Methanex Corp (MEOH) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation 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 Thursday, July 22, 2004. I would now like to turn the conference call over to Mr. Chris Cook, Director of Investor Relations. Please go ahead, sir.

Thank you, Erica and good morning ladies and gentlemen. Before we begin with our call today, I would just like to take this opportunity to remind everyone that our comments and answers to your questions may contain forward-looking information. As many of you are aware, this information by its nature is subject to risks and uncertainties that 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 2003 annual report for more information.

I will now turn the call over to Mr. Bruce Aitken, President and Chief Executive Officer of Methanex. Bruce?

Thank you Chris and good morning to everyone. Welcome to the second quarter of Methanex investor conference call. I'm in Toronto. I have a number of my colleagues with me here in the room who I'm sure will be will be able to help answer questions later in the morning.

We are pleased to produce another excellent result in the quarter. Net income of 52 million increased slightly compared to Q1, net income of 47 million. As we had expected, our realized sales price for the quarter was higher than Q1 by a small amount, $222 per metric ton compared to $220 per metric ton. This increase was partly offset by reduced sales and low-cost Chilean methanol which occurred as a result of natural gas curtailments to our Chilean plants. I will comment more on this subject shortly.

So, as we indicated in our last quarterly conference call, there has been improvement in results quarter-over-quarter. We continued to operate in a very positive environment for the methanol industry. Demand for methanol is good in all regions and our customers continued to report improving operating environment for most derivatives.

Inventories in the methanol industry are extraordinarily tight both at the producer and customer level. Spot methanol is almost unobtainable and the industry would likely suffer shortages if there are any significant unplanned outages.

On the supply side of our industry, high-energy costs continue to put methanol producers under financial pressure in a number of parts of the world. Our North American gas prices have prevailed throughout the quarter meaning that North American methanol producers are operating on slim or no cash margin.

In China, methanol producers are experiencing increased cost for coal, which is the main feedstock for methanol in that country. Producers in Asia and Europe who buy natural gas on prices related to crude oil prices also continue to see costs escalate. In contrast, Methanex' long-term natural gas contracts in Chile and Trinidad are not directly affected by increasing energy prices.

In this environment of strong demand and constrained supply, methanol prices continue to trend upward. The European third quarter contractual price increased by EUR30, to EUR230 per metric ton. It is now more in line with pricing in North America and Asia.

The Methanex longer standard (ph) contract price on all major global markets is now in the range of 270 to $280 per ton early in Q3. We do expect the degree of volatility in pricing for the balance of the year, driven in part by North American natural gas prices; however, the period of very tight supply and demand that exists in the methanol industry is expected to prevail over the near-term and this should translate into continued above average methanol prices for the balance of the year. In Q3, we anticipate realizing at least another $10 per metric ton compared to our price realizations in Q2.

I would now like to turn and comment on a couple of challenges that we have managed during Q2. First let me talk about natural gas supply to our Chilean plant. As background, about 57 percent of our natural gas that we consume our Chilean plant is sourced in Southern Argentina. Argentina has been experiencing an energy crisis brought about primarily as a result of the mystic (ph) natural gas price regulation and a dramatic devaluation of the Argentinean peso against the U.S. dollar. For the last several years, the mystic natural gas prices have been held at an extremely low level relative to international prices. This has led to increasing demand and a supply-side response of reduced investment and infrastructure and new supply.

In the face of domestic shortfalls, the Argentine government began to curtail energy exports to Chile and other neighboring countries. At the time we expected that our isolation, the isolation of our plants in the Deep South would insulate our gas suppliers from these curtailments. However this did not prove to be the case. Since late May, we have suffered 30 curtailments that represent a loss of methanol production that on some days was as much as 1500 metric tons per day. We have been actively engaged with the Chilean Argentineans and Canadian governments to intercede on our part. We have been instrumental in influencing a change in regulations that should make it easier for our gas suppliers to meet their contractual obligations to us.

In late June, the plants were operating with no curtailments; however, further disruptions have occurred in early July. Our expectation is that we will continue to suffer modest curtailments in coming months. But, we are hopeful that changes in the Argentine domestic gas pricing and investments in additional infrastructure being made by the gas suppliers will allow all contractual commitments to be met in 2005.

Perhaps a few additional numbers will help provide a context to better understand this issue. Provement (ph) and probable gas reserves in Southern Argentina where we source our natural gas from total about 10 trillion cubic feet. Our gas supplies advise us that there is also significant exploration potential. All of our Chile plants, including our new Chile IV plant, will consume about 2.5 trillion cubic feet of gas over the next 20 years. Remember that 43 percent of this gas today is sourced from Chile, not from Argentina. However, over the 20 years we will become more dependent on Argentinean natural gas.

In addition, in Southern Argentina there is a gas pipeline that transports natural gas to the north of the country. There has been some discussion around potential debottlenecking of these pipelines and if this debottlenecking occurs, the pipeline will be capable of transporting about 5 trillion cubic feet of natural gas from the southern fields. The (indiscernible) pipeline in our plants, there are no other significant consumers of natural gas in the South of Argentina.

The conclusion that we reached from this analysis is that there is plenty of natural gas to satisfy our contracts. The issues today are mainly infrastructure and gas deliverability. These issues are being addressed by our gas suppliers. We believe that gas curtailments will be relatively small and not long-term. However, as politics influence the final outcome, we will need to continue to monitor this issue closely over the coming months.

The second issue of significance for us during Q3 has been the startup of the Atlas plant from Trinidad. The plant produced first methanol on June 2 and operated for about a week at which point we needed to shut the plant down for a period. The construction of this plant has had its challenges. The original startup date was last November, so we are now many months late. While we had hoped for a smooth startup, it is fair to say that perhaps we expected some problems.

We have now in mid-July substantially completed repairs to the plant. As we speak, the plant is in startup mode; we think that the most significant startup issues are behind us. We have our best people working on the startup. And while we may have more hiccups, we expect to be shipping first methanol from this plant during August.

The information that we provided in April was that we expected the Atlas plant would operate at 90 percent of capacity during Q3 and Q4. Given the problems during startup we now expect to get less volume from the plant during Q3. After assuming an initial inventory build, we expect that our equity share of sales from this plant during Q3 will be a little more than 100,000 tons or roughly half of what we expected when we first talked about the financial impact of Atlas at our AGM in May.

So just to remind you what those comments were, we advised that Atlas would at Q1 prices, add 15 (ph) million to net income of 12 cents per share each quarter. So to be clear, we now expect about half of this result for Q3. Clearly this is assumption is still dependent on reasonable success with the startup process.

The Atlas plant will have a significant impact on our earnings and cash flow. Today we continue to source methanol from the Lyondell and Beaumont methanol plants in the U.S. that have both exposed to high North American gas prices. As soon as we are assured that the Atlas plant is running reliably, and we have restored our inventories to a more normal level, we will curtail production from both of these facilities.

As we enter the fourth quarter, we will be confronted by a number of variables that will make the analysis of our earnings quite complex for those of you that follow our company. We are assuming that the Atlas plant will operate at 90 percent of capacity. As part of our Atlas project, we entered into several long-term fixed-price contracts. Clearly we are not in a position to share the commercial terms of those contracts.

Also, we have entered into a long-term cost of service contract that is designed to allow us to earn historical average pricing over the long-term. This part of the contract gives us some near-term earnings from an element of pricing facility.

In order to help understand the consequences of these variables, we confirmed that assuming reasonable pricing stability, we are comfortable with first call 2004 estimates in the region of $1.80 per share. The other numbers that we have often quoted are that at average methanol prices of $150 per metric ton, the Atlas and Chile IV plants add $100 million to EBITDA annually. These numbers are an illustration of the earnings potential of these new low-cost assets.

Our liquidity continues to be excellent. At the end of Q2 we have cash balances of a little over $200 million, undrawn credit facility of $250 million. Consistent with our balanced approach to purchase cash liberalization, the Board has approved a 33 percent increase in our regular dividend from 6 cents U.S. to 8 cents per share for quarter.

As we have improved the cost structure of our global assets, we've also improved the ability to sustain a higher regular dividend. Since we initiated our regular dividend in 2002, this is the second time we have increased it. And we will continue to review our ability to make further future increases.

In addition, you will recall that we announced normal course issuer bid in May of this year. We have been steadily executing this bid. Based on our current rate of purchases, we will complete the bid before the end of 2004. The initiatives of increasing regular dividends and the share repurchases emphasizes our commitment of returning excess cash to shareholders. We continue to be well placed to complete our capital spending program and to pursue opportunities to enhance and grow our position in the methanol industry.

I will stop at this point and be happy to take questions.

Peter Butler of Glenhill Investment Research.

I would like to ask if you could review your projections for the various supply and demand factors for '04 and '05? Who adds, who sheds (ph) -- how much demand growth occurred -- will be blue line cross the red line? Things like that and where the current operating rates for the industry with and without Methanex?

Thank you, Peter. I will start off answering that question and I might just look to my colleague Gerry Duffy, our Senior VP of Marketing and Logistics to supplement my answers where I forget details, Gerry. The Atlas plant is in start up mode. When we start the Atlas plant up, we intend shutting down Lyondell and Beaumont. It's pretty well a match. A little more volume out of Atlas than those two plants but pretty well a match in terms of supply and demand.

We understand the MPC plant in Iran has been through the startup mode. We're beginning to see small volumes coming to America in the month of August so that plant seems to be operating. So a 1 million plant. The Iranian plant typically don't operate at high operating rates but we have no special knowledge and we assume that if it operates at a high rate -- it will produce about 80,000 tons of methanol per month.

So, for '04, in an environment where demand is growing quite strongly, where inventories are extraordinarily tight, we think any incremental supply that comes out of either Atlas or Iran will do nothing to upset the fundamental demand/supply balance.

Moving forward then into 2005, there is 1 plant in Saudi Arabia of about 1 million tons. That is substantially owned and controlled by a Japanese trading company. Our own Chile IV plant, we expect to start up during Q1. Early 2005, those are the 2 plants that start up, 1.5 million tons.

Today, our plants in New Zealand are operating at in excess on a weekly basis on a run rate basis more than 1 million tons. We don't quite know how much capacity we will operate from our plants in New Zealand in 2005 but we have some gas supply availability that our inclination will be to run those plants if they produce positive cash flow, to not a run them if they don't produce positive cash flow. So if we find the environment is softer in early '05, our inclination will be to not run those plants in New Zealand. So there is a supply offset to those 2 plants that I have mentioned early in 2005.

I guess in later in 2005, Gerry? Mid-year or later 2005 is what is called the M5000 project, which is a project in Trinidad. The Trinidadians are reported to have done some sort of arrangement with Celanese who still own methanol capacity in the United States. Quite what that deal is we don't know, but if we speculate around it, it looks as though Celanese will potentially shut down some capacity in the United States as the M5000 project comes up.

When we look at the U.S. capacity today, there is still 15 percent of world supply is coming from the United States. When we have shut down Lyondell and Beaumont, there is 10 percent of world supply comes from the US. So, in an environment of high natural gas prices in North America, any sort of price softness of methanol will put those plants under great stress. So there is potentially another 2 or 3 million tons of capacity in the United States that will be stretched under any sort of lower pricing environment for methanol. So, Gerry, any other comments to add on supply/demand for '05.

No (inaudible).

Okay.

How much, Bruce, on the base of production now with -- what is a 3 percent GDP growth number. That would put the demand up something over a million tons, wouldn't it?

Yes, roughly a million tons per year Peter give or take there. There are all sorts of short-terms dynamics of the odd things that is happening today is we have extraordinary strong MTBE pricing in North America. So, the 1 place in the world where we were forecasting declines in demand. The pricing of gasoline in North America and the pricing of energy is such that MTBE happens to be a very price effective component for gasoline today. So we are seeing all of our customers in the U.S. operating pretty well at capacity. So, there are shortened dynamics as well Peter that drive demand.

What about the industry operating rate now with and without you guys and are there any current outages going? I think the history of this business obviously is that when you run plants close to full for a while, you get a lot of these outages?

Let me answer that. We have seen the industry take some planned downtimes (inaudible) the last six months. As we go into the fourth quarter, (technical difficulty)

The answer was not heard here.

Sorry, we had a little technical glitch. We will just start that again, Peter. What I was saying, Peter was that we are (technical difficulty) seeing the industry has taken some planned downtime and maintenance turnarounds in the last 6 months or so. As we come into the fourth quarter, we anticipate that most of those will be in place, unfortunately, the industry has virtually no inventory, and the industry is going to have to rebuild inventory back to some sort of normal levels as we come through the third and fourth quarters.

So, we expect industry operating rates be fairly high on a global basis excluding China, because China is a little bit of a flat box in terms of understanding what is going on there. But if we exclude China, we expect industry operating rates to be very close to 90 percent in the fourth quarter.

I guess we would say, Gerry, that is an operating rate, we have never really seemed sustained in this industry for any period of time, so really getting to Peter's point, that we haven't really have any significant unplanned like the worst ones are sadly our own -- the loss of production in Chile is probably the biggest unplanned outage. So in this industry, we have typically seen a few of those happen each year. So we haven't seen too many of them this year.

I just had the last thing -- was a comment. As a shareholder in your Company, and I'm also an analyst, I really appreciate your skewing the cash flow towards the owners. It is a rare Company indeed where the management foregoes the versification, building pretty companies with bolt-ons, you name it and 1 of the greatest chemical stock stories in history was Celanese, which had low marketshares, high costing commodities but the CEO took all of the cash flow, plus asset sales, bought shares, shrank the float, levitated the price earnings ratio; and the stock went from 40 to 240 before they sold out the Hearst.

I think that the numbers are there that if you guys keep buying in shares you're going to shrink the float and eventually your price range ratio is going to go up a lot.

Thanks for the comment, Peter. I would say that we're all major shareholders as well, and we think like shareholders.

Super. Thank you.

Sam Kanes from Scotia Capital.

Good morning. I would like to dwell a little bit more if I can on the duration of those contracts you signed. If you can, Bruce, you may have told us all you want to in terms of trying what we do for a living -- is try to forecast earnings of course. And what you have presold now out of this new plant which is new news to us. Can you give us more color on -- is it normalized last 25 years -- is for 1 year, 5 years, 10 years?

I can't go into too much detail, Sam, but they are longer terms. They probably they are beyond your analytical horizon if you like. So if you're looking at the next 5 years of earnings, they go beyond that. I think clearly we cannot say too much about the commercial terms of them. I think by the end of the year, when you see our year-end results, you will be able to I think analyze more closely volume and average prices. Probably what you'll see if the price of methanol stays at the very high level it is at, you will see probably a bigger discount between the headline price of methanol and what we realize. Because the fixed-price contracts are clearly at a lower level than the current prevailing methanol prices.

I guess that where it takes me currently. Looking at your numbers now you're just under 90 percent; historically you have run towards the low 90s, that is already contractual positions in place even for Saturn (ph)?

There are some that is right, exactly.

Okay. I will leave it at that for now. Thanks at least for that duration of color, Bruce. One more from me and I will jump back in the queue. Is taxes and loss carryforwards used in Q2? You refer to those -- I was just wondering what the magnitude was because your tax rate fell 5 percentage points from Q1 to 2Q. Your guidance into the 30 range but you came in at 28 for 2Q. I'm just wondering if that 2 percent delta was all out of that loss carryforward utilization and what is left to go?

I'll ask Ian to respond to that, Sam.

Sam, maybe this is an overview comment. Our guidance around the 30 percent tax rate is still as valid. There is a little bit of a timing difference opposite the mix of production. In this quarter we had a little bit of a higher mix of our earnings that were in jurisdictions where we don't incur taxes, so it is relatively a short-term issue, opposite mix. Longer term, our 30 percent guidance is still valid.

Okay. Then the loss carryforward utilization? Can you give us the magnitude of that in the quarter? And what is left to go?

The only area where we have significant loss carryforward utilization is in New Zealand. So, I am not sure exactly what the contribution out of the New Zealand assets was, but that was the only area today where we have lost utilization.

Do you have a rough idea of what is remaining in terms of go-forward? At this stage?

In terms of New Zealand?

Yes.

It's fair to say that all our contributions from New Zealand would be earned tax-free.

Right.

Based on the loss carryforwards that were available and this tax shelter that we have available.

Is there ex millions of tons remaining to go? Do you look at it that way? If you keep running at 1 million tons, is there a duration curve on that?

I think in the (indiscernible) plants we produced a little over 500,000 tons the first 6 months and we have said -- our price has been between 500 and 1 million. Now clearly we are going to be closer to a million -- perhaps a little more than a million for the year. That would be our expectation.

If I could just answer maybe and give you a little more color. If we were able to produce at a million tons next year in New Zealand, again we would earn that margin in tax-free, without paying tax.

On the surface, it would put your tax rate down a little bit obviously.

To the extent that we have to earn -- tax-free earnings, many jurisdictions it would reduce our average rate.

Thank you guys.

Bob Hastings with Cannaccord.

Just a couple of quick clarifications. Did I just hear you say that you expect just over a million tons out of New Zealand?

That is correct.

Okay, I just wanted to confirm that. I missed when you said you were comfortable with the $1.80 and you said a price -- an average price for methanol. What was that?

I just said roughly at today's prices, we are comfortable with the range of first call estimates of $1.80.

Even when you say today's prices, you are talking about the higher third quarter prices?

That's right. Yes.

Assuming that carries on through the year?

Yes.

My question is on the contract -- it's just interesting, these contracts for this new facility for Atlas -- just wondering I guess to things; one is at the other end of the cycle in the trough presumably you will have higher pricing and do you see that as significantly enhancing your earnings performance and cash flow performance at the next trough?

That's the reason we enter into these things, Bob. We're taking a long-term view. We think that sacrificing some short-term earnings in order to provide more stability to long-term earnings is a smart thing for us to do. So, yes, we do expect you see higher realizations on the lower-priced environment.

And I would agree with that. I think that was tried before and when pricing came off, there was some customer back lash about this and sort of whining and complaining their price was higher than everybody else's.

That is a very good point, and I think we have been very cautious about entering into these so we tend to pick and choose very carefully about which customers these sort of arrangements are suited for. So, we have learned from our prior experience and I hope you'll see this time that prices are sustained. What I would say in the worst of fixed-price contracts in the Titan plant, and they were sustained with whether the customer was winning or losing so there was a period where customers were quite heavily underwater and they continued to price a higher price. So we do have a track record of success as well as some failures.

Yes. Point noted. Thank you very much. Good results.

Thank you.

Ann Kohler of Independent Research Group.

Good morning. I have a question regarding China and Asia-Pacific market in general. I know that in the past you had stated that you would like to be able to serve this market going forward as it is growing. I know that you are putting in some additional terminal facilities that will serve that purpose in the near term, but do have any update in terms of the longer-term?

I might ask Gerry Duffy to respond to that as well.

Certainly we have made a commitment to expand the facilities in Korea and we also are especially doubling the size of the terminal there and that will be operational by early second quarter of next year. We're looking at a number of longer-term opportunities for capital projects in the region. We have got a number of irons in the fire as we looked at the opportunities going forward.

As you know, the political environment in the Middle East is very challenging at the present time. We continue to progress on a number of fronts but we have nothing definitive to report at this stage in terms of coming to the Board with a proposal.

In terms of China itself, China today represents 15 percent of global demand. By 2009, it will represent 21 percent of global demand. So it's a hugely important part of the methanol world and Gerry -- we both own an office in Shanghai. In a last call months, we are beginning to supplement that with new hires. We're really putting a focus on China because that is where the growth in this industry is. Does that help answer your question?

Yes. Thank you.

Don Anderson with Salman Partners.

Thank you. Just wondering if you can tell us even a range of what percentage of the production from Atlas is? Is under some kind of fixed agreement?

Let me -- I will give you some numbers to the extent that I can, Don. The plant has a capacity of 1.7 million tons and you recall that we own 63.1 percent of it. So roughly Methanex's share of that is about 1 million tons. The fixed-price contracts -- there is about a bit over 450,000 ton, Gerry? Of the 1.7 million tons, 450,000 tons are fixed term contracts, fixed-price contracts and we own 63 percent of those and our joint venture partner BP owns the other percentage of them.

Okay. 63 percent of 450,000 are your fixed sales?

That is correct.

That's helpful. Thank you. Can you say -- you mentioned the MTB strength -- do you have an estimate anyone there as to what MTBE related methanol demand is in the U.S. today versus where it may have been a year ago? Are the assumptions that most have made where we run the MTB out of the system in the U.S. over the next whatever number of years, should we look to maybe adjust upward some of the MTB related demand in the U.S. in the next few years?

I don't know, Don. I think we are seeing some short-term dynamics, and very hard to say what to expect longer-term for MTB in the United States. It would have been great to see the energy bill has passed and it would have been great to see some MTB liability protection as a result of that. Neither of those things have happened so we continue to complete uncertainties as far as future demand for the product.

It is clear in the short-term MTB is an excellent blending component. It is probably, I think it is the most economic blending component and if it wasn't for the silly politics in the United States, I think you would see higher demand. Our continued assumption is that MTB will be phased out in United States over the next 5 years and I think that is probably, it might be conservative but we think that is a good planning assumption.

Of course we do know that this -- for sure this 2 million tons of MTB demand gone is from --.

It's from California, New York, Connecticut. (multiple speakers) So compared to last year, certainly it is down year-over-year.

2 million tons of MTB and the total 4.5 million tons of MTB is gone.

Are there any states imminent to stop using in the next sort of 6 months?

Not really. There are a few rumblings although I would say it's gotten a bit quieter. I think Arizona, there was a mention in Arizona, but they never used very much anyhow. So nothing that is really new or different or dramatically different, Don. I think the industry is waiting to see what comes out of the energy bill.

That's great. Thanks very much.

Peter Butler of Glenhill Investment Research.

I have a related question or 2. What are the odds in your view that in the next 6 months that the red line crosses the blue line for methanol and maybe help with some shortages -- pardon me with some outages and your pricing in fact goes up substantially. What happens next with your normal course bid when that is completed? If the red line crosses the blue line during this period of time, is the next step to do it Dutch? Or perhaps with leverage on top of cash, I presume you'd allocate all of this windfall if things really went short, you would allocate all of that to share repurchases?

I don't know what the odds are of that happening, Peter. You can certainly paint scenarios were energy prices remain high. If there were some significant disruption in the Middle East where there is a lot of methanol capacity. So there are things that could cause the market to enter a period of turmoil. We would prefer that didn't happen. We would prefer to the more orderly market where we can continue to supply our customers in a reliable fashion.

What would we do -- we just can't answer it. It is too speculative, Peter. Are as you know, we continually look at how we utilize our cash. We described often our balanced approach between investing in our industry, looking after our balance sheet, and returning cash to shareholders. And I think if you look at our practice over the last 5 years, that is exactly what we have done. So, we would deal with it when it happened.

Okay. Keep paddling.

Okay.

Brian MacArthur, UBS.

Thank you. Two questions. First of all, I don't know if this is a fair question, but you always make the statement that with Chile IV and Atlas at $150 a ton, you will make 100 million in EBITDA. I assume then with all of these fixed-price contracts that it's probably reasonable to assume that they're greater than $150 a ton; so that statement is true?

It's not a fair question, Brian. I don't like to go there because there is commercial sensitivity here, so I would rather not comment, but you can make your own assumption.

Fair enough. My real question was maybe if you could just spend a bit of time elaborating on the startup challenges at Atlas. I assume they are more -- my issue here is whether we should expect these at Chile IV as well. I would say probably unlikely, given it is more bolt-on to a current site and everything else. If you could maybe just elaborate a little bit more what they are and confirm that probably the same issues you're having there are less likely say at Chile IV.

We have been very frustrated with this Atlas plant, and as I indicated in my comment, it's been a difficult contract. We had all sorts of problems for the last 12 to 24 months. It is the largest single TRI (ph) methanol plant in the world. It's the first time anyone has tried to start one of these suckers up, so what we are learning is that large-scale plants look fantastic on a spreadsheet. But when you start to try and operate them and you run the logistics around them, these are big challenges. And I think -- in fact, we have just come out of a (indiscernible) talking about our philosophy around new plants and new investments and would we build another one of these things, and our sense is that we probably wouldn't. So that is not a definite no, but we are certainly feeling negatively disposed towards building another plant of the scale in the near-term.

So the sort of problems we're having, I think we have a degree of confidence that the team that we've got working on this is getting the problem under control. So we have had enough days of operation to begin to learn some of the peculiarities of this plant and we think that we will be able to get it operational during this quarter. But, it has been a very frustrating process. We continue to have our fingers crossed.

So as far as Chile IV though, these are scaling issues at Atlas so that 849 is just another bolt on Chile III again, it's just templating the same things so there's not really a difference.

Very different contract for us, exactly. Our Chilean organization has a record in history of excellence in terms of both operating plants and building and starting them up. And for those of you that have been around during for the last years, when we started up our other Chilean plants, they go from construction to full operation within 30 days. So, that has been the experience that we have gotten used to. So the experience we're having now is rather unusual for us. So, our Chilean project is going along very well. It's on budget; it's on time. We don't expect these same sorts of problems.

That's what I thought. I just wanted to be sure. Thank you very much.

Bob Hastings, Canaccord Capital.

A couple, maybe if I could. Just to finish up on the previous one in Atlas. When you make the comment that you would not build another -- you might be disclosed not to build another large plant. Just makes the question -- is there maybe a structural problem with the plant in terms of maybe we don't hit the 1.7 million tons when you do get it operating? Is the actual output amounts looking changed or looks a little different today?

No I don't think so, Bob. I think we are comfortable that it will operate at capacity and when we get it operating, we will get the reasonable stability on the plant. I think all of these observations -- all of these oxygen based plans tend to have big start up problems and you can look back to Titan, not too many years ago, the plants in Indonesia and Malaysia, same sort of oxygen based technology. They are difficult plants to start up. That is partly what we are experiencing. So no, I don't have a concern long-term.

Again, no difference in sort of expected operating cost either?

No. Nothing that I can think of that would I think -- operating costs? We have over the last 6 weeks we have operated the Atlas plant for a period. We got up to 80 percent capacity utilization and during the start up process, we slowly increased utilization. So we have had experience of several days of operating at a relatively high rate. So it's not as though there is something so fundamental there that this plant is not going to work.

I just wondered in your comment that you might not build another one, I would have thought that once you had the experience with the start up issues that the next one would be actually maybe a little bit easier and if you had the scale and operating cost for meeting your targets in capital expenditures, would meet your targets in future --.

There's a number of other reflections on the scale; logistics are 1. When this plant is operating at capacity, it's pumping out 150,000 tons of methanol a month. So, you need a whole lot of vessels lined up ready to take that methanol out and you need all the customers at the other end ready to take that same methanol in. So it is not just the start up and operation of the plant. It's a whole combination of factors that scale looks fantastic -- it's a lot more difficult to execute in practice.

Thank you for that. I know in New Zealand you're exploring for some more -- for some gas. And wondered what you're spending there and what you think the opportunities might be?

Some quite modest expenditures, probably up to about $10 million. What we're participating in that industry not at an exploration and production level. We are really funding a couple of wells into an existing gas field, so we don't see our business as taking risks on going out and exploring for gas. But there is some onshore gas close to our plants that has been discovered in years gone by, and we have reached an arrangement with the owner of that license and we are helping them to fund a couple of well into that.

Its a modest amount of gas, assuming success, which we would not go into it without an expectation of success, then we will get some gas at a good economics for us. But, this tends to be quite small, and this is not a second life for the plant. What it does allow us to do is to sustain our business a bit longer. The good news, there's lots of exploration going on lots of people drilling wells both onshore and offshore. And I guess the longer that we can sustain our business in that country, the higher the probability that someone will find oil or gas and we are certainly seeing as a customer for that gas.

That's a good strategy. I know that where you're looking -- was originally there was gas (indiscernible) was shut in because it was deemed uneconomical and gas prices in the country were 95 cents. Based on what you have seen before, is that gas economic at $2.00 or $3.00?

No, this would be low-cost gas for sure. If we are successful with these wells that we're drilling, this would be gas that we would regard as being internationally competitive to make methanol out of.

Great. Okay. Thanks very much.

Jacob Bont, CIBC World Markets.

Just a question on the precert (ph) inventory levels for methanol. Can you just give us a little color there as to where things stand now versus historical normal levels? Then, I just had another question regarding your thoughts right now as far as a shutdown of Lyondell and the BMC plants?

Thanks Jacob. Clearly, we don't have knowledge of the entire industry so we can comment in great detail on our own position. You had noticed on our balance sheet that our inventory levels certainly in dollars is somewhat lower than it was in the previous period. I would say that we feel as though we are at very low levels. We are really very focused on maintaining continuous supply to our customers. Probably fair to say spending a bit more money to make sure that we can do that.

But, we think we are at an unsustainable level in terms of our current inventory levels and we would like to add probably 200 to 300,000 metric tons to our current inventory level to get ourselves back into a more sustainable position. Our observation for the rest of the industry is that we certainly know our customer levels, there is not any inventory. There's lots of demand and we are certainly not selling to any new customers. We're not selling any spot methanol. We're just supplying our contracts. There is unsatisfied demand out there that we are not able to take advantage of.

So, all of the evidence that we see is just that inventories are extremely tight throughout the entire supply chain, And I guess if you say -- if we are 2 or 300,000 tons short of inventory, if you -- there are experiences typical across the entire industry, you can say that the industry on the producer side is short by 1 million odd tons of inventory. But you are making a few big assumptions to get to that number.

Sure. That gets me a bit of color on that.

Your second question was something on the shutdown of Lyondell and Terra?

Just what your current thinking is right now considering?

Considering the gas costs, we would love to shut them down tomorrow. But we really given our inventory position, we are unable to do that. The shutdown is dependent on getting some assurance around the reliability of the Atlas plant and I think as soon as we have that, and we have restored our inventories to a more attainable position, we will then give notice to those plants and shut them down.

Would you be willing to offer some idea on the timing of this? 2005?

No, it will be 2004, Jacob, more likely, but beyond that I would rather not speculate.

Okay. Thank you.

Don Anderson, Salman Partners.

Just after that conversation on Atlas, the M5000 plant for next year in Trinidad -- is that a single train or is it a similar type plant or what is it?

It is a single train; it is slightly different technology. They are using some strings of other methanol plants that exist there, so it is not exactly the same technology there. Whether they have the same problems like ours, I have no idea.

Okay. The Atlas, I guess I have to assume that the natural gas feed stocks in there in the contract that you would have set up with your price sharing mechanism that you've guided us on before, I am assuming that is not going to be affected by any long-term agreements and, therefore the realized price that you're getting out of the plant?

No, it is not affected by those contracts. That is correct.

So the fact that you're getting less realized won't affect your gas price?

No.

Thanks.

Peter Butler, Glenhill Investment Research.

I would like to ask an interesting question here. Why should -- if your stock remains under appreciated by the analyst to follow you, speaks for a low stockprice of, why shouldn't Savik (ph) or Kuwait or some of these people putting up huge investments or talking at least about putting up huge investments in a very unstable part of the world -- why shouldn't they require Methanex at a discount to what they cost and I'm sure it would enhance their combining you with their existing assets -- it would enhance the business?

It's a good question, Peter. And I've got no idea but certainly when you look at what some people are spending on building methanol capacity, and then compare that to the valuation of our Company, most people haven't thought about another way of acquiring methanol. Another way of acquiring methanol is to buy Methanex shares. The latest announcement we see Statoil in Norway spending over $600 a ton to add methanol capacity in Norway. Now that compares to our Atlas plant is still less than $300 a ton; our Chile plant is a little over $300 a ton. So we are still -- our new plants are adding capacity at around 300 and we see people in the industry adding capacity at over $600 a ton.

So, it makes no sense, and if people stopped and thought about where they put their marginal dollar and they want to expose it to methanol, they are a lot better off buying Methanex shares.

We've gone almost an hour, so perhaps if we could just take one more question and then perhaps we will call a halt to this. But if there are no more questions.

Sam Kanes, Scotia Capital.

I was queued up Bruce, I wasn't last second. I will leave it on gas costs I guess in New Zealand. You have some form of first right of refusal now to incremental gas found I believe in the Maui gas field that now is kind of separate as to old Maui gas and new Maui gas with incremental exploration. That is still subject to price -- how that was left behind about 90 days ago. I presume that that horse-trading with whoever -- first of all is anybody drilling at the moment into this new gas category in Maui?

No, I think perhaps you misunderstand what we have got in Maui. We got 40 petajoules of gas out of that. There is some conditionality around that 40 petajoules if the Maui field came up short for some reason in the next year or so, if there was some catastrophic failure in that field, then we could potentially lose some of that 40 petajoules. But what I would say today, Maui is producing at the same sort of deliverability as it has for the last few years, and it seems that every time an assessment of reserves is made, the reserves assessment keeps going up.

So the risk around our 40 petajoules is quite low but we don't have a first right of refusal on further successful finds in Maui. There is drilling going on in the Maui field as I say the last assessment I saw increased the reserves in Maui. We think that is directionally quite helpful for us to the extent that there is more supply into the local market. We are the incremental customer, so to the extent that there is not demand for gas in the New Zealand market, it is attractive for gas sellers to sell gas to us.

Is the 40 petajoules you have allocated to you priced?

Yes it is.

It's priced at a level you have committed to or can accept or reject still?

No, it is at a level that we're committed to of the first 20 petajoules we have at (indiscernible) we are most of the way through that. We have mitigated most of that 20 petajoules. The second 20 petajoules is we can take it if we want it. So, we don't have a commitment. If the price of methanol happened to go down, we could decide to either resell that gas or walk away from it.

Okay. Thank you, Bruce.

Thank you very much everybody for your participation. As I said in my comments, this is a really exciting time for us. The industry is in great shape. I feel a little sense of frustration that if it weren't for some things happening that we feel a little bit outside of our control and I'm really referring to Argentina, and a little bit to Atlas, that this would have been an unbelievably outstanding quarter. And I hope that we will be able to report an unbelievably outstanding quarter in the coming periods.

We certainly are in a very nice position in this industry. So, thank you for your participation and thank you for your interest in Methanex and I look forward to the next quarterly conference call. Good morning.

This concludes the Methanex Corporation second-quarter earnings conference call. Thank you for participating today.