash for that. We have three uses of cash grow the company, dividend, and share buybacks, and we are pursuing a couple of projects beyond the Geismar 1 and 2, they look pretty challenging on a number of fronts today.

And at the same time we had a heavy capital spend in the quarter and still generated quite a bit of cash. We have heavy capital spend, I'd say for the first half of the year. So I think what you will see us do is look at the dividend at around the normal time we have over the past years, March/April period. We will have a little bit more knowledge about the Geismar 1 project by that same time and if the price stays anywhere close to where it is today or even lower there would be lots of capacity to think about increased dividend, share buybacks, and possibly growing the company if we find suitable projects that meet our investment criteria.

Steve Hansen - Raymond James

And just as a follow-up on the New Zealand turnaround that you had going there, presumably it sounds like the MD&A everything is going on well and everything is back up and running. We should presume that facility will be running at more optimal capacity rates going forward?

John Floren

Yes, maybe I will ask Harvey Weake, who is responsible for those projects just to make some comments on that.

Harvey Weake

Yes, obviously we've finished those projects on time and under budget and the assets in New Zealand are in very, very strong condition and we are in a position they were pretty confident that we're going to be running at what we've targeted to produce over the coming years.

Operator

Thank you. The following question is from Chris McDougall from Westlake Securities. Please go ahead.

Chris McDougall - Westlake Securities

And so I wanted to just hear your thoughts on the various announcements of new capacity in the U.S. I think there's range of a fairly certain kind of additions to existing plants and then longer-term Greenfield plants. And what do you think about for your own additions are you running a particular price tag that is more aligned to $100 oil and the methanol correlation to that or how do you think of these additions other than yours are going to go and then what are you looking at for your own additions would be the question?

John Floren

Well we have a team working on a potential Medicine Hat 2 project as well as a potential relocation of a third plant from Chile. What I would say is it's we're in a really difficult environment mainly related to capital costs. I've seen some recent numbers from McKinsey talking about piping and skill trades starting to become extremely short in mid-2014 based on some of the projects that have been announced, not all of them. As well they're indicating there could be up to a 30% labor shortage to be filled by new trainees as well as migrant workers. So I think we're going to be in an environment where executing capital projects that are Greenfield in nature is going to be extremely difficult.

Today, if you wanted to finance a project you'd go to one of the firms like IHS, the banks would anyways and ask for their long-term methanol price forecast. And if you run that number plus even $4.50 gas escalating at 2% and capital of even around $1,000 a ton which I think would be difficult with the environment we're seeing you don't get the return that meets the investment hurdle rates. So I think projects methanol and others are going to be very difficult. We recently seen Shell cancel their large DTL project, their capital estimates went up astronomically in a very short period of time.

So there have been a number of announcements. I think we're pretty happy to be ahead of the curve and Geismar relocations but we are seeing pressures and we haven't really seen many of the other new Greenfield project starts. So I think we're going to be in a very difficult environment for new build projects.

Chris McDougall - Westlake Securities

And then shifting gears to Chile, what percentage of your gas was from Chile versus Argentina for the quarter? And is all of that Chile tolling production reported in your produced tons or is it not included in the produced tons?

John Floren

You'll see a footnote in our results. So it was about 50:50 between Chilean gas and tolling. And we were thinking about keeping it separate but when you start looking at what that does to inventories and sales it just didn't make sense. So we disclose it and right around 50:50 in the quarter.

Operator

Thank you. (Operator Instructions) The following question is from Robert Kwan from RBC Capital Markets. Please go ahead.

Robert Kwan - RBC Capital Markets

John, may be just come back to a couple of things here. You had mentioned here the cost pressures you're seeing I'm just wondering if you thought kind of a new thoughts as to roughly what you guys are thinking in terms of Greenfield dollars per ton. And although you don't have to make a decision today just wondering, if you look at the current environment it sounds like the bias is to returning capital versus some of these challenged projects as you've been saying. The dividend is an ongoing commitment. So how do you think about really kind of jacking up dividend growth versus the shorter term being able to buy back shares and size that based on the free cash flow at the time?

John Floren

Yes, so just on the capital project. We had estimates around that $1,000 a ton. We're still trading on a replacement cost basis around $850, so at a discount. I think it's more of a risk issue meaning its all time and materials today. It's very, very difficult to get a lump sum turnkey. So you are taking a risk on all of these labor things I've been talking about. So you can put whatever numbers you want in your model but the certainty of delivering on those numbers I think without a turnkey lump sum is very, very difficult.

McKinsey again recently we asked them and they said their view today from FID so once you made a final investment decision and all the project have been announced in North America only once has been FID and that's the South Celanese, its 42 months in their estimation for building. So 42 months in the labor market they were getting data that seems very risky as far as completing a project on time on budget no matter what that budget is.

I recently asked some of the engineering firms as well what would be an estimated premium if you even consider a lump sum turnkey because they don't want to take any risk at all, they are targeting 30% range. So that's a non-starter. So it's difficult, you can put whatever numbers you want to a model but until you actually complete the project and face the cost pressures it's impossible to predict.

So just if you don't have a project that makes sense and from a risk point of view and a investment criteria point of view, we have had a record and we'll continue to have a record of returning excess cash to shareholders. Our dividend policy has been very clear. We first of all want it to be sustainable at the low end of the cycle, we want it to be meaningful and we want it to grow and we'll look at it as we've done every year in the next month and make a decision around that. And then excess cash beyond that will be returned to shareholders through share buybacks. That's the current view.

Robert Kwan - RBC Capital Markets

And then just coming to some comments made earlier on the merchant MTO plants in Asia, operating rates down a bit but still running. Just wondering with some of the Southeast Asian supply that has come back have you seen some of them to your rates come back up just kind of balance off the actual supply with some extra demand?

John Floren

Well I think that's what we anticipate but it's a factor of price. I think some of these plants have scheduled maintenance as well. So I mean, the future is really hard to predict. I would say that the price went $500 on a spot basis may continue to run. I think my view and some of our team's view is that they probably reduced operating rates to take advantage of selling some of the methanol they bought at high prices. So they're opportunistic and I would do the same. So they're looking at economics every day and deciding how they can optimize for their shareholders and I think that's the right thing to do.

Operator

Thank you. The following question is from Charles Neivert from Cowen. Please go ahead.

Charles Neivert - Cowen

A few questions. One, what's the difference going to be on logistics costs once you're in Geismar and operating versus coming out of Trinidad? Is that going to be -- I'm assuming that the U.S. gas price even with the contract will be slightly above whatever you're going to be doing in Trinidad, is that basically going to be a total trade off there where your logistics costs are lower so your net back is pretty much the same as Trinidad or what are we looking at when that happens?

John Floren

Surely, to tell, Charlie, I mean it really depends on the base and balances. So I think it's a fair assumption as we start up Geismar we'll bring less Trinidad molecules into North America, that's a fair assumption. Where those go, I think it's too early to tell. Certainly, I've said that when we modeled Geismar and then Geismar-2 we modeled as if half of that product was going to go to Asia. Now those physical molecules they're going to never going to leave the U.S. but we modeled it that way for return basis. So where the Trinidad molecules actually end up it's too early to tell and it really depends on growth in the basins and where we think the best place to grow our sales. We did grow our sales significantly this year in Europe. And obviously I think the simplest way to look at the Trinidad molecules is a combination of Latin America and Europe, mainly Brazil in Latin America.

Charles Neivert - Cowen

And I guess two others, one, cooking fuel methanol pure as a cooking fuel, not pure but as a mixture in a cooking fuel in China is sort of in a stealth growth area. Is that continuing to see market? I mean, my understanding is its getting pretty big as an end market. Is that still sort of continuing along sort of in the background?

John Floren

Yes, it's always been there and it continues to grow, and we figured it out by plugging numbers. So that's how we come to some of these uses. You see it being used everywhere in China as far as a cooking fuel not only in restaurants and at homes and we estimate it's around a million tons today and growing quite nicely.

Charles Neivert - Cowen

And then last question, obviously when you get those new ships in on an average year of moving those ships around, one ship around what are you guys -- and assuming it's all going to be run on methanol just because the economics that go on methanol, how much methanol would one ship consume in a typical year of movement? Any ideas?

John Floren

It's a good question because the Head of our Waterfront Shipping Company is probably is going to be one of our largest customers here soon which is an interesting phenomena. On average I think you could see around 40,000 tons if it were to run 100% on methanol. I'll remind you though, Charlie, the nice thing about what we're doing is these are dual fuel, we have (inaudible), we can run bumpers when we're outside the attainment and we can run methanol when we're inside. So having that flexibility is really, really going to give us a competitive advantage going forward.

Charles Neivert - Cowen

Well my assumption is simply that you won't be the only ones in the world with those types of ships and we talked in the past about the Scandinavian things going now. And how big China -- again I'm just trying to sort of begin to bracket how big that market might be on a going forward basis. But you said 40,000 as sort of your highest number in a year per ship but the more ships the better the uptake so.

John Floren

Yes, and I think and I quoted a number. If you look at that attainment area in the north part of Europe with those regulations for low sulfur are coming in, in January, 2015, if every ship there were to convert to methanol, which they're not, you're talking about 40 million tons of demand just in that area. So these are very, very large demands. So you don't need to get a very large part of the market to have a significant impact on the supply demand balance.

Charles Neivert - Cowen

And that's just Scandinavian that attainment area that we're talking about.

John Floren

That's right.

Operator

Thank you. The following question is from Chris Shaw from Monness Crespi. Please go ahead.

Chris Shaw - Monness Crespi

A couple of quick questions I think. What kind of margin, on the tolling arrangement with Argentina, those margins is kind of like a commission?

John Floren

I rather not be too specific about those margins but you should not be thinking of them as a commission.

Chris Shaw - Monness Crespi

And then the follow-up I think was Steve's question early on the buybacks. I can't remember. Do you have an authorization in place? What is it, the amount?

John Floren

Yes, we don't have anything in place at this point. Traditionally, when we've done the buybacks we put a normal course issuer bid in and it allowed us to buy up to about 10% of the float in any 12-month period. Traditionally what we've done is instead of trying to time the market we just put an order in every day for a similar amount of shares.

Chris Shaw - Monness Crespi

And then I guess the U.S., what was the -- was there any sort of market reactions to the new the Lyondell volume? I mean, did that have any early impact that you saw?

John Floren

Well I think I'll remind you that we have an arrangement with Lyondell where any excess molecules over and above their personal needs around the world we market for them. So we've been able to adjust our supply chain based on these molecules in and so far we haven't seen any impact on the supply demand balance as a result. I think we needed that those molecules I think we're getting to a situation where the role was becoming very, very tight so I think we need that and plus some other molecules to balance things out a little bit more.

Chris Shaw - Monness Crespi

And then in your guidance for Egypt, for the year, I think you said 75% to 80% operating rates on average --?

John Floren

Yes.

Chris Shaw - Monness Crespi

Is that lower than what you did in '13, is that right?

John Floren

Slightly. On that guidance, I guided 70% last year, so we over-achieved. Egypt continues to be pretty unstable. We've done very well; we have good alignment with the government, with our partners. I think we have been getting good gas volumes and guidance is guidance, it's just our best estimate on everything we -- we estimate, but we're obviously going to try our best to do better.

Chris Shaw - Monness Crespi

And then just a quick last one. Looking at may be first quarter as some of your new produced volumes come up, should we see purchase volumes decline already in the first quarter or is that going to be a slower process?

John Floren

Yes, again quarter-over-quarter you might see some declines. What I would say is directionally as we add up to 8 million tons of our own produced molecules the amount of purchased products in our mix will reduce. Our goal is to have 80% in what we sell, our own produced molecules, around 10% to 15% long-term off-takes like we have with numerous suppliers and then the balance in spot. We're always going to maintain a spot market presence to understand the supply demand balances in different regions as well as take advantage of the arbitrage opportunities which have created significant value for the company in 2013.

So I don't think you'll see a proportion of spot sales as high as it has been in the past years but we'll always participate in selling other people's molecules as well as buying and selling spot.

Operator

Thank you. (Operator Instructions) The following question is from Brian MacArthur from UBS Securities. Please go ahead.

Brian MacArthur - UBS Securities

I just want to go back to the transportation. You comment that you got $38 million in logistics year-over-year. Is that a lot about backhaul or is it truly rerouting ships? And I guess where I'm going with this as you bring New Zealand back and you get a lot more tons in that part of world, is there another function of dropping all-in costs as we move forward before we get to Geismar?

John Floren

Well I think it's all of the above, and where we did get a big blow to our company in 2007-2008 when we lost our Chile assets and the knockoff effect was we were over-shipped over-tanked over a lot of things and it takes years to work that through. I think we've gotten really, really good at backhauling and we're doing way more backhauls than we ever have and those are profitable for the company.

The New Zealand is very interesting. I mean, the more molecules we have in New Zealand we ship them up to Asia and most of the time, if not all the time, we're bringing back gasoline and diesel to Australia and New Zealand. So those are really, really attractive for our freight situation.

So I continue to believe our teams are going to do an outstanding job and continue to improve our logistics cost, may be not to the order of magnitude we saw in 2012 versus 2013 but we're going to continue as we get more and more molecules in our system whether there are own or others to be able to optimize our supply chain. And the more molecules we have going through the same number of ships or slightly more than same number of tanks slightly more and your cost per ton goes down quite nicely. So I think directionally we're going to continue to improve our situation.

Brian MacArthur - UBS Securities

And just on the lease shipping capacity I forget what it was used to have some and then you gave some up. Are you well set up to get where you do need all this at the higher run rate of 8 million tons?

John Floren

Yes, we just ordered six ships and we have options for three others. So I think target we want to have a bit more what we call our own time charter or the vessels we own in our fleet because we see that market changing quite a bit as far as getting crews and having flexibility. The more you backhaul you need to have real flexibility and you can only do that with your time charters so that you can decide to change shipping just on the drop of a dime. So I think having more of our own can flow through owning vessels or time charter versus what we did in the past is good business and I think you'll see us do that.

Operator

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

Laurence Alexander - Jefferies

I guess given the gas composition you're getting in New Zealand is that a mix that's allowing you to currently produce at a 2.4 million run rate?

John Floren

No, we are getting some high CO2 gas. So if everything goes perfect today think of 2 to 5 something like that but we're working hard to get the higher CO2 gas is available. We are negotiating and we are optimistic we'll get it this year sometime but we haven't secured it yet.

Laurence Alexander - Jefferies

And then just kind of looks like methanol demand was up 10% this year if I look at your releases from last year and this year. How fast if you were to slice that between energy and MTO and traditional sources of demand? How fast did they grow?

John Floren

Well I don't have that off the top of my head, I can get you those numbers, but I think our numbers indicate around an 8% growth overall and obviously MTO was a big part of that, but why don't we take that offline and get you the specific numbers so I'm not guessing?

Laurence Alexander - Jefferies

I just know the two-thirds is now 40% for the non-traditional demand.

John Floren

That's right. That's right; I just don't have the exact numbers in front of me.

Laurence Alexander - Jefferies

The last question was just you've given some outlook as to the CapEx cost over the next few years and you mentioned the cost escalation. As you think about volatility around that number is it something underneath that 30% premium you mentioned, is it 10% or 20% potentially more a good bogie or?

John Floren

Yes, if you specifically relate it to Geismar I don't have a number to share. So I think we're looking at new build capital and we'll get a number but it's again time and materials, you're taking all the risk and escalation. So whatever number you get depends on how much contingency you build in and how much risk you transfer. So I think it's very difficult to predict. What I would say is the capital to maintain our plant you should be thinking for every million tons of operating capacity that we're operating about $10 million a year. So as we've done these major refurbishments and startups et cetera upon a 8 million ton run rate its $80 million a year. So very, very low sustaining capital once we get everything done.

Operator

Thank you. The following question is from Chris McDougall from Westlake Securities. Please go ahead.

Chris McDougall - Westlake Securities

So I just want to touch on your comment regarding buybacks for some excess cash and just understand in the past you've talked about the mix of dividends and buybacks and I was more under the impression that as your production volume grew overall that would be seen as more of a sustaining source of cash flow, it would prop dividend increases prior to buybacks but I just want to drill down on that comment more and may be give you the opportunity to expand.

John Floren

I think we have opportunities for both. But what we have prioritized for cash is growing the company dividend and share buybacks. Our dividend policy is to have it sustainable. So you're right. As you have more produced molecules in your portfolio you're able to generate more cash even at low parts of the cycle so it does dividend, if you do decide to raise it, more sustainable. So I think the more volume you have the more sustainable your dividend program becomes. We said growing and we are growing it every single year expect for the financial crisis period and then meaningful, what's meaningful I mean, everybody has their own definition, but if you looked at what we did last year, I think the stock price was around $40 at the time and we increased it to $0.80 or around the 2% yield. So we will go through that exercise here and make a call on that dividend recommend to our board and look to announce similar timing around the AGM. And then as we get more comfortable with the Geismar projects then we look at what new build is whether we go forward or not. It looks like we will have additional excess cash to look at buybacks.

Chris McDougall - Westlake Securities

And then lastly on inventory given the positive pricing environment here, do you think any differently about managing inventory in the face of may be a pricing would have pulled back or so?

John Floren

Yes, that's good point especially on the purchase product; we were running our inventories extremely skinny. We are in a high price environment. My experience in commodities over my life has been and you never say about the price, the cost curve forever. So night will happens, it's a windfall for our shareholders. So we are managing our inventories really, really closely to mitigate any impact if prices were to come down.

Operator

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

Steve Hansen - Raymond James

Yes, thanks just a one quick follow-up John. I just wanted to drill down on Trinidad quickly, I thought you can comment on you have some gas availability issue there in the platform retrofit cycle has increased, commentary suggested the cycle would be finishing around the end of March or Q1 making gas perhaps more available over time there. Is that still the case or what is the situation there?

John Floren

We continue to experience curtailments. The Minister of Energy was clear that he thought 2014 would be the end of the upstream maintenance. I think there are probably going to be a few periods, because of the market is so finely balance between supply and demand if there is any maintenance issues at all or unplanned. You will see some curtailments, but we do expect 2014 to be better than 2013, but again that's just guidance until we actually see it, it's what we expect.

Operator

Thank you. The following question is from Kia Lee from Tiger Veda Management. Please go ahead.

Kia Lee - Tiger Veda Management

You spoke about the difficulty of bringing on capacity in the US due to cost increases and delays. You also commented on how profitable the situation is in China I mean. Could you touch on what is the situation in China with regards to new capacity, how much is coming on, how fast it can come on, are that the same issues you are dealing within the US occur there? Because I want to tie that in also to one thing, you just shortly said which was in your experience commodity prices never stabled the cash cost. So I want to just bring that all together and figure out what's the situation in China on new capacity.

John Floren

Jeez, I wish I had all of the answers, because then I have a crystal ball. But I mean just directly the Chinese themselves the MTO producers are looking outside of China to build. I mean, a lot of the production that's come on in China has been at the high end of the cost curve and I think if you look at natural gas in China price is continue to grow up and about a quarter of the production in China still based on natural gas. And when you talk to those producers, you talk to governments, they are anticipating higher gas prices in whether they can run on higher gas prices or not will be factor with the methanol price.

So the future is really hard to predict, I think we will continue to see some building in China, but not to the extent we have seen over the last years. I think from what we understand about the regulation that you have to have an associated derivative plan. If you are building a methanol plant today to get a license for the coal most of the choices today seem to be MTOs as opposed to EMEA few years ago. But a lot of the new build methanol that's being reported is really what we call integrated coal to olefins, so they use methanol as a precursor to olefins and they make what's called a crude methanol, 90% methanol, 10% water, so really not available in the merchant.

In fact, the other side of the coin is when these integrated plants aren't able to run their methanol facilities they go into the local spot market and buy merchant methanol to run their plants. So I think it's really hard to forecast accurately all these dynamics. I think just directionally prices do not stay well above a cost curve in a commodity business for a long period of time.

I mentioned the new build and the risks associated with that in North America. If you had a view that the current price in North America is going to be sustainable for the next 15 years, then you will see a lot more being built than what's been announced, but I think the prognosticators in the industry that have a different price that than what we're currently seeing.

Kia Lee - Tiger Veda Management

Could you just as inaccurate as it maybe what are the current, what is the range of the capacity goods in China and what's the range of demand growth based on best judgment for looking out for the next three years?

John Floren

Yes, we are seeing a lot of new MTO project on the 2015 period, do they all get built? I think our current view that China will be an import market growing over time. The demand there will continue to grow and they will be an import market that will continue to grow.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Floren.

John Floren

Okay. Well, thanks very much for the interest, outstanding quarter and we are heading into 2014 in very good supply demand situation as well. We do expect higher sales volumes in Q1 and higher average realized prices as well versus Q4 2013. Offsetting these increases will be the impact of some of the higher cost opening inventories we talked about and also the benefit we experienced from a insurance recovery will not be repeated in Q1.

We are also expecting a higher effective tax rate in 2014 compared to 2013. The higher tax rate reflects the strong operating results in Canada and New Zealand where we have used all available unrecognized deductions and the effective tax rates in these jurisdictions will now approximate their statutory tax rates. Overall, we are expecting Q1 to be another outstanding quarter of earnings and cash flows. Thanks for the interest in the company. Look forward to talking to you in the next quarter. Bye-bye.

Operator

Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.

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