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OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to
the Methanex Corporation First-Quarter 2008 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we
will conduct a question-and-answer session. As a reminder, this call
is being recorded on Thursday, April 24th, 2008.
I would now like to turn the conference call over to Mr. Jason
Chesko, Director, Investor Relations. Please go ahead.
JASON CHESKO, DIRECTOR, IR, METHANEX: 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 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 the bottom of our latest news release and to our 2007 annual
report for more information.
I would now like to turn the call over to Methanex's President and
CEO, Mr. Bruce Aitken, for his comments.
BRUCE AITKEN, PRESIDENT AND CEO, METHANEX: Thank you, Jason and good
morning everyone and welcome to our First-Quarter Conference Call.
I've got a number of colleagues with me in the room and they will be
available to answer some questions a little later.
I am pleased to report that we have completed another good quarter.
In the first quarter we generated EBITDA of $127 million and net
income of $65 million or $0.67 per share.
We achieved an average realized price of $545 per ton in Q1, while
sales volumes which was down compared to most recent quarters.
As has become typical in a transition pricing period, our earnings
from quarter to quarter are volatile and this has been the case over
the last couple of quarters.
In the fourth quarter, our earnings benefited significantly from the
rising price environment and were much higher than consensus
estimates; while in the first quarter our earnings were negatively
impacted by the decreasing methanol price environment.
As I mentioned in the last conference call, there are a few factors
mainly related to timing of inventory flows, which caused our
first-quarter earnings to be lower than Q4 '07, despite average
contract prices being similar in both quarters.
Firstly in Q1, our sales mix was less weighted towards sales of
produced methanol and it's the sales of produced methanol that drives
our profitability. Second, in the first quarter we did not benefit
from the sale of low-cost inventories resulting from our lower
methanol price environment, as was the case in Q4. And thirdly, as a
result of the declining methanol environment, we realized a negative
catch margin of $19 million on purchased price in the first quarter,
compared to a $35 million gain in the fourth quarter.
I'll comment more on the industry environment, second-quarter pricing
and our earnings expectations later in the call, but first I would
like to provide you with an update on our operations.
Production from our large low-cost plants in Trinidad during the
quarter continued to be excellent. We produced a total of 510,000
tons, which is higher than design capacity for those plants of
481,000 tons.
Our site in Chile continued to operate at about 30% of capacity
during the quarter, with gas supply sourced exclusively from Chile
and we produced 309,000 tons. The only pleasing aspect of this
performance is that the rate of production was higher than both Q3
and Q4 2007 which is a result of the fact that we had recently been
sourcing more gas from Chile. I'll comment more on the outlook for
natural for our plants in Chile again in just a few moments.
Our Waitara Valley plant in New Zealand operated well during the
quarter and produced 120,000 tons of methanol. I mentioned on the
last conference call that we working on switching production to one
of our larger 900,000-ton plants at the nearby Motunui location. I'm
pleased to be able to confirm that we have agreed to terms on a
gas-supply arrangement which will allow us to operate the larger
Motunui plant to at least the end of 2009, and will add about 400,000
tons of incremental production to our supply chain.
This agreement is subject to some final authorization procedures
which we expect to conclude in a few weeks. But in the mean time, we
are well-advanced in preparing to restart the plant. We plan for this
to occur during the third quarter and we will continue to operate our
smaller Waitara Valley plant until around that time. The capital
costs associated with the restart is about $55 million.
With the restart of the Motunui plant, we've affectively replaced one
Chile methanol plant at economics that are comparable to a plant in
Chile in the current price environment. After start, we will have
about 1.4 million tons of flexible capacity in New Zealand, which
could operate in the future, subject to availability of gas on
commercially acceptable terms.
It's perhaps useful at this point to provide some updated guidance on
natural gas pricing. With increased capacity in New Zealand and new
sources of gas supply in Chile, our natural gas pricing has changed a
little. Based on our production mix with Chile at around 30% capacity
and the Motunui plant startup; the overall average price we pay under
our gas contracts is approximately $1.25 per MMBtu at posted methanol
prices of $150 per ton. And we share approximately one third of the
upside on methanol prices with our gas suppliers above their price of
$150.
Switching topics now to the industry and pricing outlook; over the
last few months we have seen some rebalancing in the industry and an
improvement to the global inventory position. As a result, pricing
has moderated, but remains at high levels with the average
non-discounted price in April across the major regions [set] at about
$490 per ton.
As we had expected, the very high price environment led to China
becoming a net exported in Q1 and we believe that this was the
biggest influence on rebalancing the industry. There has also been
some softness in demand in some derivatives such as formaldehyde and
biodiesel in some regions. However, overall demand remains healthy in
both traditional chemical derivatives and in energy applications, as
higher global energy prices continue to drive strong demand for fuel
blending and DME in China.
In addition, high energy prices are continuing to support strong
demand for MTBE. With the recent reduction in methanol prices, we've
already seen some supply-side reaction, as prices are now at a level
where high-cost producers can no longer generate positive cash flows.
Natural gas prices are in excess of $10 in MMBtu in the US and in
Europe, so the gas costs alone to produce methanol in those markets
are in the $400-a-ton range.
There are also producers in China who are faced with natural gas
curtailments and escalating core feedstock costs and some who have
the opportunity to switch production from methanol to ammonia. As a
result, the overall industry operating rate in China has recently
declined. China has reverted to becoming a net importer of methanol
and recently we have seen an increase in spot methanol prices, which
reflects an increased tightness both in China and in other global
markets.
I will switch topics now and talk about some of the opportunities and
challenges that we face. Firstly, natural gas supplies to our plants
in Chile; as I mentioned earlier, we continue to operate our plants
at about 30% of capacity with gas supplied exclusively from Chile.
Last month, the Argentine government announced an increase export
duty on natural gas exports to a level that represents the highest
imported natural gas price into Argentina, which would currently be
about $7 per MMBtu.
Given this level of duties, we do not expect to see any gas supply
restored from Argentina. As I have commented before, the solution to
our gas-supply challenge is to source more natural gas from Chile.
Gas source from Chile is not impacted by this export duty and thus
offers an economically more attractive and secure long-term gas
supply source for our plants.
In this regard, we are continuing to see good progress being made on
gas development in Chile. Firstly, with the support of our financing
announced last quarter, GeoPark has accelerated development in the
Fell Block near to our plants. GeoPark increased gas supply to our
plants during the fourth quarter, and is currently supplying a little
less than 5% of our total gas needs in Chile.
We expect further increases this year, as they plan to be supplying
us about 7% of our total gas needs by the end of this year. Their
ultimate goal is to supply about 20% of our total needs.
Secondly, our main gas supplier, ENAP, continues to make good
progress with its gas development activities in southern Chile and we
expect incremental gas supply to result from these initiatives before
the end of this year.
And thirdly, the government of Chile is in the process of finalizing
and signing the contracts for the nine exploration blocks that it
awarded to international oil and gas companies late last year under
its bidding round. We were advised that these contracts will be
signed in the next few days and expect exploration activity in these
blocks to commence in the coming months.
Based on the significant activity and monetary commitments related to
natural gas development in southern Chile over the next few years,
I'm optimistic that we can return to running our four plants in Chile
in the next few years.
As I've stated previously, it is a key objective for us to accelerate
gas development activities in southern Chile. And I expect we will be
able to make further announcements on some initiatives in this regard
over the coming quarter.
The next opportunity I wanted to provide you an update on is our new
methanol project in Egypt. The project continues to be on budget and
on schedule to start up in early 2010, with the project now about 30%
complete. [Piloting] activities are almost completed. Dry dredging
for the berth has well progressed and there are currently over 1,000
people on the site involved in construction activities.
As this plant will be among the lowest cash-cost plants in the world,
we expect that it will produce significant cash flow for our
shareholders, after it starts up in early 2010.
The last projects I wanted to discuss are our DME projects. Firstly,
our joint venture DME project in Egypt continues to progress well.
Our project team has been formed to develop the project and we
recently have held meetings with the DME off-taker and the port
authorities to address sales and logistics. This project is a good
example of the viability of DME outside of China and we are
continuing to pursue other similar opportunities.
Secondly, our joint venture DME project in Shanghai China in which we
are in a 20% interest, commenced operations in November and is
operating well. DME demand in China continues to be strong with a
high energy price environment supporting a high DME price, and thus
methanol affordability into DME. DME produced from our joint venture
is mostly being blended with LPG and sold LPG distributors in China.
I'll change topics now and make a few comments about our liquidity.
Our cash flow from operating activities during the fourth quarter was
$110 million after changes in working capital. During Q1, we returned
a total of $88 million to shareholders via dividends and share
repurchases. As of a couple of days ago, we had almost completed our
normal course issuer bid, having repurchased about 8 million shares,
and we expect to complete the bid over the next few weeks.
We have a number of uses for cash as part of our consideration of
managing our balance sheet. Firstly, we are in a strong position to
meet our commitments on the Egypt project. Secondly, we will continue
to focus on opportunities to invest to accelerate gas development in
southern Chile and to improve the security of natural gas supply to
our Chilean plants. And finally, we will also continue to explore
initiatives to invest to expand the demand for methanol in the energy
markets.
With a healthy financial position and the strong methanol price
environment, we are well-positioned to meet all of these objectives
and continue to build on our track record of returning excess cash
flow to shareholders.
Before stopping for questions, I'll make a few comments regarding our
expectations for the second quarter. Firstly, as prices have trended
down over the first quarter and into the second quarter, we would
expect our average realized price to be lower in Q2 and this would
have a negative impact on our earnings.
Secondly, as I mentioned earlier in the call and on previous
occasions, in transition pricing periods it is normal that our
earnings will be impacted either positively or negatively by the cost
of inventory, whether the inventory is produced at our plants or
purchased from others. This impacted our results negatively in the
first quarter and with lower anticipated pricing in the second
quarter; we would expect this to also negatively impact the
second-quarter results.
To provide some additional guidance on this factor, we calculate that
there is about $50 million of deferred costs in inventory at the
beginning of Q2, if we normalize Q2 earnings based on the April
methanol price.
And one final comment I would like to highlight regarding our fixed
price and cost-to-serve contracts; I've mentioned on previous
occasions that these contracts make up approximately 20% of our total
sales. Due to our current production challenges, our produced sales
are currently making up a smaller proportion of our total sales mix,
as we had to source more sales with purchased product at market
prices.
Effectively what this means with our current production base is that
we have a larger proportion of produced sales exposed to the fixed
price and cost-to-serve contracts and we do not benefit as much from
the high current methanol price environment.
Taking all of these factors into account we'll produce significantly
lower earnings in the second quarter. And while this disappointing,
we believe that as our cost structure normalizes and we add
additional production capacity in New Zealand and Chile, we can look
forward to improved earnings later this year.
I should also remind you that the price of methanol has spiked
upwards sharply in the last two years, and we believe that the
circumstances that exist today could lead to further volatility in
pricing later this year.
I'm also very optimistic about the future of our Company and the
ability of our asset base to generate cash. As Chile sources more
natural gas and Egypt comes online in less than two years time, we
will be well-positioned to generate strong cash flows.
So at this point, I'm happy to stop and I'll take any questions that
you might have.
OPERATOR: (Operator Instructions). And the first question is from
Jacob Bout from CIBC World Markets. Go ahead, please.
JACOB BOUT, ANALYST, CIBC WORLD MARKETS: Good morning.
BRUCE AITKEN: Good morning, Jacob.
JACOB BOUT: A question on Chile; what do you have operating there
right now? Are you still operating two plants at partial capacity or
is it just one? How are things going to fare through the winter in
the southern hemisphere? And are you still comfortable with the-- I
think you gave previous guidance that would operate in roughly 33% of
capacity in 2008 and kind of 40% in '09 and 50% in 2010?
BRUCE AITKEN: Okay, well for the very short we are operating one
plant today at almost capacity. We had lost a little bit of gas
supply as a result of cold weather starting to occur in southern
Chile. But then we're operating still roughly at around that 30%, so
the guidance hasn't really changed. But each week we are producing a
little bit less than we were during Q1.
I was in Chile just two to three weeks ago and met with both GeoPark
and ENAP. Both of them have plans to increase gas supply to us in the
coming months and I think this will certainly offset any increased
winter demand that we always observe in the southern hemisphere and
may allow us to get back to running two plants and have increased
capacity again.
So I think the guidance we've provided of 33% this year still feels
quite conservative to me, Jacob. And I think by Q3 and Q4, as we come
out of the winter time, I think we'll find ourselves operating at a
somewhat higher rate.
Longer term, the numbers are a bit of a guess. But what we've said,
that by 2011 (inaudible) back operating four plants. And that seems,
when I've looked at the activity that's occurring, the prospectivity
in the various blocks; that feels to me like a very conservative
estimate. So I'm a big optimist. I think we can get the equipment in
there, but I appreciate that oil and gas exploration doesn't happen
overnight. It doesn't happen quickly. And so we think 2011 is a very
realistic view to have an expectation of running our four plants.
JACOB BOUT: Okay. And then just switching over to China; do you have
a sense on the delta between methanol prices coming down and how much
capacity shut down? And then perhaps maybe you could layer in just
with rising coal costs in China, how the shape of the cost curve has
changed and what some of the new (inaudible)--?
BRUCE AITKEN: Okay; I think lots of questions here; but as we're
waiting, a couple of numbers that could help you; in Q3 2007 China
was an importer of about 220,000-230,000 tons in that quarter; so
almost at an annual rate of about a million tons a year, roughly. In
Q4 that declined to about 130,000 tons and as pricing went up, China
begins to think about exporting rather than importing. And in Q1,
they exported a net 170,000 tons. So if you go from the peak in
China's import to 230,000 tons to Q1, there's about a 400,000 ton per
quarter swing there. Now that's equivalent to adding 1.6 million tons
annually or a new world-scale plant to global supply. So that's the
influence that's China has had on the world demand-supply balance
over the last couple of quarters.
Now in the month of April, we know already that China is back to
being a net importer of methanol. We think 70,000 or 80,000 tons of
net imports have flowed into China in the month of April. So we've
seen a complete reversal with now-- you could say we've now gone back
from having a new 1.6 million ton plant, that's now just been turned
off again. So I think that's part of why we're seeing higher spot
prices for methanol and all of the world markets, because China is
having this [influence].
Getting to some of your other questions, coal prices have continued
to trend upwards in the last six months and really it's following
crude oil prices. We see the high-cost producers in China now are
having cost structures in the $300 to $400-a-ton range. As I
mentioned in my comments, there is certainly quite a large number of
small producers who have the capability of producing either ammonia
or methanol; and many of them have now switched to ammonia because
it's more profitable for them. And there has been some government
policy in China that's also encouraged production of ammonia
(inaudible). So my expectation is that those guys will continue to
produce ammonia rather than switching back to methanol. So there's a
(inaudible) if you like, loss of some production capacity as a result
of that.
And then natural gas in China is a scarce commodity. The price is
rising quite dramatically. A lot of the producers in southern China
have been curtailed for some time and are still curtailed as a result
of shortages in natural gas. A view that I've heard expressed by an
official in China is that other than the (inaudible) plant that
operates on the coast of China, most other natural gas producers will
be shut down in the next two to three years; and that today
represents 3 or 4 million tons of capacity.
So China is having an influence on our market in lots of different
ways and I would say in most of it-- for a producer like us, most of
that influence is positive.
JACOB BOUT: Where are spot prices currently for methanol in China?
And then the last question; just what is the DME capacity that has
been ramped up currently in China?
BRUCE AITKEN: Probably I can't answer the question, Jacob; or I don't
have exact numbers on it. Do you have any exact data on (inaudible)?
The spot prices globally are anywhere between the high 300s- 370-380
to about $450-a-ton. So today, China is towards the top of that
range. It's in the $420-$430-a-ton spot pricing range. So-- spot
prices in the US gulf are still the highest in the world, but China
is second. The lowest prices today in the world happen to be in
Europe, which we find that to be a bit extraordinary because a lot of
the high-cost production that's really stressed in the world is in
Europe. So we expect to see that situation change in the next month
or so.
In terms of DME demand, the numbers that we've been quoting are
probably a little bit old, Jacob-- it was about a million tons of
methanol went into DME in 2007 and we expect this year to see more
like 4 to 5 million tons of methanol flowing into DME. So it's very
dynamic and so far there are a lot of plants under construction and
they are coming on stream almost as we speak. I know that there is
one on a site that's adjacent to our plant in Shanghai, but it
started up in the last month or so and it's a 300,000-ton plant that
consumes 450,000 tons of methanol. So that's one that was not
included in my numbers that's included in the growth in 2008.
So it's not a very precise answer for you. I'm sorry, but it's a very
dynamic environment.
JACOB BOUT: Thank you very much.
OPERATOR: Thank you. And the next question is from Fai Lee from RBC
Capital Markets. Go ahead, please.
FAI LEE, ANALYST, RBC CAPITAL MARKETS: Thanks. First I just had a few
questions; one, I'll just start off with Egypt. And I just wanted to
understand where the project was with respect to cost to budget. When
the project was originally announced, I believe it was like around
$800 million. And I just wonder-- it seems like you're on time. Are
you also on budget as well?
BRUCE AITKEN: No. We're actually on budget and I expect that maybe
some of our disclosures have confused readers a little bit. But at
various stages, we've had some costs and we've forecasted forward our
remaining capital commitments so the number that we've had for our
project has been consistent right from day one. We are absolutely on
budget and the progress that we're making is right on schedule. So
I'm delighted with how we're progressing in Egypt.
FAI LEE: Okay, great. And just switching topics and with respect to
new gas supply in Chile; have you had any discussions with suppliers
to get a sense of what they maybe wanted to charge for the new gas
supply?
BRUCE AITKEN: Yes. Some discussions; I think the important thing
here, Fai, is to realize that the [world] of methanol has changed and
we can afford to pay more for natural gas than we used to pay in the
past. In a world where the average price used to be $130-$140 a ton;
and we were very keen to be sure that we had a $1 base price and we
had protection for our cost structure when prices went down to those
levels. It feels to me that -- I always hate saying that the cycle is
different from the last cycle, but it does feel that this is the
case; that high energy prices have clearly driven the price of
methanol and I don't think we're going to see $100 methanol prices
again ever. But who knows? It wouldn't be the first time that I've
been wrong about future forecasts.
So what that leaves us with is an ability to pay more for natural gas
than we've paid in the past. When we look at the structure of our gas
contracts and I've given you some updated guidance this morning; if
you multiply those numbers through, (inaudible) and methanol prices
at $300 a ton, it delivers a very nice gas price for gas suppliers.
So my belief and expectation is that we will be able to sign gas
contracts that are very similar to our current contracts and the
methanol price sharing is what enables us to deliver a gas price to
the suppliers. That certainly meets all of their expectations and
provides us with a very economic operation as well.
So I'm certainly not concerned that we're going to be-- that we don't
have an ability to afford to pay the sort of numbers that gas
suppliers will need in order to justify their investments.
FAI LEE: Right. And just- I haven't worked through all the math yet,
but just as a ballpark in terms of like perhaps a dollar per MMBtu or
MCM-- are we talking maybe in the $3 range going forward? Is that the
new paradigm with gas pricing?
BRUCE AITKEN: Well, no I think at that $300 price if you work through
my formula, it's roughly--$300 is $150 over the base of $150. So I
think we're sharing one third, so we're sharing about $50 a ton which
represents about on a per ton basis, about $1.30 per MMBtu. So if you
add that to the $1.25 that I mentioned was the base, we're at about
$2.50. So at $300 methanol prices, the formula that I gave you will
deliver around $2.50 and I think that delivers a very nice return
back to gas suppliers.
FAI LEE: Right. But I guess in the-- you're seeing gas prices from
Bolivia and Argentina at significantly higher levels. Do you see that
the producers might want to charge something more similar to what
they might get around the region?
BRUCE AITKEN: Well, I think there's a big difference in gas prices
around the world, based on where that gas is. And gas that can be
delivered to major urban areas and be consumed by residential
consumers clearly has a higher value than gas that's in a remote
location. So what we tend to look at is what gas suppliers net back
long term to LNG or ammonia. And I think methanol competes mostly
with those products. So it has a very different value than looking at
[Henry Hub] gas prices, for example; because the market dynamics are
quite different.
FAI LEE: No, I understand that. But I'm just saying that even in--
like what pricing that Bolivia is charging for gas in that region is
still is getting pretty close to what you might -- not right there
right now, but it's getting closer to those Henry Hub prices.
BRUCE AITKEN: It is, yes. But I think that Bolivia is taking
advantage of a situation where Argentina is very short on natural gas
and doesn't have too many choices, so good luck to them.
FAI LEE: Yes; and you don't feel that the producers have that ability
to do that?
BRUCE AITKEN: Well, I think the other factor here as far as a number
of these explorers are existing gas suppliers. So we do have existing
gas contracts with them with pricing terms that have been agreed. So
certainly in the case of one those suppliers, we have an agreement
that the new gas will come to us based on the prices that are
provided on our existing contract.
FAI LEE: Okay; alright, great and thank you.
BRUCE AITKEN: Take care.
OPERATOR: Thank you. The next question is from Bob Hastings from
Canaccord. Go ahead, please.
BOB HASTINGS, ANALYST, CANACCORD ADAMS: Hi, thank you. First, just on
obviously with higher energy prices, methanol has gone higher and
future production is going to attract higher gas prices than what's
under contract now I would think; other than that one producer. So if
you were looking at New Zealand, I assume they're not negotiating at
$2.50 per million BTUs, but something higher than that. And we see
problems I guess in New Zealand with the government there saying
they'll want to use gas for power generation because of greenhouse
gases in the future. Is that going to have a problem or a longer-term
impact on your supply in New Zealand?
BRUCE AITKEN: No, it's actually a positive for us. They have stated
that they want all incremental electricity supply to come from
renewable sources. So what's that done is dried up the potential
demand for natural gas in the country at a time when supply is
growing. So I think that's one of the reasons that suppliers have
been coming us and keen to sell larger volumes to us and lock us in
for a period of time.
BOB HASTINGS: Can you remind us on what the greenhouse gas emissions
are from a ton of methanol produced?
BRUCE AITKEN: I don't know if Michael-- if you--
UNIDENTIFIED COMPANY REPRESENTATIVE: About .6 of [a ton] CO2 for a
ton of methanol-- so yes, there are greenhouse gases emissions that
come from it, but I think if a country New Zealand, for example, was
looking at global greenhouse gases emissions, I think the valid
comparison is how much CO2 is produced from a ton methanol produced
in China from coal, and that number is more like two or three times
higher-- so [two or three tons] of CO2 per ton of methanol. And so
therefore there is not much point in turning off an efficient plant
in New Zealand to save CO2 when the substitute is a much less
efficient operation.
BOB HASTINGS: I know that's the argument my wife uses about not
cutting back CO2 emissions.
UNIDENTIFIED COMPANY REPRESENTATIVE: It's effective in Europe
(inaudible)--
BOB HASTINGS: Well, my wife always wins, but-- so when I look at this
gas going forward of what's going on around the world, I see Egypt
internally is excited by these-- what they now call cheap gas
contracts that have been assigned, in particular with Israel. And now
I understand they're paying up to $4.50 per million BTUs for offshore
gas. So I'm wondering if could there be any potential that Egypt goes
the way of Argentina with political pressure-- that they might change
those gas contracts somehow?
BRUCE AITKEN: Well, there's always that potential that one of the
keys in Egypt is the (inaudible) gas prices are competitive with LNG
prices in that country. So there's a lot more gas being dedicated to
LNG than there is methanol. I think we've done a lot of things in
that country to try and protect ourselves from random acts of
government. For a start, we're a 60% shareholder and the other 40%
are Egyptian shareholders. So there is an element of sharing in any
good fortune or excess (inaudible) that come out of that project.
The way we've project financed this project; we have groups like the
European Investment Bank who I think provide us a degree of comfort
that Egypt is not going to change the rules on that. And then that's
said, when we talk about this topic within Egypt, the Egyptians are
very proud of their track record that they have never changed
agreements with international (inaudible) in the past. They've had a
very consistent approach and if they've agreed to something, they
stick with it through thick and thin. And that's their track record
and I take that at face value. I've observed the same thing and when
we've talked to other current investors in Egypt, they would describe
the Egyptian government as being a model of consistency. So I don't
expect that to change, but this is a funny old world and you never
know. But I think we've done a lot to protect ourselves in that
country.
BOB HASTINGS: Okay. I'll let somebody else step in. Thank you.
BRUCE AITKEN: Take care.
OPERATOR: Thank you. And the next question is from Sumanta Biswas. Go
ahead, please; from Polaris Capital Management.
SUMANTA BISWAS, ANALYST, POLARIS CAPITAL MANAGEMENT: Hi, I've got two
very general questions. On the China thing and as we were discussing,
it looks like there's a cap on the price because when it goes up they
come in. Where would they put that cap at current market conditions--
around $600 maybe?
BRUCE AITKEN: It's probably a little lower than that. I would think
it's-- well it's probably north of $500, so maybe not too far away.
There's no doubt we observed that when prices move very quickly to
$700 and $800 a ton, there's a very big incentive to throw in export
methanol from China. Exactly what the trigger point is-- it's a bit
hard to say. I would say it's probably over $500 a ton.
SUMANTA BISWAS: That's fair enough. And the second one on Chile; now
your resumptions of getting everything all back by 2011 is based on
gas that has already been found and just needs to be taken out or the
majority of it has to be found first and then to be taken out?
BRUCE AITKEN: No, it has to be found first. There's been quite a lot
of history and exploration in southern Chile and it's been almost
exclusively ENAP; that's a state-owned oil and gas company that have
undertaken that exploration. And they have particularly been looking
for oil, so they've never really been driven to look for gas. What
they've told us in a number of the areas that they've explored for
oil, that they've found natural gas and then they've shut the well
and then moved on. So there's no doubt that gas exists. But because
there was never a market for it, they've never had any dedicated
program to develop that gas. And ENAP themselves were investing in
southern Argentina, so they were anticipating supplying our gas
contracts as of some of the prospects that they had in southern
Argentina, without even contemplating the development of their own
resources in Chile.
So the opportunity they've got now, now that things have changed in
Argentina, is to go back to those areas where they've drilled before
and develop the gas resources that exist. So I'd say one, the gas
needs to be found and needs to be developed; but this doesn't feel
like a green-field wildcat exploration program. There is a history of
gas production in the area and the geologists would describe the area
as gas prone.
SUMANTA BISWAS: Thank you.
BRUCE AITKEN: Okay.
OPERATOR: The next question is from Sam Kanes from Scotia Capital. Go
ahead, please.
SAM KANES, ANALYST, SCOTIA CAPITAL: Thank you. Bruce, how would you
answer the question or observation that now that (inaudible) is
building their own G terminal, ENAP under the government of Chile;
would they not have to consider assuming great success I guess in the
area of finding additional gas reserves to looking at putting up some
form of liquefaction terminal in [Puertorinas]?
BRUCE AITKEN: They've said that to us very and a good (inaudible)
Sam; that to the extent that where there are most quantities of found
that gets clearly dedicated to our plant. To the extent that they are
extremely successful in finding a lot of gas, then they would look at
building liquefaction capacity in southern Chile. But in their minds,
a lot of gas is something more than five (inaudible) years. If there
is five (inaudible) years of gas in southern Chile, that will keep us
going for 30 years probably, so a long time; past my retirement date,
Sam.
SAM KANES: Mine too, I guess. Bruce, switching horses; there's been
some news, and maybe more noise than news, about LPG canisters
exploding in China that were DME blended product. I assume DME has
water in it, like methanol and ethanol have water in it. This may
be-- I don't know; somebody making something out of not very much.
But how would you respond to what [Platt's] and others have picked up
here over the last two weeks.
BRUCE AITKEN: DME doesn't have water in it. It is different from the
alchohols. It's an ether rather than an alcohol; so no it doesn't
have water. There was a notice that was produced by a group for the
general administration quality supervision inspection and quarantine
service; when we're advised that this is an administrative notice,
it's not [lore]. It hasn't been widely acted upon in so far as people
are continuing to blend DME with LPG.
Now we understand that there has been an issue with leaking LPG
cylinders, but it's not at all clear that it has anything to do with
DME. DME is a product that's been widely used in the personal care
industry and has a long record of-- a very good record of safety.
It's flammable, which clearly it is because it's a substitute for
LPG, but we have never in other applications come across this issue.
And our initial take on it is that this issue has nothing to do with
DME or DME blending and it has a lot to do with the design of some
cylinders that have come into the market.
With that said, we take it very seriously because I'm sure as all of
us must know, we care about health and safety and we don't want to be
associated with any product that is potentially dangerous to our
customers. So we want to make sure that if there are any rules or
laws that emerge out of this business, then we want them to be based
on good science. So we are spending a bit of time to ensure that we
understand the impact that DME may have on LPG cylinders. But our
first blush certainly is that this has nothing to do with DME.
SAM KANES: Thanks for that, Bruce. Also a question on DME; with this
rapid expansion of DME production in China is also of course,
coincident rapid expansion of methanol production in China; could you
hazard a guess in saying in general that China's policy is to match
one to the other or are you seeing some differencing of one outpacing
the other?
BRUCE AITKEN: Well, China's policy is to turn its coal into useful
energy and they're doing that by generating electricity with it.
They're doing it by turning coal into methanol and then some methanol
into DME. Some of the methanol ends up in gasoline and there is a lot
of activity taking place with different gasoline blends right up to
even 100 blends are being experimented with in Shaanxi province; that
the Chinese auto manufacturer, Chery, is now producing methanol cars
that can run M-100. So China's policy is all around self-sufficiency
of energy or greater self-sufficiency; less dependency on crude oil
from the Middle East and other places. And I guess we can all
identify with why that's essential policy for them.
So they're certainly not making methanol to make formaldehyde or
acetic acid. Their strategy is all about energy.
SAM KANES: Thanks, (inaudible) and Bruce and your other answers.
OPERATOR: Thank you. And the next question is from Hassan Ahmed from
HSBC. Go ahead, please.
HASSAN AHMED, ANALYST, HSBC: Good morning, Bruce.
BRUCE AITKEN: Good morning, Hassan.
HASSAN AHMED: So a quick question; I know we've [talked] a bit about
Egypt, but sort of new news seems to be coming out of Egypt talking
about how the Egyptians are essentially going to raise the price for
gas and electricity to certain industries by anywhere from 60 to 110%
in August '08. Now essentially the charter is that slowly the
Egyptians will phase out some of the subsidies over the next three to
four years, but again; I'm fairly sure you've looked into your
longer-term contracts. But I guess what I want to get a sense for is
that once that contract does expire, how should we be thinking about
the price of natural gas out in Egypt? I mean, even right now, the
charter is that both these booths- the price of gas will go up to
like $2.65 a million BTU.
BRUCE AITKEN: Yes. A couple of comments; energy has been heavily
subsidized in Egypt for a long period of time and that's a
significant drain on their Treasury, so it doesn't surprise me that
they're taking some moves to try and remedy that situation. And I
would say, as a passing aside, I notice this on a lot of developing
countries as we travel around the world; that gasoline prices and
natural gas prices are being subsidized and this is particularly the
case in oil-producing countries. So this is in places like Saudi
Arabia or Argentina, where there are heavy subsidies that I think are
not sustainable; particularly in places like Argentina and probably
in Egypt as well.
So that is a little bit of an aside; and our gas contract is a
25-year contract so the price we've got is locked in for a long
period. We did a little calculation for the Egyptians as to what sort
of net back they would receive had the plant been operating during
the late 2007, and that produced a very nice price and we calculated
also the returns that they would make on their equity investments and
any excess returns, and tracked that back to the price of gas; and
satisfied ourselves and them for that matter, that the sort of
returns that our plant was capable of generating, exceeding the
returns that they LNG provide in that country.
HASSAN AHMED: That makes sense.
BRUCE AITKEN: So I do feel some degree of comfort. Now the other
thing, and one of the reasons that we're really interested in DME is
that there is a way taking Egyptian natural gas and turning it into a
product that can be useful to Egypt and to the households in that
country. So instead of importing LPG at whatever the equivalent price
is today, but it's a very high number; they are taking advantage of
their own domestic natural gas and substituting imported LPG. Again,
that's a big positive benefit for their country. And (inaudible) I
think that depends on security in that country.
HASSAN AHMED: Now a slightly different; now moving to China now,
obviously there is a fair bit of noise around the DME side of things;
but as we all know, acetic acid is a big sort of demand and [jet fuel
guys] well in (inaudible) inaudible. Now is it fair to assume that
this coal-based methanol that's being produced out in China isn't
high enough grade to sort of service the ever-growing acetic acid
industry in China?
BRUCE AITKEN: Well, I get some different stories on this, Hassan.
Some producers have told me exactly that coal-based methanol has a
potential as a poison in the catalyst in the acetic acid process.
I've had other acetic acid producers tell me that no, they're quite
happy to use coal-based methanol. I don't want to mention a name, but
there is one prominent acetic acid producer in China-- who says that
they can use coal-based methanol but they've been very active buyers
of natural gas based methanol from the Middle East ever since their
plant started up. So I'm inclined towards the view that there's a
strong preference for natural gas based methanol into acetic acid.
HASSAN AHMED: That's very helpful, Bruce. Thank you.
OPERATOR: (Operator Instructions). Our next question is from Brian
MacArthur from UBS Securities, Canada. Go ahead, please.
BRIAN MACARTHUR, ANALYST, UBS: Good morning, Bruce. I just want to
clarify the comment that you're talking to 1.25 MMBtu at $150 per ton
and then sharing it with one third. I assume that's before the Egypt
plant comes in; that's sort of based on today at 1.8 in Trinidad.
BRUCE AITKEN: It is. What we're wanting to help with is incremental
gas in Chile and the gas contracts in (inaudible). We don't want to
get into individual geographies and talk about the gas prices in
every geography and it's much easier I think for us to give you
global guidance. And that guidance covers all of those territories
until Egypt come on.
BRIAN MACARTHUR: Okay. But does it assume over time that Chile ramps
up to 3.8 million tons or is that kind of based on a 1.2 or 1.3
million ton level in Chile?
BRUCE AITKEN: Well today, it's based on the 1.2-1.3; but I'd say; I
can calculate it, but I think it will be applicable to Chile up to
2-2.5 million tons probably. So when it gets at a higher rate, we may
have to look at that number again. And I'd expect that the number
would go down at that point and not up. So it feels to me that that
guidance should be good for the next couple of years.
BRIAN MACARTHUR: Right. So you kind of employ as you get new gas from
other suppliers in Chile, you're going to get a similar type of
contract, basically.
BRUCE AITKEN: That's correct.
BRIAN MACARTHUR: Okay, great; that's all I wanted to check. Thanks
very much, Bruce.
BRUCE AITKEN: Okay.
OPERATOR: Thank you. Currently there are no further questions.
BRUCE AITKEN: Good, well it's a good time to break up; we're just
about on an hour so that's really great. Thank you very much for
everyone participating on the call.
One little reflection I have is that a real preoccupation with
quarterly earnings and I find it a real frustration for a Company
like ours. We have lots of volatility in our quarterly earnings over
the last couple of years and you can see that if you look back
quarter by quarter. But we have consistently generated substantial
earnings and cash flows out of our asset base and I think we have
that capability in the future as well.
So there's no doubt that 2008 is a challenging year. We really are
feeling the effects of losing all of the production capacity in Chile
and that's evident in our results. But as we get-- I think we're
making tangible progress to restoring our assets in Chile. We've
talked about Egypt-- less than two years away from operation. We've
got New Zealand coming on stream in the next few months. So I think
lots of growth that provides some incremental earnings and
incremental cash flows in the short term.
And I think then if I think medium to long term there is substantial
incremental cash flows that I don't think are reflected in our
valuation today. So thank you very much, everyone, for your support
and good morning to everyone.
OPERATOR: This concludes the Methanex Corporation First-Quarter 2008
Earnings Conference Call. Thank you from Telus.
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