Methanex Corp (MEOH) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Methanex Corporation's second quarter 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 Tuesday, July 22, 2003. I would now like to turn the conference call over Mr. Chris Cook, Director of investor relations. Please go ahead sir.

Thank you very much Carol. Good morning ladies and gentlemen. Before we begin today I would like to take this opportunity to remind 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 they may cause the stated outcome to differ materially from the actual outcome. So I would ask that you please refer to the bottom of our latest news release and to our 2002 annual report for more information. I'll now turn the call over to Mr. Pierre Choquette, President, and CEO of Methanex.

Thank you Chris, and good morning to all of you joining us by telephone and by our Web cast. We really appreciate your interest in our Company, Methanex. In my remarks this morning I would like to cover up four areas. First I will make some comments on the second results then I would like to review the important strategic transactions that were executed during the second quarter. As a third subject I would like to give the brief update on the approved capital projects that we have in Trinidad and Chile. And then at the end I would like to comment on our outlook and path forward. And as usual we will then be happy to take your questions. It's a coincidence that all members of our senior management team happen to be together this week for normal meetings, so they are in the room with me, which got all the experts that are here to answer your question. So starting with results, we are quite pleased with our results for the second quarter. We've been able to maintain EBITDA the $100m level, net income at the $50m level. And we've done this in an environment where we have lost on an annualized basis close to 1.5m tons of what used to low cost capacity in New Zealand, and also in an environment were we have been exposed to higher then expected North American gas costs. It's also been an environment where there is been no help at all from the demand side.

Actually, If you look back over the last four quarters or even the first half of this year in terms of rates, over the past four quarters we have generated net income of 239m that's before unusual items, EBITDA 433m and therefore we turn an equity that's have been close to 25%. As we look at the results for the quarter I would say that while methanol prices have been quite predictable recently, the impact of the last production in New Zealand on our overall business results has made it quite a bit more challenging for others that follow Methanex to be accurate on our cost of sales. And really until we had low cost production to our asset base there are two significant factors that can cause our results to vary from quarter-to-quarter and these include the increased reliance that we have and produce methanol and we do this to supplement our own production and honor our sales contracts. And then there is the magnified effect of the produced product mix, particularly between Kitimat to the higher cost plan and surely a lower cost plan.

So specifically for instance, in the first quarter in our mix of sales Kitimat was proportionally a little bit lower than its actual production. In the second quarter it was the other way around and that has an impact on our results. But overall we basically conform our views that we had expressed late last year and we talked about this again earlier this year, that we could continue to maintain stellar results in spite of our loss to capacity in New Zealand. And just as a reminder at, when we reviewed this we've said that we expected to be able to maintain income around 50m and EBITDA around 100m based on stronger pricing, which is what happened in the second quarter.

If you look at some highlights for the quarter in different areas starting with revenue, overall sales volume was 1.6m tons. We are selling at a rate that is consistent with our supply capability and the contractual obligations to our customers. Compared to previous quarters, volumes were steady in Asia and in Latin America. They were down slightly in North America and in Europe. From a pricing point of view, average realized prices were 245 a ton for the quarter that compares to 223 in the first quarter. In June, more specifically, our realized prices were $236 per ton. When you look at the prices, they were actually higher in Asia and Latin America than in Europe and North America and that's because in those two regions of Europe and North America, we now have a few long term fixed price contracts and they really reduce realized prices in a high prices environment.

These fixed price contracts now account for a small portion of our global sales volume. Turning to costs, our MDNA statement is quite detailed and provides a good analysis of changes in cash flows from quarter to quarter. But I'd like to maybe, provide a - not maybe, I would like to provide a different perspective and give you more detail about the trends in our deliberate cash costs, which is measured in dollars per ton, which is quite something we don't report. If you look over the past twelve months, the low point for our cash costs was the third quarter of 2002. Now if you go to the second quarter of 2003, our cash costs were about $45 per ton, above that low point in 2002. And a majority of that increase is due to increases in the cost of natural gas at our different production facility. I just want to remind people that at high methanol prices, particularly at level of such as $250 a ton, our gas contracts in Chile and now those in Trinidad, as well, with our acquisition of titan, have a margin sharing mechanism that is close to 25%.

But as you know, we have intentionally structured our long-term gas contracts in these regions to share profits during periods of high methanol pricing so that we can conversely enjoy low peak stock costs during periods of low methanol pricing. And in terms of North America, of course, I think everybody would know the numbers, but just as a reminder from the period of the low point of the third quarter of 2002 to the second quarter of 2003, gas costs actually doubled in North America and that's reflected in our cost structure for Kitimat. Another important component of our costs is the impact of purchased methanol. Now during the quarter, we incurred a loss of $10m on the sale of 332,000 tons of purchased product. As I mentioned earlier, I think we will continue to purchase product to supplement our own production, we'll do this until our new production assets are in place.

But the financial impact, of course, depends on the relationship between spot and contract prices because a portion of what we buy is at spot. Just turning to operating performance, we had excellent operating performance during the quarter from the plants in Kitimat, Chile and Trinidad. As we report in the MDNA, these plants operated at 99% and that's 99% of maximum proven rates in the quarters of the pretty severe measurement. The New Zealand plant produced at an annual rate of 900,000 tons versus its 2.4m tons capability and that's is consistent with the gas that is currently available to that facility.

Turning to cash, cash flow from operations was $87m during the quarter. We closed the quarter with a cash balance of 285m. This, even after completing a number of cash consuming significant transactions, which I'll review in a minute. Our use of maintenance capital has not changed materially, so to the end of 2005 we still expect this to be above 80m, including the requirements for Titan and Trinidad. So clearly, we continue to have absolutely superb liquidity. Let me switch now to the strategic transactions that we have completed or executed in quarter 2. In May, we acquired the 90% of the Titan methanol plant in Trinidad, which we did not own. The financial details of that transaction and the financial structure are covered in the MDNA. Now since we took ownership, in May, the plant has been operating very steadily. It has been operating close to an annual rate of 900,000 tons per year.

During the quarter, the accounting impact on our results was, Sales were 100,000 tons and EBITDA of about 7m. It would be dangerous to extrapolate that because, for the full production, because part of the sales volume in Q2 was actually inventory that we purchased at fair value when the transaction took place, so the full impact of the acquisition will be clear in the third quarter. And as part of this transaction we also acquired the Chemag distribution business in North America, which we thought was an important factor for us. During the quarter, we completed the acquisition of the customer list that's lying down. So, that payment has been made. It's another important restructuring initiative from our perspective. At the end of the quarter, we also acquired the ammonia production assets of Pacific Ammonia and that was at our Kitimat site in British Columbia. And I want to be very clear about this, this is not a diversification move, that no intention of diversifying away from methanol, and as part of this transaction, Mitsui will take the full production output of the ammonia at our sight at cost.

So we don't have any exposure to market risk in terms of ammonia, so our sole motivation in this transaction was to gain maximum flexibility at that site, particularly after our new low cost assets in Trinidad and Chile are in place and we've now achieved that. Finally, we had a major change in ownership during the second quarter of Nova exited Methanex and that's part of this transaction. We purchased 9m shares for $89m, we think that's an excellent investment and a very good use of excess cash. And frankly, we've reduced the number of shares outstanding and at the same time we've improved the liquidity in our stock. So we think that's a great outcome. I want to repeat that we're particularly pleased that we're able to execute all these transactions, while maintaining superb liquidity in deed. As I mentioned earlier, we still have cash balance of $285m, bank alliance of $291m and from our perspective, we still have a strong pricing environment, which can still allow us to generate EBITDA at close to the $100m level to a quarter.

Turning now to project that we have under development just a few comments on this, in Trinidad the plant known as Atlas, is of 1.7m tone low cost plant being built by Methanex and BP. We estimate our remaining commitments to complete this project to be about 37m. Now the project has been delayed somewhat by a number of factors including a labor dispute in late 2002, but we still expect production in the early part of 2004. And we're also adding a [fourth] train to our complex in Chile, 840,000 tones. On this one, we have approximately 200m to go in terms of spending on a project of 275 and we expect production there in the early part of 2005. We also continue to develop a project in Australia, that's an item that we'll be reviewing with our board this week and we are looking to make a final decision, a final investment decision by the end of September on this project.

I cannot over emphasis the importance of these projects for our company and for our owners. And although I've mentioned this before, I want to repeat it again; a good way to describe the impact of this project is to look at the cash generation capability of Methanex at a constant methanol price. So, I gave you some numbers looking at out company at methanol price of 150 per tone, which of course is very below where we are right now, but a price that we would consider to being mid-cycle. If we go back to 1995, we had production of 4m tones and at that methanol price, we would have generated 160m of EBITDA. Last year in 2002, our realized price was actually very close to 150, we had production of 5.7m tones, EBITDA was 240m. In 2005, looking only and I repeat only at the plants in Chile and Trinidad, at the same market price, we actually, it's a coincidence but we would have 5.7m tones coming from these plants and the EBITDA would now be 350m.

We haven't approved the project in Australia. But if we did it would increase that EBITDA by about 25%. So at 350m of EBITDA, cash flow from operations is about 290 and cash generation after regular dividends and maintenance CAPEX is about 240. So we think this is a very attractive price to go after and really makes the point about the fact that we look at ourselves as a very significant excess cash generator. Just moving to outlook, our path forward, in the short-term we're seeing a small reduction in transaction prices. For the third quarter, published transaction prices are currently about 8% lower than June levels on average and that does vary quite a bit depending on the geography. That reduction is not surprising particularly in view of the lack-luster demand, which was evident particularly in the second quarter. With our market intelligence we estimate that the impact of the SARS viruses, in China in particular, combined with the anticipated NTB reduction in the United States to have impacted demand negatively at an annual rate of above 1.5m tons, so 1.5m tons per year rate. It's also an environment, where we saw good production performance in existing producers, so, in that environment I think major producers felt that it was appropriate to adjust prices and that's what happened.

Our views going forward haven't changed one bit. We currently see signs of improvement in demand in a few geographies but others are still challenged. We still see a requirement for the industry to operate at levels never before experienced in order to meet demand in 2003 and 2004. No new capacity is scheduled to come on stream until 2004 and we are confident that we will see plant shut downs when the new plant started up. So our views haven't changed. From a Methanex short-term operating perspective, looking at the third quarter we would expect sales volume to be a little bit higher in the third quarter. We also expect a small improvement say of around 50,000 tons in sales coming from our own production. This is in spite of the fact that we had an incident in Chile in early July and we've lost close to 100,000 tons of production from Chile as a result of that incident.

We also expect an improvement, a very improvement in cash cost. So the combination of small improvement in sales from our own production improvement in cash cost is significant. But as we look at the quarter it will not entirely offset the expected reduction in realized prices. But these reduced costs, increased low cost production are really important part of the factors for the rest of the year. We continue to see 2003 as an outstanding year for Methanex. Our optimism for 2004 continues and that's based on our confidence that, not only do we have a favorable supply and demand fundamentals but at times when you have a softness, you also have very high natural gas prices that makes the floor of price mechanism work as we are seeing today. So just like to close by repeating what we think a very key important message is about our company continues to be absolutely focused on methanol. We've just concluded a quarter of very important transactions for our shareholders, all accretive to earnings per share, all adding value for the longer term. The few strategic projects that we have going currently are all aimed at maintaining our global leadership position while dramatically improving our cash generation capability and I gave you numbers on that. And our commitment to owners and shareholders remain the same. We are committed to sharing the excess cash generation and on that subject our track records speaks for itself. So I'll stop with this point, Carol and I will be happy to take questions.

Thank you, one moment please. Samuel Kanes, Scotia Capital Markets. Please go ahead with your question.

Good morning Pierre.

Sam

I presume you've done the mass. If you owned that Trinidad flat, operated as of May 1st and you had full control of the production and therefore the full margin of that production. Or would that EBITDA number have been, you've reported there was 7m, would have been higher and how did you derive this fair value for the inventory. If you just give some light on that Pierre?

I'll let Ian Cameron our CFO, speak about the fair value. By the way if you can't here him clearly, because we have a speakerphone here that we have never used before, please speak up and that applies to all the questions. In terms of margins, I think the best way I would describe this is at current Methanol Prices, certainly the prices that where there in the second quarter. Gas costs in Trinidad have a fairly hefty showing mechanism. So you have about $2 gas cost in Trinidad. That means that you have delivered cash costs at around $110 level and very next the best I can do for you in terms of talking about margins. I would also add that when the plant in Trinidad was financed by previous owners. One condition for the project financing, I think I mentioned this before, is that a small amount of the production would have to be done at fixed prices, which are basically cost or service type of prices, so the plan does not get the full impact of the market price and I think that's important in terms of trying to estimate the margins from that plan.

Thanks Pierre, I will ask one more. Your purchased Methanol strategy as you back and fill your production from New Zealand, were you saying in your opening comments that you are going to gradually take that down towards zero? Or you'll always be a factor in this stock market in some fashion I'm sure.

We would like to be a factor in the stock market, both buying and selling, actually. So it would be a component of our strategy. It very much also depends on where we are at any particular point in time, in terms of inventory and sales contracts, but, for instance this quarter, we are not making new purchases, we have commitments for the third quarter, where we are purchasing at a lower rate, And certainly once we've got […] on stream and […] on stream. Assuming we are still operating New Zealand then there will be climate for purchase product is much less. This is probably having lost New Zealand quickly and not having replacements. The period in our history, we have to purchase the largest amount -

So, the second quarter loss of 10m, I guess you are saying that's the high water mark then perhaps?

Well it's really a function of where we bought the spot price, or where we bought the spot product. Some of the stuff we buy as transaction base, so there's no market risks, some of the stuff we buy as stock and so its a function of where we bought it at and where we will be able to sell it out. So I'm not trying to avoid your question, I'm just saying it's really a function of market conditions at any particular point in time.

Thanks Pierre.

Peter Parker, Grem Hill Investors Research, please go ahead with your question.

Yeah, thank you.

Good morning Peter.

Good day, yeah, your track record on buying in shares is really shareholder friendly. But I am looking at your press release, and you talked about, you remaining committed to returning excess cash flow to shareholders, but it sounds like, as in the side-arm or as it says, you mentioned it last day, after a number of things that could soak up all of the cash flow. Say that buying shares at 985 was an excellent investment, what do you think of it here? Would you like to have the flexibility to take that 285m on the balance sheet and buy shares?

Well, Peter. Thanks for the question and as you said our track record speaks for itself. When I became CEO of Methanex, we had 200m shares; we have 119m today. So, that's certainly a pretty impressive track record. Three years ago we weren't paying a dividend, we are not paying a regular dividend, and we had a special dividend. I think that's pretty impressive. In the past quarter we bought back 9m shares from Nova, so we certainly have had evidenced again that we are prepared to share in the excess cash. I mentioned at the end of my remarks, because I wanted to emphasize it, wanted people to remember that's what we are committed to. And I think that there are two ways of returning the excess cash flow.

We will continue to examine our dividend policy strictly in the light that, the fact that we a have lower share count right now, so it makes sense to re-examine that. And when I look at the other transactions that we have in place, and I match it with a cash generation capability, which of course is always dependent on market price of Methanol, but I still see an environment of significant excess cash flow, and so I think commitment does not change. And as some of our shareholders like to say, it's important that we use all of the cards to satisfy our owners and to do that on a regular basis in an appropriate time and we intend to that.

Okay. In the last couple of conference calls, you've said it in pretty strong terms at least for you guys, that you've thought that Methanex would have increased earnings next year. I am wondering how much of a moving target this is? It looks like '03 is going to come in less than your thoughts, and I am wondering whether, how should we adjust '04? Are you still seeing '04 up or is it only because '03 is going to be depressed so much?

I have never made a specific forecast about numbers; I have always said that I have felt very good about 2004 as being a great year for Methanex. And of course it is always dependent on the view of pricing and the number of shares outstanding, but I stand by what I have said in the past. First of all, I don't see this year as being less than what we have seen for the past three months. It might be less than what some people have published, but our own internal forecast doesn't change very much, so that hasn't changed. And I mentioned in my remarks that I continue to be quite optimistic about next year and I am confident on that for two reasons. We still think supply and demand fundamentals are on our side and if it turns out that there is some weakness particularly due to economic activity, we still are in an environment at least for the time being, at very high natural gas prices. So it's simple arithmetic when you look at the new capacity we have on stream and depending on what price you use, you still come up with two outstanding years.

Okay, well thanks for the help.

Bob Hastings, Raymond James, please go ahead with your question.

Thank you, here [-]just to clarify. Earlier in your comp remarks you were saying, by the way excellent production, I'm [- ]this production I'm [-] very, very impressive, that is out of all the areas actually, but in the terms of your earnings, you made a comment that looking a [-] is almost [-] I think you said looking ahead, you sort of saw $100m of EBITDA on a quarter of $50m of earnings, but at the end, I think you said that, the subsequent quarters would be, may not offset the improvements of subsequent quarters may not offset the declining Methanol price, can you clarify what that really is?

Absolutely. The [-] I tried to help as much as I can in terms of looking at the third and the fourth quarter. And what I said about [-] so I'll repeat what I said about the third quarter, for what we currently see about pricing, so what's been announced for July, and from early announcements for August from some of our competitors in some regions. When we look at that, and we look at [-] it's also clearly, quarter to quarter there will be a lower price, I mean that's simple arithmetic, people can just look at what's been announced for pricing and do that calculation.

Thanks.

We had a significant negative offset from Q2 to Q3 from pricing, and a major portion of that we still think can be offset by the improvement in [-] in production, produce sales, and reduce cash cost. The one thing we hadn't planned on, of course was very significant impact of losing 100,000 tons of capacity in Chile. So it's in that context that I said we didn't think we'll be able to offset the full impact. When I look at Q4 and again it's dependent on where we settle on pricing, but if the pricing in [-] I'll put it to you this way, if the pricing in Q4 wasn't the same as Q3 we would expect a stronger quarter in the fourth quarter.

Okay great. Thank you and then, the.

But I still stand by the way by [-] in that environment again with the pricing as we see it today, the 100m EBITDA, approximately is a reasonable number.

Okay excellent. And can you clarify in the [-] you had some obviously some logistical issues as you dealt with New Zealand. Can you clarify what the incremental cost of logistics would have been in the second quarter versus the first quarter?

Well as a general comment, actually we continue to make [-] you know we're burdened with very high gas cost, but out of the rest of our business the logistics part continues to be quite attractive. So I've mentioned in the past that we thought that we had achieved a permanent [-] if you want improvement of about $25m a year, we just reviewed this yesterday, and I can confirm that it's at least that, but to your specific question, I'll ask Gerry Duffy, to answer that.

And Bob, as a result of the complete realignment in Asia Pacific we've probably seen, in that region a cost increase of close to about $2 a ton. But while we've seen that cost increase we've seen cost decrease elsewhere and we've been actually quite fortunate to be able to take advantage of the bank haul opportunities. So the exact impact on the numbers is fairly small, and I can't just put my finger on it.

That's okay, I just wondered if there is any kind of major impact quarter over quarter and clearly not.

No, it's not, it's very small.

Overall?

That you know, it will be the order from [-] you know cents per ton.

I think Bob when people look at what ever they would have estimated for the quarter and things that would not have been anticipated, there's really two places to look, one is the magnitude of the losses on purchased product and the other one which will be very difficult to estimate is, how much of our sales from production, came from Kitimat versus Chile. And it just happened that in that quarter the higher proportion of our sales. When I say higher proportion, I mean, compared to the production in Kitimat more of the sales coming out of inventory came from Kitimat than say the corresponding production from Chile, I'd […] at it's production getting the sale.

So we had an unusually good benefit in the first quarter and that was all set. Second.

[…] I mean it [-] I don't think, we would say it was a huge change, but it's an important factor.

Yeah. Okay and then for the rest of the year that goes back to normal you think?

Yeah, Yeah.

One last question Pierre, in New Zealand, I realized there's a gas issue there, and you've got the gas under contract till the end of the year. Are we seeing any progress in terms of securing additional gas supplies and any idea of what pricing is looking in that market now?

We're currently paying about $2 for gas, the current Gas cost in New Zealand for the production that we have in place. Bruce Aitken is here, and I'll just say a few words and if he wants to add to it or if I am wrong he'll correct me, but Bruce has got a number of activities, some of which are a little bit uncomfortable talking about, but we think will be resolved in the month before the end of August, which on the upside could see us having gas to operate at a higher rate than what we've been doing, and in any case we're trying to secure enough gas to continue to operate one of the plants. That gas is likely to come to us more like in total around US $250. Are you still there Bob?

Oh yes, so what you're saying is that it's likely that we'll see production at least continuing at this rate and possibly higher but the gas price have been higher and maybe up to $250 or something?

That's our current view.

Well that's excellent. That's certainly better than I was looking for. Thank you very much.

I think to carry on; I mean once we have got these things confirmed we will become public about it because they have a significant impact in terms of net present value.

Yeah absolutely. Great, thank you.

Donald Anderson, Salman Partners, please go ahead with your question.

Thanks, […[ there is an announcement out this morning some restructuring or potential restructuring in the industry, I guess Celanese maybe giving themselves the option to reduce some of the production and take some from Trinidad out in '05. I'm sure this is something you guys would have been trying to work on. I guess maybe if you could just comment on it if it was something that you have been trying to do and if you’re certain market concentration is maybe limiting future sort of restructuring or any [--] any comment you may have on that Celanese announcement from this morning?

Well, first of all I haven't seen the announcement, but - so I'll just give you some general comments. It's an important point that you make because it reinforces our view that as new capacity comes on stream there will be offsetting shutdowns. The one's that we've been particularly involved with, I think we've been public about. So we are expecting when our plant comes on. In Atlas the two plants were shut down and they were not Celanese plants. While we worked with Celanese in the past, our understanding is that Celanese are working with others and frankly it's good news to hear that if another plant is built in Trinidad, there's been announcement for another plant, that it will be substantially offset by what Celanese might do. And that to us means for the 2005 period, continued, high operating rate similar to '83 and '84 and that's why we feel so good about our business. So, […]. Sorry, my colleagues are correcting me. So we see operating rates in '03 and '04 higher than we've ever seen before and when I hear comments like the one you just made which […]publicly then […].

Sorry, Pierre, you cut off just a bit for me. I'm not sure if that was the same for the others but it was just the last couple of seconds.

Probably cut off because you have a fire engine in the back there in Vancouver.

Okay, sorry actually I am in Toronto right now, but let me [--]

Let me repeat what I had said, it's an important point. So I'll go back to about one minute. I said that we felt that we [--] our own market intelligence shows operating rates in '03 and '04 at the highest level that we've ever seen in our business. In '05, if the new plant in Trinidad actually comes on because it has been announced, and if it is partially offset by whatever arrangements they may have made with Celanese, I think that's fantastic news and it shows the willingness for the industry to restructure. I think that's great news.

Great, yeah same here [--] in terms of Medicine Hat, what are your views right now?

We've continued to organize ourselves to be ready to start. We are delaying the decision. Our inventories now are healthy. And the people in New Zealand are in the middle of negotiating access to new gas. So the combination of finalizing, you know what we can do in New Zealand, combined with what natural gas prices in North America are really going to determine our decision but we basically have done the work, so that if we need the capacity to meet contract obligations, we are ready to start. Today we don't think that that makes economic sense.

Okay. Thank you for that. One last [-] What are your sources, saying right now on the plant in Aramplis, and that will be it from me? Thanks.

We don't have any new information for Arand and the numbers been communicated in the past but of course I don't expect people to remember what we would have said in the past but in our own planning we are assuming mid-to-late 2004. That's the way we would -That's what we used to measure capacity utilization and when I talk about capacity utilization and when I talk about capacity utilization in '03 and '04 at similar levels and high levels that includes that observation.

Okay. Thanks, actually I would like to ask just one more, if you look at on the line […] facility, just to clarify, you sort of say, at certain rights to production in '04 from the […] facility. Can you just expand on that and you know what [-] how easy it is for you to take it down off the market and use it down or and I promise that's the last, thank you.

Okay, within the context of whatever we would have signed from a confidentiality point of view, I'll ask Gerry Duffy to expand on it.

The one we've explained is that we have operating license at that facility effectively January first of next year, so depending on our supply-demand requirements we have the option of running that center or running the plant as of January first.

So, I probably should have put it that way [-] it's a very clear right.

Okay thanks very much Chris.

Philip Berger of Goldman Sachs & company. Please go ahead with your question.

Thank you. Of the $285m of cash on your balance sheet, is there any that is stuck at Titan or Atlas right now or is it all at the parent company?

There is a modest […]. There's a modest amount of cash at the Titan level that's subject to reserve for debt repayment in due course of around $10m.

Okay and of the cash that you generated, Titan were you [-] are your plans to pay down the debt there or to distribute that back to the holding company. What are your plans for that?

Over the next, approximately three years, that the cash we generate from Titan will be dedicated to repaying debt.

Okay.

Tony Campbell of […] partners. Please go ahead with your question.

Good morning Pierre.

Good morning Tony.

I am wondering if you could just sort of give us an update on California and MTBE and also I guess this whole thing is pretty dead in an alternative energy at the moment but if there's any movement there?

On California, When we look at everything that's published, there is pretty good statistics on this. We would say that the conversion in California is about two-thirds complete. So, of the 1.5b tons of methanol that we thought would de-eliminate on an annual basis, one million of that has already taken place, ethanol is in place. And this might sound like solid rates and it is. But I read last week that the State of California now has a larger incidence of breaching air requirements than they've seen in the past five years. In terms of [-[ the rest of US, we haven't seen very much happening, other than to say that the anticipation of the strong driving season or very high gasoline demand. This summer never seemed to actually happen. So that would apply to all components and gasoline. But MTBE use for octane blending was also happened to be at a lower point. In terms of alternative energy, our focus is very much on those applications that we think make the most economic sense. We continued to allocate development dollars to this, and we are identifying from opportunities, particularly we're studying methanol as the best cheapest source of hydrogen. And we're picking a few targets to do this, that wouldn't require a whole lot of money. But that's the stage we are at. We are focusing a lot of our efforts on non-automotive applications where we think the conversion can take place quickly.

And Pierre?

Yes.

I have one follow-up question and I'm just not so [-] up to date on the rules but, since you've completed the transaction with NOVA. Is there anything that can […] you from doing another issue [-] issue or bid on the TSE?

No, absolutely not. As a matter of fact we've gained much more flexibility because normal cost issue a bid, the maximum you can do is 10% over a 12-month period and of course with all the shares now being liquid. So the flow being, basically the full number of shares, it actually gives us a greater opportunity that we had in the past, nothing that's what we would do but we have all the flexibility in the world, but there's no [-] we could do that, we can do one tomorrow or next month, three months from now. We can do a normal course issue a bid; we can do another detraction for the matter of financial flexibility and doing this at the right time.

Okay, keep up to good work. Thanks a lot.

Thank you.

Thank you. If there are further questions, please queue up now. And we have a question from Peter Butler of Glenhill Investment Research.

Hi, hello again. I was thinking about your comment that buying the shares back from NOVA was an excellent investment. And that was at 985. That implies that you are looking for [-] to be a excellent investment, you'll be looking for a substantially higher price. I am wondering if [-] you are in charge, you know the facts and you know what the cards are they are going to be turned over. Do you have some positive cards that we don't know about that might be turned over? One thing is, it looks like that millennium plant that you mentioned in the last conference call. That surely looks like it could be a […] any other positive cards?

Thanks Peter. You are very demanding owner you know, I mean we just played almost half a deck here in the second quarter of cards. Let me comment on the first part of your question and I believe I've mentioned this in the past. We [-] it's not that hard to build up a very good model of Methanex and when I look at our company and I look at only the approved projects, never mind what we might do in addition to what's already been public and approved. And which just built the model; we put in there a pricing mechanism, which reflects basically a replacement cost. So much lower than what it's been historically. When we look at that we discount our cash flows at 11%. You end up with a value for the company that I will just simply say is north of $14 US. So, when we are buying back stock at 9.85. That's an investment that fully meets our criteria. So you would have to discount the cash flows at 14% to 15% to end up with an enterprise value at $14. So clearly, when we buy the stock at that price [-] a great investment. And so, that you haven't changed, it will continue to be parts of our approach in terms of the next cards to be played. Talking about some of the things you just said, we think that industry restructuring is an essential component of our strategy we've had such strategic reviews this year, we've had assigned accountability responsibility for that. Because nothing works better for our company than a balance supply in demand environment and if people want to continue to approach us, which they are to work with us on that then we'll continue to do that and when we have got something concrete then we'll be public about it. It takes a long time to develop those opportunities.

One comment and one last question. The comment is you're fairly conservative with this 11% discount rate, you could actually argue for something in a significantly less than that and it’s just a comment. The question is, the unprecedented operating way of the industry now and these plants are really difficult to run high temperate, high-pressure etc. As you look back in previous periods of the history what's been the experience for the industry after they have been running plants hard in delay and maintenance. What are the odds that you could have significant outages or what has happened in the past?

I would never dare predict what's going to happen in the industry, but I'll give you a couple of facts as best I know them. I think, in the second quarter the industry operated close to 90%, which is why we had an imbalance in supply and demand that was at a time of very low demand. And that results in pressure on spot price, I mean the mechanism actually works. The industry can't do that it will not do that. And so if you look back historically to when people delay flat turn around. What happens is exactly what you just said. Right now, for instance, this has just happened SABIC has two units down, in Saudi Arabia. We are not too proud of what happened in our plants in Chile. But you know we lost 100,000 tons of production between July 1 and July 20. Now we are still going to operate at 97%. But in our case that's in a short term that's a big impact in terms of supply to the industry. So, I appreciate the opportunity to reinforce the plants.

This industry does not operate at 90%, which was the case in the second quarter. Now there is a whole bunch of actually plant turn around that was trying to take place between now and at the end of the year. And there have been a couple of incidents by the two major players in the industry, which is rather unusual. I do want to comment on your first comment about discount rates. Up to now we've stopped in 11% discount rates appropriate. I think if you look at our end D&A you'll see that we are now trying to approach much more our target capitalization rates, so we have a much more efficient balance sheet. The enterprise value of the company is going up at almost 60% in the space of six months. And clearly, because we are at 40% debt then you have to say yeah 11% is conservative. But that's okay. It makes for better projects when we use high discount rates.

Okay, I don't wish SABIC they had helped for their plants, but are these [-] do they have serious problems with these two units?

Just two on plant outages that happened sequentially, one unit went down and another unit went down. And the downs best we can tell for two to three weeks.

Did you hear that?

Well, they have been down to have your intelligent saying what about what's the cause it, hopefully it last for the next year or two.

No. I would never wish that, but I think it’s an example of what I would say would be two of the better operators in the industry SABIC and ourselves in our case was an incident that where we had a complete electrical black out affecting all of our three plants in Chile. The operators actually lost the screens so, we had to shut down the plant manually, and in that environment it takes quite a while to restart the plant. So, it's very much the nature of the process. So, here are the two top guys who have started operating records. We still think we are going to be above 95% and Rodolfo who is next to me, the head of manufacturing slash 97% for the year. But, we did have that unplanned incident. It's such a critical factor to talk about supplying demand and I will repeat again what I've said, second quarter operating rates not sustainable at a time when we had demand that really wasn't helping. We don't think the industry can maintain that operating rate. We also think we are going to see recovery and demand, that's why we feel optimistic about supplying demand for the rest of the year and going into 2004. And that's bound to have an impact on spot prices.

It sounds like, you are thinking that the next move in prices might be up rather than down?

Well, in the short-term, competitors have announced price reductions. Some people get quite upset about that. I never thought that anybody would get upset with prices of $240 a ton but, so be it. And, we certainly are saying to our customers, we are making adjustments today to reflect the current environment, particularly where spot prices have gone. We still think the fundamentals could result in higher pricing.

Okay. Good luck.

Thank you.

Winfried Fruehauf from National Bank Financial. Please, go ahead with your question.

Yeah. Good morning. I have a question on spot versus contract sales and in the second quarter of this year, what would have been the mix between spot and contract sales for you, and how do you see this develop for the balance of 2003, and then 2004, and if you can 2005.

When all of our sales are at contract prices, though they would be published transaction prices, less a discount to reflect the size of the customer and as I mentioned in my remarks, a small portion of our volume is at a fixed price that came from the Titan acquisition. So, we have no at this point, nor do we expect next year to have any sales at spot prices. The references between spot and contract is when we are purchasing, we are purchasing at spot. From time-to-time, we have posted a price, we call it a rack price for a certain volume to be taken in a very short period of time at a certain point. We have not sold any of that year-to-date, because we haven't had the supply.

Okay.

Does it clarify?

Yes. It does. Thank you, the other question I have is, going forward and looking at the percentage of the output from your various plants that are committed to contracts of one year and longer, assuming you operate your plans as you expect at very high rates.

Without giving you the precise amount today, we probably have 30% of our sales that are under contracts of three years or more, and the rest would be one to two years. And as we renew the contracts every year this is about the type of mix that we want. Now, within that, there are actually ten-year contracts with very important customers, there is a five-year contract, with a very important customer. But, the percentages I gave you, I think I am looking at Gerry Duffy here head of marketing, pretty close.

And, what does that looks like for Titan and for Atlas next year?

The Titan and Atlas would be, would fall to the similar vain with the exception that in the case of the Atlas there are off take commitments on the part of the owners that are much long lasting like BPO other requirement caustic products. But that's part of the shareholder's agreement.

Okay. So, in other words, we'll see new capacity coming on at Atlas and also I forgot to mention Chile. You do expect to have substantially all if not all of your output under contract of a term of at least one year or longer.

I have. If that is variably, if that was behind your question, absolutely, I mean we'll have 5.7m tones of production out of Trinidad and Chile, which are the low cost plants, when this process is complete and that would still leave us short of our total contracted commitment, because we will continue to maintain a contracted commitment in anticipation of adding production in Asia.

Okay. Thank you very much.

You're welcome.

Van Coller of Gilford Securities; please go ahead with your question.

Thank you. Good morning Pierre.

Good morning.

A couple of questions. First, could you give us a little additional color on what you see in terms of demand, and sort of the tone of demand over the last 3 to 6 months on a regional basis?

Well, we can certainly, you know Chris Cook, if you can talk that offline about what we saw in the different regions. I think that would be more appropriate but I would maybe [-] let me repeat, maybe slightly different words what I said earlier and in terms of demand. We have seen, this is our market intelligence, when we look at what's happened in China, in the first half of the year. People thought a lot about the SARS crisis and used it as an excuse for everything, the fact is that it was a mandated lack of movement of people and movement of goods, which resulted in substantial reduction in imports into China and overall consumption within China and we can measure that. We think that the impact of that jury was half a million tons, annual rate per year. And then we look at MTBE, so that would have been in Asia, when we looked at MTBE we saw the impact annualized on the first half of this year, of the deduction taking place being about 1m tons in North America. So, that's what is behind the, by comments that we saw in the second quarter in particular, the reduction in demand annualized of 1.5m tones. We do expect the China part to come back and indeed we've already started to see that. So, when you translate that in terms of year-over-year growth, our current estimates for 2003 demand versus 2002 is basically flat. Does that give you the right color?

Yes, thank you. And the next question that I have, could you just give a little color in terms of your inventory status over the segment at the end of the second quarter versus the end of the first?

At the end of the second quarter, in tons we were at about, just slightly over a million tons. At the end of the first quarter, we were 850,000 tons and so that would tie into the remarks that we bought substantial product in terms of stock product, to be able to cover our sales we are not buying any new stock product because we think we have the appropriate inventory situation and of course, losing 100,000 tons in Chile is going to eat through that awful quick. So, we were slightly above our targets at the end of the first quarter, we are probably very close to our targets today.

We also had 100,000 tones of new inventories to help the Saturn acquisition at the end of the quarter.

Okay.

Yes. Thank you very much.

Rob Hastings, Raymond James, please go ahead with your question.

Yes, thank you. Pierre, two quick ones. One was I guess we're following on your inventory situation. You were saying that you don't expect to be stepping back into the market anytime soon because your inventories are fine or were you saying that, that might be coming because of the Chile

Well, maybe that is the word they use, so let me try again. We purchase spot material in the second quarter and we purchase, what we have described as strips. So we have commitments already in place for the third quarter. So there will be some purchase material coming to us, obviously because if you look at our production capability versus our sale, which we expect to go up in the second [-] in the third quarter, we just can't do it from production. What I did say, which I want to repeat is that we have not been active for two months now in buying new spot material. I would also add if you want to get at the dynamics of the market that many of the MTBE producers, who normally are the buyers of spot material, have also not been active, because some of the plants have been shut down. That is why spot prices have moved.

No, that was the last, I mean, of course soon I was getting at and as when you are coming back into the market, which I am sure you don't want to say.

Sorry, I didn't [-] I missed that.

Sorry, that was I was getting at. But of course, what I really [-] I guess [-] what have really would get that was, when we maybe coming back into the market and providing more […] pricing?

We wouldn't do it that way. We would just try to match the [-] you know our production and purchase product with our contractual obligations. And right now, we haven't had a need to do that [-] we haven't had a need to buy a spot product.

But Bob, you just gave the [-] you gave up the answer yourself anyway.

Oh I know, and I wouldn't [-] I know you have to step in and buy and it wasn't really expecting you to tell me when you were going to earn your competitors, when you were going to do that, but I thought I will try.

The last question is in your capital structure, when you referred to that, you were [-] you were saying you are sort of getting July deal structured. How much cash now do you think you need to have on hand and how do you look at your ongoing CAPEX requirement, to try at and for us to engage when you might have surplus cash that you didn't need to want to buy back stock or part a surplus dividend.

Well, just repeating some fundamentals, we felt that for our type of business, if we do have low cost plans, that 40% capitalization is the furthest we would want to go. So that is one key point. Second point is that we think we need maximum flexibility in our business, so all we have on hand, have evolved, that has got a reasonable term to it, it is critical. We currently have one, we are in the process of renegotiating that. And, part of that renegotiation is in the context of whether or not we proceed with our Australia. So, we want the decision along Australia concluding the refinancing of our evolver. Our critical factors, before we go and play another card in terms of distribution [-] am I answering your question?

Yes, I guess, you know, not to make a prediction for say, but in terms of [-] if Australia were to go ahead, and it was sort of the $500m cost that you have thought might be a reasonable ballpark, I think you have said in one of your conferences. If that were the case, do you see any ability for the company to buy-back stock or pay a special dividend within the next 9 to 12 months, even under those conditions?

Well, that is actually precise, when it depends on the price of methanol. Again, I think people know me very well. I don't try to avoid questions, but it is very much a function of the price of methanol, I think to look at it in a slightly longer timeframe. And when I look at supply and demand, and in a scenario that reflects our views as supply and demand, therefore pretty good pricing. Then, you know between now and over the next three years, assuming would that work at maintaining the appropriate capitalization in the company, we have very substantial excess cash flow. Then it's a matter of picking the right time for the distribution in the right form.

Yeah. That's what my numbers suggest, as well. I just wondered if you would wait until all your capital requirements were behind you before you came to that decision. So, if […] when I had that men to push back?

What our approach has been, and this is an area where we are conservative, and don't apologize for it. I prefer the word 'prudent'. As we want to have the liquidity identified, doesn't have to be necessarily on hand, but clearly identified before we go on commit to a project. We wouldn't want to commit to a project counting on future cash flows. Once the liquidity is been identified, whether it's in the form of an appropriate revolver or in the form of a construction facility, then I think we're in a better shape to make those decisions.

Okay. So, as long as revolver was in place, you'll feel that you could go ahead and do that.

I said, as long as we have revolver in place and then some more backup, perhaps in terms of a construction facility, right?

Right. Okay thank you very much.

Okay. Carol, we've been on the phone for an hour and ten minutes. We'll take two more questions if there are any more questions.

Okay. And we have a question from Samuel Kanes at Scotia Capital, please go-ahead sir.

It's a quick one, I guess, it's technical and precise. The 9m shares you bought from Nova, do they count? Since I came out of the control block you can say a normal course 10% issued over it.

If we were doing measure of a normal course […] today it would be on the shares outstanding [-]

I thought so. So, directly then, that doesn't qualify?

No. So you heard that clearly? So, if we were to announce a normal press issue of it now, it would be based on 190m shares. The maximum would be 11.9m.

Thank you.

Sorry, there are no further questions in the queue.

Okay. Thank you very much Carol and thank you for all of you who listened in. And please if you have a requirement for further analysis, particularly in terms of movement of costs from quarter-to-quarter, don't hesitate to call us through Chris Cook. And again, we'll talk to you next quarter. Thanks again.

And this concludes the Methanex call, thank you.