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Methanex Corporation (NASDAQ:MEOH)

Q1 2010 Earnings Call Transcript

April 29, 2010 11:00 am ET

Executives

Jason Chesko – Director, IR

Bruce Aitken – President and CEO

John Floren – SVP, Global Marketing and Logistics

Michael MacDonald – SVP, Corporate Development

Ian Cameron – SVP, Finance and CFO

Analysts

Jacob Bout – CIBC

Bert Powell – BMO Capital Markets

Peter Butler – Glen Hill Investment

Steve Hansen – Raymond James

Sam Kanes – Scotia Capital

Charles Neivert – Dahlman Rose

Fai Lee – RBC

Paul D'Amico – TD Newcrest

Chris McDougall [ph] – Tridio Capital [ph]

Bernard Horn – Polaris Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation first quarter 2010 earnings conference call. As a reminder, this conference is being recorded on Thursday, April 29th, 2010. 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

Hi. Good morning. Ladies and gentlemen, I would like to remind our listeners that our comments and answers to your questions may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause 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 ND&A and to our 2009 annual report for more information.

I'd now like to turn the call over to Methanex' President and CEO, Mr. Bruce Aitken, for his comments.

Bruce Aitken

Great. Thank you, Jason, and good morning, everyone. And welcome to the Methanex first quarter investor conference call. I have a number of colleagues with me in the room, and they will be available to help answer questions a little later.

Firstly, I'm pleased to report an improvement in our results from the first quarter. We sold 1.7 million tons of methanol, representing a 12% increase over the last quarter, and our highest volume of quarterly sells since the second quarter of 2007. This increase (inaudible) and anticipation of increased production volumes in Egypt and Chile. In the first half of 2010, we are managing our supply balances by increasing purchases of methanol, but expect that the next two years will become less dependent on purchases and supply more sells with produced product.

During the first quarter, we achieved an average realized price of $305 per ton, which is $23 per ton higher than last quarter. And this led to higher EBITDA of $81.5 million and net income of $29 million or $0.31 per share.

There were a couple of factors that caused that earnings to be lower than normal and lower than the consensus forecast of $0.42. Firstly, our stock-based compensation was about $0.08 per share higher than it would have been in a quarter in which our share price did not increase. We also have higher (inaudible) compensation in the first quarter each year due to accounting rules. Secondly, one of the factors that are difficult for analysts to estimate is the level of sales from produced methanol. We make a significant margin on produced methanol that at a much more modest measure than purchased methanol. So it's small changes in sells of produced methanol can have a substantial impact on our results. So despite achieving higher production in the first quarter, the benefit of this is not yet being reflected in our earnings as our sells of produced methanol were a little over net production in Q1. If sells were the same as production in Q1, this would have improved earnings by a further $0.05 per share.

I'll comment more on industry and pricing outlook a little later in the call. But first, I'd like to provide you an update on our operations. Our plant in New Zealand, the Motunui plant, continued to operate well and produced 208,000 tons of methanol. I'll comment more on the outlook for these operations and natural gas in that country in just a few moments.

In Trinidad, we produced 455,000 tons of methanol, which is a little below capacity for those plants as some cyclical issues led to a short period of unplanned downtime at our Trinidad site during the first quarter. These issues were resolved in late March. And the site has been operating well since that time. However, we are planning a short outage at (inaudible) plant next week to conduct another minor repair.

In Chile, we operated the site at about one-third capacity, and produced 304,000 tons of methanol. This represented our base quarter production in Chile in two years as we benefited from increased gas supply from the successful new gas development initiatives that are taking place in southern Chile. And again, I'll comment more on the outlook for natural gas and our plants in Chile in just a few moments.

I'll switch topic now and address the industry and pricing outlook. As I mentioned in our last conference call, methanol demand has recovered significantly over the past year. And current annualized demand has now surpassed pre-recession levels. We are continuing to see improved demand in both chemical and energy derivatives in all regions. And current indications are that demand will improve further over the coming quarters. The strong energy price environment continues to underpin healthy demand for methanol in both fuel-blending and DME in China. Demand growth into these derivatives has been very strong in recent years. And the outlook for both – the outlook for further growth is excellent.

China has recently introduced an M85 or 85% methanol national standards for blending methanol with gasoline, which took effect on the 1st of December, 2009. And we expect an M15 or 15% methanol national standard to be introduced later this year. Provincial programs in China will also continue to support more methanol fuel-blending. For example, we understand that Xanji [ph] province, which has been blending methanol into gasoline for more than 20 years is planning to introduce an M30 or 30% blending standard later this year. Also, the oil majors, such as Sunnytech [ph] have begun retailing M15 fuels in Xanji. And we understand that by the end of this year, all retail stations in this province will be offering methanol blends.

On a personal note, I was in China over the last quarter and visited another manufacturer who has M100, 100% methanol vehicles. That's subject to the release of a national methanol vehicle standards are ready for mass commercialization. I had the opportunity to test drive one of these vehicles. I found the performance to be excellent, with better acceleration than a similar gasoline-powered car.

The DME industry will also continue to operate at a higher rate during Q1. In the last two quarters, there's been a (inaudible) change increase from DME operating lights in China. And we believe that if high oil and LPG prices persist, this further upsides potential.

Turning to methanol supply over the last quarter, operating rights in the industry have improved. In China, production increased. And natural gas-based plants operated higher rates after the lifting of winter gas restrictions, and some new plants have began operations. This has led to some replenishment of global inventories, and we think some downward pressure on pricing.

In April, our average non-discounted price across the various regions was about $350 per ton. And we have just posted our May numbers kind of price for North America at $333 per ton. However, as prices have come down, we are seeing some higher cost capacity shutdown. In the last weeks, spot methanol prices in both China and Europe have increased. It does seem that the current pricing levels of high cost producers are moderating rates of production.

There are four new methanol plants representing 4 million tons of capacity scheduled to start outside of China by the end of this year, including our project in Egypt. If all these tons come on line promptly and operate well, then there maybe some downward pressure on methanol prices. However, history teaches us that it may take some time this capacity to operate at higher rates of utilization and have a meaningful impact on industry supply. Given a substantial amount of high cost capacity that is operating in the methanol industry today and the strong energy prices and demand growth continue, this new capacity may not be particularly disruptive to industry pricing.

Longer term, we believe the industry supply and demand outlook is very positive. Apart from plants expected to serve this year, there's little new capacity expected to come on line outside of China over the next few years. This suggests that even (inaudible) can serve the demand growth assumptions for the methanol industry. Supply will be challenged to keep up with demand. And this should support a healthy methanol price environment in the next few years. This environment also lines up nicely with our plans to increase production in Chile and possibly some of our other locations in 2011 and 2012.

I'll switch topic now and provide you an update on the key initiatives that we have focused on. First, in natural gas through our plants in Chile, as I mentioned earlier, we achieved higher operating rates at our Chile site in the first quarter as we operated two plants underpinned by increased gas supply from new gas developments in southern Chile.

As I mentioned over the last conference call, we expect an improvement of about 20% or 25% through our production in Chile in 2010, compared to last year. And this assumes that we operate one plant during the southern hemisphere winter when demand for natural gas is higher for residential purposes. In this regard, earlier this month, we reverted to operating one plant so we expect lower production from Chile in the second quarter. We also expect we've got (inaudible) two plants again and operating our Chile site at higher operating rates during the third quarter.

We continue to see positive news coming out of southern Chile on the development of new gas supply. The Fell and Dorado Riquelme blocks, where we have contributed capital to accelerate gas development, continued to increase gas deliveries to our plants over the last quarter. And these two blocks now account for more than half of the gas supply to our site in Chile today.

We are also beginning to see the results from nine other blocks near our plants, in which several international oil and gas companies have been ramping up exploration activity. For example, over the last (inaudible), we have four exploration blocks in southern Chile announce the gas discovery. And this could result in incremental gas supply to our site later this year. With momentum building in southern Chile and drilling activity forecast increased significantly, we expect production at our Chile site to increase more quickly in 2011 and 2012. And we continue to be optimistic about returning our Chile site back to a four-plant operation.

The next project I want to provide you an update on is the methanol plant in Egypt, which is almost complete. Prior to startup, there're some remaining construction activities, and then pre-commissioning to be completed in the process area. Much of the utilities have been in operation for several months. And the operating organization has been working shifts for some time to support the utility's operations and complete commissioning activities. We continue to target first methanol production in mid-2010. We are very excited by the addition of the (inaudible) exit into our supply chain, which we expect to increase methanol supply to our customers and increase our cash generation in the second half of this year.

Turning to our operations in New Zealand, we currently have sufficient gas to operate our 900,000 multi-million plant until near the end of this year, and are close to finalizing contracts with a number of gas suppliers to extend the operation of this plant. Based on the improved outlook for natural gas in New Zealand that has booked in recent years, we are optimistic that we can secure more gas supply in that country and potentially restart more capacity in the future.

In this regard, on the last conference call, I mentioned the new initiative we're involved in with a small company TIA Exploration [ph]. We committed around $10 million to fund some natural gas exploration in the Teranaki [ph] region near our plant. And we expect drilling to commence from this prospect in the second quarter.

I'll change topic now and make a few comments regarding our liquidity and capital allocation. During the first quarter, we generated $78 million of cash flow from operations before changes in working capital. And we continue to be in a strong financial position. We have conservative leverage, a $200 million undrawn facility, no refinancing requirements until 2012, and a cash balance of $196 million at the end of the quarter.

We have two immediate priorities for the use of our cash. Firstly, we have a number of A fund opportunities to grow our company. We expect to continue committing capital to accelerate gas development in southern Chile and improving the utilization of that site. And we also – further potential to increase in restock production in New Zealand and Canada. And we may commit some capital at these sites in the coming months. We are in a strong position to satisfy these initiatives and our planned capital maintenance expenditures.

And secondly, we have committed to returning a fixed cash to shareholders. With the Egypt project starting up soon, our business will have improved potential to generate cash flow. So we would expect to be in a position to build on our strong track record of distributing excess cash to shareholders through regular dividends and share buybacks.

Before stopping for questions, I'll briefly comment on our expectations for the second quarter. Firstly, pricing has moderated in line with the second – has moderated a little in the second quarter. So at this point, we would expect to have lower average price realization. And this should lead to modestly lower earnings. However, with the Egypt project targeted to commence operations later this year and the Chile expected to be back operating at higher rates in Q3, we believe that the improving trends of cash flow and earnings are to gain likely in the second half of the year.

So this point, operator, I'm happy to stop and take any questions that any of our investors might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question will be from Jacob Bout from CIBC. Please go ahead.

Jacob Bout – CIBC

Good morning.

Bruce Aitken

Hey, good morning, Jacob.

Jacob Bout – CIBC

I have a few questions on the M15. I think this was the first time that we've seen the suggestion here on a timeline when we could see the M15 standard being established in China, you're suggesting, by the end of the year. What gives you this level of confidence?

Bruce Aitken

I have John Floren on the line, Jacob. So I'll ask John to make some comments on that.

John Floren

Hi, Jacob. We were expecting, actually, the M15 last year. And as a result of some of the input from automobile manufacturers in China, it's similar to the E15 story in the US that we're all following today. The worry was that the older cars using an M15 standard would have some challenges with some of the seals and gaskets, et cetera. So the Chinese government decided to do quite a bit more extensive testing. And that delayed the M15 rollout by about one year. So we are expecting, based on our contacts, to have that standards some time mid to the end of this year.

Jacob Bout – CIBC

And is this just for the gasoline market or is there any direct blend into diesel as well?

John Floren

This M15 the direct blending for gasoline. Having said that, there is more and more methanol being blended directly with diesel.

Jacob Bout – CIBC

Okay. And then, should we look at this as a – the M15 or the 15%, is this on a volume basis or on an energy equivalent? And really what I'm trying to get at is if you're assuming that global – or the Chinese gasoline demand is around 65 million tons. Does that move the needle from, say, 4 million tons of direct blend to 10 million tons? Or do you go from 4 million to 23 million?

John Floren

The 15% is volumetric. Just because there's a standard it doesn't mean it's going to get widely used day one. But the trend would be there. I think it's an economic opportunity for gas blenders. And we're seeing some of the bigger guys come into space now with actual fuelling stations using methanol. And I think also that over time, because of China wanting to be more self-sufficient on energy, it's part of their strategy to use their coal to make liquid fuel. So I think those two things combined, over time, will lead to a more adoption of M15.

The other thing about China that's a little different than the US is because it's such a new market, they don't have an old accretive (inaudible) as I said the US has. So they don't have the same over earning of 20 and 15-year-old cars that US would have.

Bruce Aitken

And we have quite a presence also on M100, John. That's 100% methanol mix. So there's a bit of work to be done before the standards authority approves the release of 100% methanol vehicles. But certainly, the car manufacturers are gearing up for that, Jacob. And I think that will be – if we can roll this clock for 10 years, we're going to see a fleet of vehicles that run on 100% methanol.

Jacob Bout – CIBC

Okay, maybe just a last question to flush it out, what is your sense on what the current demand in China is right now for methanol, for fuel blend? And then, what is the upper end as far as how much can they actually blend into gasoline using the current engine technology in China?

John Floren

Well, if the current demand for 2010 is around 4.5 million tons of methanol into fuels, at the upper end, it would be just a guess. The market is the fastest growing market in the world. So you have to tell me what timeframe you're talking about in assuming that most of the cars end up using M15, we're talking four or five, six times where we are today, assuming any normal growth rate.

But as we get into these higher blends, as Bruce mentioned, it's really difficult to forecast. What's there, Jacob, is we've been following this over the last 5 to 10 years. We've always underestimated the amount of methanol going into energy applications in China, in DME and fuel-blending.

Jacob Bout – CIBC

And if I can just rephrase that question, the current engines right now. Can they handle a 15% blend or because there's been some suggestion that that number could actually be higher, closer to 20% or 30%?

John Floren

I think what we're going to do is 15% for a while, and then see what happens to the fleet. That's what I would suggest. And it's blending, so you don't have the same issue. It's as if you're running 100% methanol as far as the energy and the (inaudible) values. So we would expect to be into the standard for most of the gasoline specs in China for a few years, anyway.

Jacob Bout – CIBC

Okay. Thank you for that.

Operator

Thank you. The next question will be from Bert Powell from BMO Capital Markets. Please go ahead.

Bert Powell – BMO Capital Markets

Bruce, I was just wondering if you could share with us your thoughts in terms of the capacity that's coming on in the second half of this year that's inside China.

Bruce Aitken

Well, I think those 5 million tons came on last year, and then 5 million tons this year. So the (inaudible) being built in China and they are coming on. And they are producing. For the most part, they're in the inland provinces, and they're based on coal resources in those regions. The Chinese industry typically operates around 50% capacity utilization. I think that's a function of both economics and the fact that coal-based methanol is more challenging to operate than natural gas-based methanol. So I think they're operating rate is explainable.

Our long term view is that most that methanol will operate, and it will find its way into the fuel area, such as John as explained, that we see lots of growth occurring in gasoline and DME, and in diesel. I think that John also mentioned that the Chinese government is on a path to having a significant part of its liquid fuels or transportation fuels supplied by methanol manufactured in their own country.

Longer term, we also see – well even midterm, we see that the coastal provinces where all the people live – well not all the people, but a lot of people live and that where the chemical industry resides, that will be supplied by, in our view, imported methanol, mostly made from natural gas. So we've been saying that for a few years now. That's the way the world's worked out. And it's what we still believe in the future.

Bert Powell – BMO Capital Markets

Okay. And just to Chile, if you look at what you're finding today, is it reasonable, the exit rate for – at the end of 2010 would be consistent with 1.5 million tons of methanol in 2011?

Bruce Aitken

Roughly. I think that's a reasonable estimate. And we've had a few frustrations in Chile. I feel that it would – never quite delivered on what we hoped in any period. You can go back and explain the reasons that 2009 was a pretty tough year. And I know all of the companies operating down there cut back their budgets to slow things down. And while the latest earthquake hasn't had a direct impact on the plants, there's no doubt that the government is a bit more focused on the earthquake area, quite appropriately so. So we struggle to get the attention of some of the government departments that are important to us.

So there're some things that have been a bit of a frustration. But the reality is that as money is spent as well as the drill – the success rate has been quite high, and we see continued deliveries – increased deliveries of gas in our plants. So I think our view has unchanged, albeit things are happening a bit slower than we hope they would.

Bert Powell – BMO Capital Markets

Okay. And just last question, on the discounts, my recollection is that those start to roll off in the second half of 2010. In other words, I think you're currently disclosing about 10% is subject to pre-existing fixed-price contracts.

Bruce Aitken

That number was 20%. So it's similar as fixed-price contracts have already rolled out. You're probably seeing the biggest part of that impact has already occurred.

Bert Powell – BMO Capital Markets

Is that likely to – is that going to continue in the second half of this year or is that really more of a 2011?

Bruce Aitken

And I'll let John to comment.

John Floren

Hi, Bert. It's John Floren. So we've seen some impact in the first quarter. But there is another pretty significant one that's coming to the end at the end of April, impact on that. The next ones after that are more 2011.

Bert Powell – BMO Capital Markets

Okay. Perfect. Thank you.

Operator

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

Peter Butler – Glen Hill Investment

Good morning, good morning.

Bruce Aitken

Hello, Peter.

Peter Butler – Glen Hill Investment

I always thought that you guys had a rather lean organization. But I note that you must have more than one person writing the scripts for the press release and for the charming CEO's conference call.

Bruce Aitken

I assure you we do. It's a lean organization. And what's your point, Peter?

Peter Butler – Glen Hill Investment

Well, in your press release, on the subject of cash, you talk about to invest in growth and you don't mention shareholders. And in your conference call, you quite rightly talk – include shareholders there. When I read the press release, I was wondering whether – does this hint about another Egypt project coming around the corner? Or is there anything that doesn't meet the eye here?

Bruce Aitken

Nothing that doesn't meet the eye. I think we've been really consistent over a long period, Peter. And I think you can continue to see that consistency. But one thing that's different today is we've had lots of opportunities sitting in front of us that have outstanding returns. And whether it's a plant here in Canada or added capacity in Chile or New Zealand, every one of these initiatives that we're working on have sustained to a double-digit return.

And certainly, I'm – I'm an enthusiast for distributing increased cash to shareholders. But while we have great projects existing to grow the company and provide great returns for shareholders, I'm an enthusiast for that as well. So if there's any little subtle change at all, it's simply that we do want to pursue great projects that we have sitting in front of us.

Peter Butler – Glen Hill Investment

But the things that you mentioned, maybe doing some more exploration, which sounds damn good, and they don't seem to be extraordinary uses of cash.

Bruce Aitken

Well, if they provide extraordinary returns, they're certainly extraordinary uses, aren't they?

Peter Butler – Glen Hill Investment

Well, the point is that the things that you suggest as investments in growth, don't seem to be that large. And I guess I'm lobbying for maybe a large program to return cash to the owners.

Bruce Aitken

Yes. No, no, you are right. All of these projects themselves, there are a few things than just the (inaudible). They are light capital. It's not a huge amount of money. This is not a second Egypt or a Greenfield plant. That's certainly not in our current thing in the horizon. Ultimately, of course it is because we need to continue to grow business.

But the reality today, Peter, is by my definition, we don't have much in the way of excess cash. We've been operating between $150 million and $200 million that are cash. And in the environment that we've been in, the – the challenges that we've been confronted with, that doesn't meet my definition of excess cash. So we're certainly not at a point now where we're ready to start either – or increasing distribution.

Peter Butler – Glen Hill Investment

Well, Bruce, you've done such a super job as CEO. I just like the opportunity once in awhile to pull on those tail feathers.

Bruce Aitken

I could feel it tightening right now, Peter.

Peter Butler – Glen Hill Investment

Okay. Thanks for your help.

Bruce Aitken

Okay.

Operator

Thank you. The next question will be from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen – Raymond James

Yes. Good morning, everyone. Bruce, you mentioned of directing a little bit of strategic capital towards Canada is certainly quite interesting. I understand the unique strategic nature of that plant in Alberta in the context of not much being left in North America anymore. But am I to understand that you might have made some progress towards securing long term gas contracts with the domestic producer?

Bruce Aitken

That will be overstating our – the progress we've made. We certainly talked to other producers about the potential for long term contracts. But I would say, we don't much appetite for those. I think the North American gas market is a bit more focused on the immediate market. There're quite a few avenues we're chasing down. What we observed, if our plant in Medicine Hat was operating today, we'd have a blanket cash cost of around $200 a ton based on today's natural gas price.

So there's a great margin opportunity. But we need to commit $45 million or $50 million of capital to get that plant restarted. And none of us have a crystal ball in terms of what the future gas prices – and I am talking to lots of people that's bulls and bears out there. And it depends which group you choose to believe as to whether you think this is a great opportunity or not.

Steve Hansen – Raymond James

Okay. Yes, that's an interesting debate. Just shifting to China, if I may, the DME production certainly has shown some growth with recovery in energy prices of late. But there's also been some hiccups related to blending labeling with regard to cylinders. Do you guys have a view on that and how that's shaping up? I've been hearing things about it spreading, but–

Bruce Aitken

There's much ado about nothing there. It was an issue of labeling that was a retail – a wholesaler who was selling DME blends as pure LPG. So it's really an issue of being listed as straightforward in that one product that we're selling. And also, we understand perhaps blending at above the recommended rate of blending. So the authorities did crack down on that particular distributor and have been a bit more rigorous in treating the rest of the market. But we've seen little or no impact on demand as a result of that.

And as I mentioned in my comments, the last six months, we've seen real steep change in the amount of methanol flowing into DME. So I think that – while that issue has created a bit of noise in China, it certainly hasn't impacted the market at all.

Steve Hansen – Raymond James

Okay, great. That's encouraging. And then just one last one, if I may also, related to China, do you have any comments on – or perspective on the anti-dumping investigation by China right now and how you think that's going to play out? I understand we could be due for a ruling or some sort of finding here in the short term.

John Floren

Yes. It's John Floren. We are expecting to hear something in the next weeks. We're expecting to hear something by April 1st. So I think that we haven't heard something indicates that China's going through a pretty difficult decision-making process on this issue. I'll remind you that the number two and number three importers into the country, Iran and Oman, are excluded from this investigation. So it's hard to say what's going to happen. But we think an impact of any duties will be minimal as people would just readjust their supply chain. I think our concern is what could be next if there's not an impact on imports that the Chinese are looking for. So it's a bit of a story to be played out in the next 12 months.

Steve Hansen – Raymond James

Sure. Okay. That's it for me. Thanks.

Bruce Aitken

Sure. Thanks, Steve.

Operator

Thank you. The next question will be from Sam Kanes from Scotia Capital. Please go ahead.

Sam Kanes – Scotia Capital

Good morning.

Bruce Aitken

Good morning.

Sam Kanes – Scotia Capital

(inaudible) on math, Bruce, the $0.32 basic Q1 number you referred to, of course, if you had matched production with your sales produced volumes, you would have picked up $0.05. And there was $0.08 of stock comp, one shot in Q1. When you refer to Q2 being down in earnings per share, which number are you referring to?

Bruce Aitken

Well, I'm not going to talk about stock comp. That's like forecasting the methanol price. I was really referring to the core earnings, which being at a $0.32 plus the $0.05, if you like.

Sam Kanes – Scotia Capital

Okay. So it's $0.32 plus the $0.05. That's what I was looking for. Okay. I imagine there're other people looking at mothballed methanol plants around the planet, including yourself in Canada.

Bruce Aitken

Well you know, there's not too many as you're saying. When we've scanned around the world, a lot of the plants that you think about. There's a plant that operates in the US and in Canada, for that matter. Most of them is being just manned order, or moved, or sold, or done something with them. So there're very few that are actually mothballed and sitting in a location where there are competitive (inaudible) of supplies. So I think this is a really unique opportunity that we have.

Sam Kanes – Scotia Capital

When you say very few, would you elaborate on one or two areas?

Bruce Aitken

There's only one I can think of. There's one in Malaysia. Is there any other, John, that you can tell? There's one small plant in Malaysia that as I talked about restarting as well.

Sam Kanes – Scotia Capital

Okay. With respect to DME recovering in China, in your initiatives, how you profiled in your priorities, obviously, some were below the ones you've announced are DME expansions at your site in China with your partners as well as Egypt. Is there anything of any – noteworthy of mentioning in there?

Bruce Aitken

So with actually just the start of the fund in engineering and designs for our project in Egypt, there – we're a 20% shareholder in it. It's a few million dollars of the billets. That's why it doesn't rate much for mention. We never set out wanting to be DME producer. We were always interested in the industry and willing to understand it. And we're willing to support our partner in China. So that's the reason that we've invested. But it's a pretty small contribution. And we still don't have any ambition to become a major player in that industry.

Sam Kanes – Scotia Capital

Switching then to the opposite side, feedstock costs, in integrating yourself, which you're doing tentatively, I guess, or moderately in Chile. Does it make strategic sense, from your perspective, of being more aggressive on the feedstock side with respect to your usage of feedstock?

Bruce Aitken

I think it does for me. Our business model has been to build these big plants that last for 30 or 40 years, and will underpin those with long term contracts. Now, in some places, that's worked really well. In other places, it hasn't worked well at all. And Chile's a great example of – where we've had long term contracts that people, for various reasons, haven't – on it. So a different model is to become more integrated into the upstream. And I think that's what we've – I think you might have used the word tentatively moved into that.

I don't think where we're at – we don't want to turn ourselves into an E&P [ph] company. I don't think we have the skills and we don't have the ability to manage risk in the way that those companies do. But I think the model that we're developing in Chile, we kind of like. If we can develop a similar model in other markets, then that – we're really quite enthusiastic about that as well. So it does spread some fly of a bit more capital important to the upstream.

Sam Kanes – Scotia Capital

Yes. Last thing, there's been a variety of MTB/ETB switching going on, sometimes one way, sometimes the other. I'm not sure if there's any trend whatsoever there at all. This is to you John,; are you seeing any trend there?

John Floren

We're seeing growth in MTB/E. That's the trend we're seeing. I think you're aware of the enterprise plant in North America that started up. It was about 200,000 tons of methanol. That's all for export. We continue to see growth in MTB in China at a very significant way. And Africa, they replaced leads. So it's not growing at the rate of fuel-blending and DME, but MTB is far from a dead product. I think if we look at Hanston's [ph] results, they probably consider it as specialty based on the amount of money that they're making from MTB/E. So I think the world outside the US is still using a lot of MTB/E. And we'll continue to do so.

Bruce Aitken

And it's been an extraordinary profitable product in the last couple of years probably.

John Floren

Yes. The interesting dynamics, Sam, is that as the octane becomes short because US is importing so much octane because of not using MTB/E, there's more demand for MTB/E in those other markets where they're short in octane the US is importing, so pretty interesting things happening.

Sam Kanes – Scotia Capital

Also it showed up in Liondale's [ph] – some form of IPO or prospectus here along the same lines.

John Floren

Absolutely.

Sam Kanes – Scotia Capital

Thank you, gentlemen.

Operator

Thank you. The next question will be from Charles Neivert from Dahlman Rose. Please go ahead.

Charles Neivert – Dahlman Rose

Good morning, guys.

Bruce Aitken

Good morning, Charles.

Charles Neivert – Dahlman Rose

A quick question on China and not so much the cars that are on the road, but the cars that are being built, what's being built now in terms of compatibility with the M standards? Are they mostly in effect, what we would call a flex-fuel, where they can take the M85? Or are they being built more in line with an M15 or M20 situation? I mean, what can you say about what's going on there?

John Floren

If you could a blend, Charles, I think most of the cars that are being built today can consume M15, no problem. I think our quote was about $100 per car difference to be compatible with alcohol fuels, similar numbers are still what we're seeing in the US. As far as M85, I don't have the exact split. But there are quite a few vehicles being built in China that can take M85 as well.

Charles Neivert – Dahlman Rose

Okay. And then just briefly, you talked about the other plant in Trinidad going down for some – for a quick fix and some maintenance. Can you comment about how long it might be and what kind of loss relative to what we saw in the first quarter on the other plant in Trinidad in terms of tonnages?

Bruce Aitken

Yes. We're ready to – the current – the outages occurring over the next week is about eight days. And that plant produces at 5,000 tons a day. So it's about 40,000 tons of lost production. I would say I've been a bit disappointed in the production rates in our (inaudible) facility in particular. It's a big plant. And they're all small things that are very hard to predict and very hard to anticipate.

The one that occurred in March was a design fault in a large compressor. And when we finally found what the issue was and back to the vendor, the vendor acknowledges end user as a fault, and never told us. So that was really, really disappointing that that's something we could have resolved had we had communications with that vendor. So it seems to be small, annoying, little things like that. And this current one is a similar nature again, another design or fabrication issue.

Charles Neivert – Dahlman Rose

Okay. That's it from my end. Thank you.

Operator

Thank you. The next question will from Fai Lee from RBC. Please go ahead.

Fai Lee – RBC

Great. Thank you. My first question relates to your estimate of the marginal cost of production in China. We've seen some production switch on at higher prices, and we've seen some switch off when prices have come down. Do you think that with the North American price coming down at $330 net price, maybe $300, is that where you see the marginal costs, maybe that's lowering enough to keep China's production offline? Or do you think that you'll see some more production switch on and go back and forth here?

John Floren

It's John Floren. We're at supplies here in China. I think the import clarity price today is around $270, $275. And we got there – what we have seen is about 1.5 million tons in China, mainly coal-based turnoffs for reasons of maintenance, is the official reason. We probably think there's probably some maintenance and mostly cost curves impact. I'll remind you that if you're buying coal at $110 a ton. You double that to make a ton of methanol. So just cash cost for coal alone is $220. So if you're inland getting it to the coast, it's $50. You can see the economics pretty quickly. So I think we're at the inspection point right now. And that's why – Bruce mentioned earlier of seeing some bounce back in the spot market in China.

The other thing that's happening, we talked about dumpings a little earlier. We are seeing quite a few of the metal traders in China moving up their imported material from Saudi, Indonesia, and Malaysia in front of what they expect the dumping ruling here in the next week or so. So that has also contributed some of the pressure on the downside.

Fai Lee – RBC

Okay. And when you say your inflection point, about maybe – are you referring to $275? Or do you think that your new level around $300 is reasonable?

John Floren

Again, China, we look at the cost curve. If we get to that $270 number as an example, there's probably 100 plants on that place on the curve. They're all acting independently. They all look at cash. They all have different drivers. So it's hard to say that they're all going to act in concert. So it's really difficult. There's a range, is what I would say.

Fai Lee – RBC

Okay. And earlier Bruce you commented – I'm just going to switch topics. You talked about the new capacity that's coming online is going to take some time to hit the market, if that seems to be historically what's happened. I just wanted to confirm that's not – I'm trying to say something about your Egypt plant, and maybe you can comment on how you expect to see that ramp up over the next year.

Bruce Aitken

Sure. And I've got Michael MacDonald in the room as well. He's running our project in Egypt. (inaudible) last month, would make a comment on how we've gone on over the last quarter, and then what our forecast is.

Michael MacDonald

Thanks, Bruce. Hi, Fai. Just to remind people of the status of the project right now is that the utilities are operational right now. It's now focused on the pre-commissioning of the office and plant, and the rest of the profit. In terms of schedule, since the last conference call, we have incurred some delays from our expected schedule and that was due to some construction execution issues relating to the contractor and head contractor. So these are construction issues. And they're nothing related to the underlying front.

Our target there continues to be startup in mid-year. And our focus is to achieve a safe and reliable startup. And we continue to expect to produce some methanol in Q3. But if we don't recover the current delays, the Egypt volumes will have a less impact on Q3 earnings than if we were to recover delays.

I should add, Fai, that in one of the morning comments, I did note that there was note about the impact on Q2. I think we can say with certainty now that Egypt will have no impact on our Q2 earnings.

Bruce Aitken

Yes. I think we've got it to that last point. I think that Mike's take on this, Fai, this is a 30-year we're building. And we built it out over the last five years and we're – during quite a difficult time in the global economy and a challenging country, and we've always acknowledged. And we're getting close to the end. And I now everyone wants to fine-tune their models to determine exactly when the things are going to start up. But we wanted to cautiously, carefully make a good job of it. So we're much more focused on doing that than we are on rushing the start just in order to say that we've started in that.

So we'll continue that steady process. As Michael said now and I think as I've said last time, don't expect anything in Q2. And I think that's – we're confirming that now. And the volume in Q3 will be a bit dependent on whether we can catch up some of the delays that Michael talked about.

Fai Lee – RBC

Okay. And just in terms of if you – when you do start up, it's not going to be 100% based on your current targets. Are we talking maybe like 60%?

Bruce Aitken

No. This'll probably circle up to 100% remarkably quickly. But the challenge here is that there'll be a few gremlins [ph], and you end up turning them up for a week, and then turning it back on again. Our experience since starting up plants in Trinidad and Chile has been that when we're ready to start them up, today operators have high rates of utilization right from the beginning.

Michael, is there anything?

Michael MacDonald

Absolutely, right, yes.

Fai Lee – RBC

Okay. All right. No, I just wanted to ensure because earlier you were talking about some of these plants not operating – not particularly to yours, but they may not be operating at high rates right away.

Bruce Aitken

He's probably talking about some of the other plants.

Fai Lee – RBC

Okay. Yes, just a last thing, just on the share compensation, Sam's question, if – maybe it might be a question for Ian. But if your share price doesn't change from the end of the last quarter, should your expense not come down? And also, I think there were some – I thought there were some (inaudible) in the first quarter that may have impacted your expense.

Ian Cameron

But Fai, if the stock price doesn't come down, we would still have stock compensation expense because as part of the stock compensation expense, it gets amortized over the testing period. So that would include stock options and PSEs.

Fai Lee – RBC

Right. I was aware of that. But I'm saying if your share price doesn't change relative to Q1, should your not – should your expense not come down?

Ian Cameron

That's the–

Bruce Aitken

Yes, substantially.

Ian Cameron

Substantially. So it would – $5 million of that stock compensation in the first quarter rates to the increase in the stock price. And then there's a waiting every year to stock compensation based on – as Bruce said earlier, on the accounting rules that provides an extra charge in Q1, which reduces significantly in the other quarters.

Fai Lee – RBC

Okay. That's what I was trying to get at. So your base might not really be $0.37. It might be a little higher than that depending on where your share price goes.

Bruce Aitken

Well, I don't know. I'm not quite sure what probably is your point here. And maybe we can just take this offline.

Fai Lee – RBC

Yes. That's all right. That's fine. Thanks.

Bruce Aitken

And help you with it later.

Operator

Thank you. (Operator Instructions) The next question will be from Paul D'Amico from TD Newcrest. Please go ahead.

Paul D'Amico – TD Newcrest

Hi guys. Bruce, just really quick, I know I've asked you this in the past. But in terms of the August inter-quarter [ph] 2012, is there any updated thoughts you can give into refinancing interests or what not?

Bruce Aitken

We wouldn't seem to refinance it. But it's a little far out in the future. We think the structure of our balance sheet is the way we like it. So at this stage, we have every intention of refinancing that bond.

Paul D'Amico – TD Newcrest

Is this something that – as you get closer, are going to be opportunistic? Or are you already pigeon-holing very close to the end date?

Bruce Aitken

Well, we certainly – I don't even think in the next 12 months, for sure. But I guess we've always got a little watch on the market. And we'll make decisions (inaudible).

Paul D'Amico – TD Newcrest

Okay. And something in terms of a bit of a history lesson here, you mentioned in terms of potential restart in Canada as an example and looking for long term gas contract supplies and what-not. What long term arrangement would you be talking about? Are we talking 10 years, 15 years plus?

Bruce Aitken

No, no, no. I think there's a – in my mind, there's a dislocation between North American gas prices and oil prices today. They present a great opportunity for methanol. And we wouldn't – and our – it's very hard for me to envision a circumstance where we would either think about burning our Greenfield plant in North America. The good fortune is that we have this plant in Medicine Hat. It's about 470,000 tons. It's in pretty decent condition. But albeit, we have to send some money to get it in operational order again.

But for a relatively small amount of capital. We can bring another 0.5 million tons into the supply chain with a decent cash cost if we could find gas prices that are similar to prices that prevail today. And one of the challenges is if you look at the forward curve for cash, it's a lot stronger than today's prices. So we've been trying to think of some – find ways of seeing some certainly around fees at cost before we go into (inaudible) $50 million.

Paul D'Amico – TD Newcrest

No, I understand that. What I was trying to get a gauge on is how much certainty in terms of how far out. And my second part of the same question is, in the past, for instance, is that a shorter term than it was in the past such that you're more confident now?

Bruce Aitken

Yes. No, I think – in my mind it's a short term opportunity. Eventually you'd say oil and gas prices in the – in North America will end up at some clarity as they have been for most of the last 20 years. So I think we're in a – we're in a period now where the shale gas or LNG, or conventional gas, or demand, there're all sorts of reasons why gas prices are low today. And it looks to us as though that's something that might prevail for the – through the next – and whether it's three years or five years, I don't know. I doubt that it's 10 years.

So once you've spent the capital, then I think we've bought ourselves an option to operate that plant whether we choose to or not. And that's probably our ideal circumstance that we've built ourselves (inaudible) of a lesson, that they would have taken advantage of this continuities and gas pricing away from Canada.

Paul D'Amico – TD Newcrest

I appreciate that. Now, that clarifies it. Just last question on eMethanex, I know it's been beaten to death, but just to get an idea on Q3 as a range. At this point, are you still confident you're going to be north of 50%?

Bruce Aitken

I do. I don't want to throw out numbers forward because it's – it's too hard to say. I think the project's going on really well. We're actually quite pleased where it is. It slept a little. We're a little disappointed with that. But in the context of the scale and size of this project, I think it's going on along really nicely. There're no red flags that we can see that will cause significant delay. So as I say, for us, safety, reliability, quality, all those are important features to us in starting this plant out. So we don't intend to rush it. But we want to do a good job when we do start it out.

Paul D'Amico – TD Newcrest

Okay. I appreciate it. Thanks.

Operator

Thank you. The next question will be from Chris McDougall [ph] from Tridio Capital [ph]. Please go ahead.

Chris McDougall – Tridio Capital

Hey, guys. Thank a lot. A couple questions, first one, just – I might have missed something you talked about with the Canadian facility. If you decided to start it up today, about how long would it take for it to be operational?

Bruce Aitken

Well, it's about a 6-month schedule to return it to operating status. And a good part of that is we have to – we're going to recruit 100 people, so – and train them. So that's not something you can do overnight.

Chris McDougall – Tridio Capital

Okay. Great. And how long do you think until you make the decision to go forward with that? You discussed some of the factors, but what's your–?

Bruce Aitken

I think during the summer, we will make that decision. And it's not a smart thing to even contemplate starting it up in the middle of winter. So what's in my mind is this is a spring start in 2011.

Chris McDougall – Tridio Capital

Okay. Great. And then, touching back on the stock comp and any other special items that occurred either positive or negative to earnings in first quarter, so you said that there was a $5 million hit to stock comp of additional stock comp because of the run up in Methanex shares. I'm just trying to make sure that that increase in stock comp was due to an increase in Methanex shares where it will go away if Methanex shares stay flat versus the average during last quarter?

Bruce Aitken

Well, it's a bit complicated. I think the answer is yes. At the end of the (inaudible) – there're three elements here. One, there's a regular amortization of stock comp over a testing period. So that's something that occurs every quarter regardless. And then, there's an adjustment stock comp based on the share price. This quarter, the shares were up 20%. So you would expect that there would be a hit to income as a result of that. And I hope that they are – with 20% every quarter. And we have to explain this (inaudible). We'll all be very happy investors at that stage. And then the third element, and Ian mentioned it before, in Q1, every year, accounting rules forces them to – an additional expense that is not repeated during the other three quarters of the year.

Chris McDougall – Tridio Capital

All right. And what was the amount of that expense?

Bruce Aitken

$2 million to $3 million.

Chris McDougall – Tridio Capital

Okay. Thanks. And so, the additional stock comp, aside from that first quarter expense, is due to the amount of change in Methanex shares or due to the level?

Bruce Aitken

Yes, most it's a run up on the stock price.

Chris McDougall – Tridio Capital

So it will go down if the stock price doesn't change?

Bruce Aitken

Yes, if the stock price goes down, well then that was a negative adjustment.

Chris McDougall – Tridio Capital

Okay. Okay, great. Thanks a lot. Sorry for the detail.

Operator

Thank you. And the last question will be from Bernard Horn from Polaris Capital. Please go ahead.

Bernard Horn – Polaris Capital

Yes, good morning. And I just wanted to follow-up a little bit on this price discrepancy between gas and oil in North America. I mean, we know that there – you suggested that the reason is because of the shale gas coming on, and of course, the LNG glut, if there is one, around the world.

So my question is as a potential buyer and when you're trying to procure long term supplies, how much credibility do you give to the gas producers who have indicated that it seems like the shale gas has quite a long life to it because every once in awhile you hear about long term viable sources of gas. And then, it hangs in there for a little while. And the next thing you know, we've got a shortage. I don't know how you make a decision based on that. But maybe you could give us a little bit more of an insight into how you're thinking about it and whether or not it's shale gas you'd be relying on or imports of LNG, and how that – how Medicine Hat would secure those or how they would get it – how you'd get into Medicine Hat.

Bruce Aitken

Most of the gas that we would try and source into Medicine Hat is conventional, shallow gas that is being produced in Alberta over the last 20 or 30 years. And there's been a lot of it. And it still is. I think the – there are lots of different opinion on shale gas. I look at the Barnett shale, they've produced over 5 Tcf of gas out of that shale over the last few years. So you know that the gas exists and you know you can produce it.

How sustainable is it? What are the long term decline rates? How much gas is ultimately recoverable? I'm certain they expect not to answer any of those questions. As I really – I think some people who are very positive about it, and others are quite negative about it. So I think the jury's out in terms of the long term recoverability of shale gas.

But there's no doubt that short term, (inaudible) it's having an impact on the market because it's adding supply in a market that's already well supplied. And I think LNG is just the icing on the cake. There is a lot of LNG coming into market. And I think North America is the market of last resort. And there still is LNG turning up in the US today despite the fact that gas prices are low.

So my own feeling is that supply is overwhelming demand. And it probably continues over the next – and whether it's three years or five years, I don't know. But that's the opportunity that we have to source gas and away from Canada, and turn it into methanol, which trades like oil. So we're taking advantage of that disconnect between methanol and oil, or between natural gas and oil.

Bernard Horn – Polaris Capital

Okay. So even though you have to take – you have to have an opinion on the viability of shale gas, as long as it exists for the next two or three years, the capital investment you make in Medicine Hat is sufficiently low enough that you can make that as long as you have a discrepancy that lasts three to five years, and then you could be out of it if it returns to clarity?

Bruce Aitken

We've run also some models around. And it's all gas pricing and methanol price. Those are two big variables. And then, the – many of those models, you get your money back in 12 months. So this is not a long term investment. This is all about building ourselves an option to operate that plant if the economics makes sense. If it doesn't make sense, then we'll turn it off again. And it feels – if my three to five years is right, then the – if you paid your capital back in 12 months, you know that the return on that capital is going to be over a three to five-year period.

Bernard Horn – Polaris Capital

Right. And would LNG have any viability for you at all there?

Bruce Aitken

No, not really. And Medicine Hat's in the middle of the prairie. So this is all about, as I say, conventional gas available in that location.

Bernard Horn – Polaris Capital

Okay. So it's just a – all right. No pipelines that come into there from elsewhere like from the coast or anything like that.

Bruce Aitken

And most of the pipelines export gas. There are lots of pipelines in the area that – LNG will find its way into the US Gulf and maybe the US Coast, and what has to (inaudible) in terms of the market. But will never find its way to Medicine Hat.

Bernard Horn – Polaris Capital

All right. Okay. That's very helpful. Thanks a lot.

Bruce Aitken

Well, thanks, everyone, for your comments. So we have got our annual general meeting, in fact, in another hour. And I know it will be webcast. So any of you who are interested in there – in continuing to learn more about Methanex, you're welcome to join us in another hour. I feel very positive and optimistic about the situation that we're confronted with. We're in an environment where demand for methanol continues to grow robustly, energy prices are high. And we talked about the outlook for energy applications. And we're sitting here with lots of opportunities to grow our low cost production base to take advantage of the positive environment we're in. So I look forward to the next few quarters or next few years (inaudible) for just a great run here. So, in the interim, thanks for your support and we'll talk to you next quarter.

Operator

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time and we thank you for your participation.

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Source: Methanex Corporation Q1 2010 Earnings Call Transcript
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