Methanex Corp (MEOH) 2005 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 Thursday, July 21, 2005.

I would now like to turn the conference call over to Ms. Wendy Bach, director of investor relations. Please go ahead

Thank you, Mandy. We apologize for the delay in getting started. As some of you in Canada may know, our telephone company here is suffering a general strike, so we apologize for the delay. I'd like to -- before we start, I'd like to remind our listeners that our comments and answers to your questions may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Please refer to the bottom of our latest news release and to our 2004 Annual Report for more information.

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

Good. Thank you, Wendy, and good morning everyone. I reiterate Wendy's comments around the delay and apologize that we're running a little late, a little bit beyond the control with TELUS whatever they can. We are hopeful that the question-and-answer session will work well, but please bear with us if there are problems. I'm sure Wendy will be delighted to try and help you respond to questions after the call. But let's hope that TELUS can manage to keep us all together for this period.

I'm actually in Ontario. I have a number of my colleagues here in the room with me, and welcome to the Methanex conference call. Our second quarter earnings represent another excellent result for the Company. While earnings as we expected were a little bit lower than our record Q1, it was still higher than our average quarterly earnings in 2004. Our net income was $63 million, $13 million less than the first quarter, but $11 million higher than the same period in 2004. While some perceptible changes have occurred on the demand side of our industry over the last quarter, we remain in an environment that is supportive of above average pricing. We have noticed softer demand for formaldehyde particularly in Europe and Latin America, and market psychology amongst our methanol consumers is towards lower prices. Softer pricing on the spot methanol market in the major markets of the world encouraged us to modify our contract postings for July. These prices in all major markets have moved down by teens, $20 per ton for July. While we will continue to adjust our prices to maintain competitiveness, we do not think that industry fundamentals support the current weakness.

Today we believe that about 2.5 million tons of methanol capacity in North America is cash-negative, and other producers in Europe and China are operating on low or no margins. We are also aware of methanol capacity in China that has in the last month switched from methanol to ammonia manufacture. This indicates that at today's slightly lower prices, methanol prices in China are at the top end of the cost curve are under margin pressure.

We would expect the delays to the new plant in Trinidad, and our own supply disruptions in Chile in Trinidad will stress supply chains over the coming months. While demand is not as robust as it was in the latter half of 2004, it continues to be healthy in most derivatives. A conclusion from the analysis of these various factors suggests a continuation of the environment of above average pricing.

The most significant news during the quarter was the disruption to our gas supply in Chile. Just to remind you of the recent history of this issue, during 2004, we lost about 50,000 tons of Chilean production as a result of gas curtailments in Argentina for the period May to August 2004. This is the winter period in the southern hemisphere and a period of peak energy consumption. We had advised the market that we expected 2005 would be no worse than 2004, and this expectation seemed quite valid until the middle of June, when we suffered some relatively large gas curtailments. We advised during our conference call on June 21, that if curtailments continued at the rate of the previous week, we would lose about 65,000 tons of production in the second quarter, not including any production losses from our Chile IV plant. On July 4, we issued a press release stating that our gas deliveries had ranged widely, but our production losses were actually 45,000 tons, again excluding Chile IV. So you can see from these numbers that curtailments did moderate towards the end of June.

So what actions have we taken in the last couple of weeks? First, we have accelerated two planned maintenance turnarounds at the Chile II and Chile III plants. These were planned for August and October. We have now completed the Chile II turnaround during July, and that plant is in startup mode right as we speak. We expect it to be producing methanol tomorrow. This plant was off-line for 14 days. The Chile III plant is expected to be off-line for 21 days, and that turnaround will take place in August. The reason for accelerating these turnarounds was to mitigate the effects of potential curtailments during the Argentine winter.

The second major action we've taken is that I have personally met with all of our gas suppliers in Chile and Argentina; I've met with the president of Chile, the secretary of energy in Argentina, and our senior people in Chile are in almost daily contact with government officials and gas suppliers. We have discussed both short- and long-term solutions with all of these parties. The short-term solutions involve maximizing gas production in southern Argentina, and thereby maximizing deliveries of gas to our plants. This mission may not avoid curtailments, but it will minimize their effect.

One longer-term solution involves the potential of greater reliance from our Chilean gas supply -- I'm sorry -- greater reliance on Chilean gas.

Some of you may have read recent media statements from our Chilean gas supplier, the state-owned energy company, ENAP. In their announcements, they have expressed optimism regarding the potential for further gas exploration in southern Chile. ENAP has also stated that supplying Methanex will be the first priority for any gas that is found. They have completed 3-D seismic surveys, and they have just recently signed a drilling contract, and are ready to commence exploration drilling. We have pledged support to accelerate this development.

ENAP has publicly stated their belief that five trillion cubic feet of natural gas reserves are possible, and this, for your information, is a short distance from our plant. Methanol plants require about one trillion cubic feet of natural gas to produce about one million tons of methanol for 20 years. So if ENAP is correct, this would certainly underpin gas security for our plants for many years into the future.

We have also spent some time in proving our understanding of the causes of the curtailments. While the actions of the Argentine government and our gas suppliers have had a major impact on the supply of natural gas to our facilities, there is no question that cold weather has aggravated the situation. The largest curtailments occur on the coldest days. It is also apparent that Argentina has operated the pipeline that runs from the south to the north of the country at higher capacity that we've ever seen historically.

Going forward, there is a small incremented new gas supply that is due to come on line in Southern Argentina; however, there is still further debottle-necking to place on the pipeline. The net result of these two is similar to the current supply and demand balance, which means that we should expect to continue to see a correlation between curtailments and cold weather. If the future is the same as the past, then we can expect to see curtailments ease after the winter. In 2004, curtailments ceased on August 11. However, Argentina has constrained -- an issue of constrained energy supply and it has increasing demand. So we cannot be sure that the future will be the same as the past.

Our production records in Chile during July has been more positive. We have received all or substantially all of the gas we nominated on most days in July. Up until yesterday, we had lost a total of 15,000 tons of production in Chile related solely to gas curtailments. So, again, if you recall the numbers I mentioned a little earlier, you can see from the numbers, the curtailments have moderated significantly since mid-June.

News regarding gas supply from Argentina rather distracted us from celebrating the start of our Chile IV plant. The plant was making methanol and proceeding smoothly with start-up prices when the curtailments occurred in mid-June. This caused us to shut down Chile IV and to defer our start-up process. In late June we recommenced the startup of the plant and completed technical performance by achieving an operating rate of 85 percent in early July. We've continued to increase the rate of the plant and as of this morning, the plant is producing at a rate of 100 percent. While we've had a number of design and construction problems with this plant, I am confident that now we have a first-class plant that will satisfy Methanex's standards for plant operations.

Now I'll make a few comments on Trinidad. We completed a turnaround at our Titan facility during April and May. Since this time, the plant has operated with 100 percent reliability, and it has been operating at about [inaudible] capacity. We have had a technical design issue on the Atlas plant that has caused that plant to operate at less than full capacity for the latter part of Q2. This plant is currently shut down to undertake repairs, and we expect it to be off-line for a total of 21 days. We are, of course, hopeful that this repair will remedy the issue that we suffered in the second quarter.

I would like now to make a few comments around liquidity. The second quarter was another strong quarter for positive cash flows. Cash flows from operations were a little over $100 million. We spent about $40 million on Chile IV in maintaining and developing our facilities. And a further $55 million on distribution to shareholders by both dividends and share repurchases. In the second quarter we repurchased about 2.3 million shares. In late June, we decided to suspend the normal course issue of bid. We will continue to evaluate the resumption of the bid after we've completed the refinancing of our bonds, and I confirm that we intend completing the normal course issue of bids before its expire next May.

Most listeners will be aware that we have 250 million of bonds due for repayment in August 2005. Our plans regarding these bonds remain unchanged. We intend to repay $100 million and refinance the $150 million balance.

Before I start to take questions, I'll make a few comments regarding the factors that will impact our results in the third quarter. I've already mentioned two outages planned in Chile II and Chile III, and the repairs to our Atlas plant. We also expect some gas curtailments as we move toward the end of Argentina's winter. These production losses are offset at least partly by incremental production from our new Chile IV plant. Subject, of course, to any curtailments, we expect to see the full benefits and cash flows of Chile IV in the fourth quarter of this year.

I've also mentioned that methanol prices are low in July, and while further fluctuations are possible, I would reiterate our view that we remain in a strong environment of above average pricing. Average global Methanex non-discounted list prices in July are $281 per ton, and this compares to the average list prices in the second quarter of $300 a ton, so you can see a small deterioration in pricing from July compared to Q2.

We also have some areas of upward cost pressure. Chile IV gas costs in the current high price environment are higher than Chile I to III costs. In addition, Chile gas costs are calculated on a 12-month rolling average, so do not react instantly to declines in the methanol prices. Gas costs at Kitimat are also increasing. I'm sure many callers are aware of North American gas costs. They are ranging in the high $7 and low $8 range over the last few weeks. So we expect that Q3 will represent a period of lower revenues and higher costs with an obvious impact on margin. However, a number of the issues that I've mentioned are short-term timing issues. We are still in a very good environment, and I expect that this will be demonstrated in the following quarters. So I will stop at this point and would welcome any questions.

Thank you. (OPERATOR INSTRUCTIONS) Okay. The first question comes from Mr. Bob Hastings. Go ahead with your question, please, sir.

Hello, can you hear me okay?

Yes, loud and clear, Bob.

Sorry. Thanks. Just a couple of maybe quick ones here. The New Zealand, I notice, you positioned it for more flexibility. This was a quarter where we had some issues unfortunately in Chile, and New Zealand's production was actually down when you probably needed it the most. I was wondering if there is anything going on there, or --

We had a small outage in May. I think the plant was down about five days, Bob, so it was nothing very significant, but we needed to take the plant down for a small repair.

Okay. Now it's operating fine?

Yes, just fine.

Okay, great. And the pricing you mentioned was -- still you expect it to be above average, and average, I guess, is about 150 bucks a ton over time. Can you be sort of a little bit more -- give us a little better range than that, or --

The average is actually more about $155 a ton, if you take the last 10 years. We've now been through 10 quarters where the price has been above $200 a ton, and I think -- my memory is that it ranges from about $204 to $260-something, the last quarter being $256, and we've indicated that pricing will be a little softer than that certainly for July, and we won't speculate on August and September. I don't see much reason for the price to collapse. I think there is too much supply there at the top end of the cost curve that will become more and more stressed in a much lower price environment. So my expectation is, we will go through another quarter were again we're above $200 a ton. Now, how long is this going to last for? Again, I don't want to speculate long-term on methanol prices. We've never done that. What we've tried to do is describe the environment that we're in, and the environment, as said, demand is still healthy. We've got a lot of plants now at the top end of the cost curve that are cash negative, and that suggests to me a very tight supply/demand balance.

Okay. So I couldn't get you to go down that slippery slope on pricing. And then the last thing, really, is -- one thing on the pricing as you pointed out in your release is the discount has increased from the market level because of the production with more contracts at lower pricing. In the third quarter would you expect that discount to be at that? I mean, is part of that from Chile IV, so that's some of those contracts at fixed lower prices having kicked in? And then as a follow up to that, could you give us some indication where you see that discount sort of getting back to the historic number like what -- that it will break through and then the discount will obviously get lower than historically norm as the price goes low.

Okay. What you would have noticed over the last few quarters if you've been -- and I know you've followed it, Bob, that as the price has gone up, the discount has gone up. So I think this quarter we're at about 17 percent. Now, there's a little bit of variation quarter-to-quarter based on sales mix, so some quarters we had more fixed price contract sales than other quarters, so that causes a little bit of variation that would be hard to model. But you will find there is a very direct correlation between the price of methanol and the level of discount. But certainly as the price goes down, you'll find the discount goes down as well.

If you go back and look historically before we signed any of these six-month contracts, our discount rate was typically around 10 percent, so what you can say from the sort of mid-range prices up to where we are today, that discount increases from around 10 percent to around where we are today, 16 or 17 percent. It's not particularly linear, but it's roughly linear, so I think you can certainly model something around that without us disclosing the confidential details of the commercial contracts we've entered into.

Just as a quick followup on that point is that if Chile IV had been -- and Chile IV had been operating through the full second quarter, there hadn't been any issues of getting gas, would we have seen the 17 percent discount rate, or would it have been a little bit higher because that production also had some long-term contracts?

There is no fixed price sales contract attempted at Chile IV.

Okay, great. Thank you. Sorry, I think I cut you off. Were you about to give me some more information?

No, no.

Okay. Thank you very much. I'll jump back in the queue. Or if nobody else gets on, I can still ask more questions.

Yes. How are we doing, operator? Are there more questions?

Yes. I'm sorry. The next question comes from Cherilyn Radbourne.

Good morning, Bruce and Wendy.

Hi Cherilyn.

I was wondering if you could give us an update no industry inventory levels currently.

It's always a very difficult question, and I think we've given indications in the past, and they tend to be based on what our inventory levels are, because I guess we have a few -- we know when our inventories are going up and down and how difficult or easy it is for us to buy or sell methanol on the stock market whether the industry is long or short or balanced. And certainly the sense that I've certainly shared with shareholders over the last 12 months is that our own inventory levels were stressed and typically we had a lot of trouble buying spot methanol and finding the volumes that we needed to keep our customers supplied. I would say that during the second quarter, that latter point is something that changed. We did not find it very difficult to find molecules to replace some of the production losses that we suffered in Chile, in particular. So that suggests to me that there certainly was more inventory around in the second quarter, and our explanation for that is there was certainly a month or two of slightly softer demand. It's a little bit seasonal, a little bit related to slower economies. I mentioned Europe before; we certainly notice that Europe slowed down. At this time of year we can see a little less formaldehyde consumption in China. So there rises a few little seasonal effects that you can throw into the mix.

Certainly in Q2, the sense was that inventories were a little bit higher. As we have now ended Q3, in the latest week we've seen spot prices for methanol move up again. So in the last week they've moved up by $10 a ton. There are more and more and different buyers in the market, and there is less spot availability around. That would suggest a little that the market has tightened up a little. We've gone through a period of a little bit of looseness, and certainly it suggests that the markets are perhaps tightening up a little, which again is very consistent with our big picture view that demand is okay, supply is a bit constrained, not much reason for fundamental weakness.

Okay. And then just lifting our heads up to look beyond the next few months, can you give us an update no the status of some of the new plants that are scheduled to come on-line in 2007? Is there anything that is closed financing or started construction apart from MPC IV?

Okay. The only one that we've really public notice on and I guess you've seen as well, there is a plant in [inaudible]. I said that it is closed financing. We've seen nothing and heard nothing in terms of what's happening on the engineering or construction, but certainly that plant was a million ton plant. If they started construction today, they would be complete by towards the end of '07, if they were on a 30-month construction schedule, and that would be a realistic construction schedule. So nothing else other than China and we talked about China separately. I can't think of -- I'm just looking around at my colleagues here. No, I don't -- there is no other information that we have that is different from that.

Okay. And just lastly, can you comment to what extent the difficulties that you had in Chile would alter your appetite in any way to engage in M&A or industry restructuring activities of any kind?

Our appetite for M&A and industry restructuring, no, I don't think it does. Can I be philosophical for a few moments? I think the world's a tougher place to do business in the last couple of years. I think high energy prices have something to do with it. You certainly see governments, and I could name four or five of them. When you start with places like Venezuela, Bolivia, and I think you can add Argentina to the list, where high energy prices have tended to change the behavior of governments, and I think governments are deciding that -- whether it's energy companies or other foreign investors, they've been getting too much of the pie and it's time for the country to take some of that value back again. We all know that's short-term and it's all based on the desire to be -- to win votes and popular support and retain power. But I -- I could talk on the subject for the next 30 minutes here, and I don't want to. I think fundamentally, we didn't change our views. We are a leader in this industry. To the extent that we can find opportunity to restructure or to add to or improve our business, we are just as enthusiastic as ever. But I would say, I just think the world has become a slightly more complicated place to do business.

Okay. Thanks very much for your comments. That's it from me.

One little addition on the question of inventory that just occurred to me. When you're in an environment where customers expect price to go down, they'll often run down their inventory, and we think that happened in May and June as well. So adding to any perceived link that was in the market at that stage was certainly some behavior that we're seeing customers reduce their inventory levels rather than increase their inventory levels.

Thank you. I'll get back in queue.

Thank you. Our next question is from Peter Butler.

Thanks. When Methanex mentions the potential uses of cash either in your written stuff or verbally, you always seem to mention returning money to the shareholders last and not first. And I was struck by your comment today that you suspended the share repurchases pending refinancing of the bonds. I don't see any causal relationship between the two, and you talk about having a lot of cash on the balance sheet plus borrowing power. Am I missing something here?

I think so, Peter. You know that we've had a long track record of buying back shares. We bought back 80-something million shares over the last 10 years. We retired them at an interest on an average of less than $9 units a share. So an outstanding investment on behalf of shareholders. Over the last five years we've returned 500 million of cash to shareholders, so there is no hesitation on behalf of management and our board of directors to dedicate excess cash flows to returning to shareholders. So we stand by our track record.

What you would also know is that we tend to be slightly conservative across this company, and I think we're in an industry where that caution and conservatism is appropriate. So we do have a bond issue expiring. I can't and won't talk about any renewal process. Those of you in the securities industry will understand why that's the case. But I think it's fair to say that we have a refinancing risk. You could say it's a modest to very low risk, but it is a risk, so our caution and conservatism would say to us that while we have this issue outstanding, while we need to finance $250 million worth of bonds, it is sensible to preserve our cash resources, and particularly at a time when we've lost some cash flow as a result of the curtailments in Chile. So we are perhaps being a bit cautious and a bit conservative, but that's the nature of our company and that's I think partly why we've been very successful over the last 10 years.

Well, you have a good track record, I'm just quibbling with -- you said that you're only going to pay down 100 million, and you have I think 250 million on the balance sheet plus borrowing power of at least that. So --

Well, the balance, Peter, is returning cash to shareholders, maintaining a prudent balance, and investing to grow our business. Again, we've really demonstrated a commitment to that balance. We haven't feasted on our efforts over the last five years, and we've been enjoying the benefits of those investments during that period of time. We have kept a very, I think, conservative but prudent balance sheet, and we have managed to return lots of cash to shareholders. So that's our philosophy, it's our strategy, it's our track record, and that's what we're still committed to.

Okay. On supply and demand in pricing, it seems like compared to your previous view that shutdowns plus growth would balance -- keep supply and demand tight. Looking at this, it looks like the shutdowns have been significantly more than expected, which says that the growth has to be a lot less than expected. Is this all to be attributable to a buyer strike? Has China been sitting on their hands during the second quarter? The buyer strikes can have a very significant impact on the apparent demand.

Yes, that was a little bit of my response to Cherilyn's last question, that determining when buyers have a view that the price is going down, their behavior is typically to buy a bit less and to wait to buy at the lower price. So there is no doubt that that had some influence on the availability of methanol during June. Now, today we're not observing that same link on the spot market. If you looked into China, you'd say the buyer psychology in China would be the same as I just described. The Chinese, I think, are quite aggressively bidding down the price of domestically produced methanol. So China today would be the low price market in the world. But we don't see too much other change in behavior. There are still imports going into China. We still have large customers there. So I think we are in a volatile commodity here and it's impossible to precisely measure supply, demand, inventory movements. Our feeling is that -- and I guess I've said this for a long time -- that we should expect to see some volatility, but the volatility will typically occur at the top end of the price range, not at the bottom end of the price range. So I don't think this is unusual at all.

Yes. Okay, well thanks for your help.

Okay.

Thank you. Our next question comes from James Banicek (ph).

Yes. I just read a blurb in the press about greater than anticipated problems in Iran and the MHTL plant. Can you further elaborate on what you know? Thank you.

Yes. The -- what we know is what we read around MHTL. The plant was chewed up this month. They talked about it starting in July for a long time. They've recently said August. We've noticed that they're buying methanol in the market, so they would be a supplier who looks as though perhaps they're a little constrained on their supply chain. They continue to say that the plant is close to completion and will start up. Now, other than that, we really don't know. So our own experience starting up plants is sometimes -- our plants in Chile have typically started up very quickly and operate very efficiently. Our plants in Trinidad haven't started up with quite the same efficiency, and plants in other parts of the world sometimes they can take 12 months to start them up. So we don't have any special knowledge as to how well positioned the MHTL group is to start their plant up.

In Iran -- again to reiterate, our knowledge is a bit based on what we read in the media. It’s probably not too different than what other investors have read also. The Iranians have a track record of announcing projects a long way in advance of doing anything. When they start to build them, they then take a lot longer to build them, and then once they're built, they take a lot longer to start them up, and they don't operate them very well, either. So all of those things tend to push those -- the market impact on those plants far more to the future than perhaps certainly their announcements would suggest.

So I think our own forecast, John, is around the end of '06 for that plant to set up. So we think the second half of '06 is when the Iranian plant will probably begin to produce methanol.

Thank you.

Thank you, Mr. Banicek. That is everyone in the question-and-answer queue. That concludes our queue, unless anyone else has a question, please press 01. Okay, we have one more question from Jacob Bout.

Good morning, Bruce. You talked a little bit about long-term natural gas solutions in Chile. To be clear, are you actually sponsoring some [inaudible] programs there?

No, we're not -- we're not spending money. What we've said to the president of the country was that we have a real sense of urgency around developing some security to our feedstock supply for our plants in Chile.

And at this point we're basically talking three years out?

Well, it could be quite a lot quicker than that. What ENAP tells us is that they've done a lot of drilling in [inaudible] in the southern area around our plant. Typically in history they've gone drilling looking for oil, as oil and gas companies do all over the world. Once in a while the end up finding gas, and in most occasions, where there is no market for that gas, they cap the well and then move on and they drill another well looking for oil. So what they've told us is that they know gas exists, what they've never done is try to delineate the fields and understand a reduced capacity. They have now completed -- I mentioned before -- they've completed three seismic surveys which helps them do exactly that, delineate the field, and now they need to drill another couple of wells. They are committed to drilling two wells before the end of this year, just confirming that with my colleague. So I think we'll know really soon the sort of gas quantities that may be available. The fields are very close to existing infrastructure, so I don't see this as being a typical wild catch exploration program that could take 5 to 10 years to produce results. I think we can expect to see much more rapid understanding of what gas is available and how it's to developed much, much sooner than you could expect.

Okay. Just, then, on the natural gas contracts you have in Chile and Trinidad. Are they all tied to methanol prices, or would they be -- are there some -- is some portion of it is tied to an index --

No, no. They are all tied to methanol prices.

Okay. And then --

I think we've -- again, we've said this many times that based on 150 a ton, they're all roughly the same. There is variation, but they are all roughly around a dollar. When the price begins to escalate over 150, we have all sorts of different formulas, and it reflects in negotiations that took place at various times. So some of them have higher level of sharing and others have lower levels of sharing, and I indicated earlier in the call that [inaudible] is one that has a high level of sharing at very high prices. Fundamentally, the contracts in Chile and Trinidad are all similar.

All based on methanol prices. Okay. And just last question on MTBE demand in the U.S. Obviously, it's been a lot stronger in 2005 than I think most people were anticipating. What are your thoughts there going out, let's say, for the next five years? There has been some noise as far as MTBE being declared cancer causing, that type of thing.

Our demand forecast for MTBE, Jacob, would see no consumption of MTBE in the United States after 2008. We've had that assumption in our model for the last probably two years, and we haven't changed it. Now, short-term in 2004, surprisingly stronger demand, 2005 was the same. The price of MTBE today is extraordinary, and MTBE manufacturers are making enormous margins. On behalf of them as a supplier, and I'm delighted when my customers make money, so that's excellent. And to our knowledge, all of the MTBE capacities that can be operating is operating, so the consumption of methanol in that particular derivative is about as high as it can be. However, that said, I think the longer term prognosis is getting probably more negative in the United States.

You referred to the carcinogenicity of MTBE. That came from a leaked memo on a study that's been completed by the EPA. The EPA has since withdrawn and clarified that this is a study that's incomplete. It's not due to be completed for the next 18 months. They are embarrassed about the fact that that study was leaked, and I would say that no other study that we've seen attributes the linkage between MTBE and carcinogenicity. So the leaking of that memo was clearly political, it was designed to influence the passage of the energy bill. Maybe [inaudible], I don't know.

Well, arguably, if you're drinking ethanol, you'll probably get cancer as well.

Well, that's right, exactly. Yes, yes.

MTBE demand throughout the rest of the world, this issue is said to be in the U.S. only. Have you seen any carryover into any other parts of the world?

I'd say a little bit, but not a lot. You've certainly seen high levels of MTBE consumption throughout Asia. Indonesia, the latest country with increase in consumption. I can't remember the percentage of the Indonesian gasoline poll that still has leaded gasoline, but it's quite a high number. So the Indonesians have a program to try and eliminate lead from gasoline over the next couple of years. And MTBE is a very good compelling [inaudible] mix. It adds octane, it's cleaner burning, so it improves both air quality and reduces leaks in the environment. So there certainly is demand growth for the product in other parts of the world.

Now, there is -- I guess when anybody looks up MTBE on the Internet, the first sites you get to are based in California or in the Midwest, and they'll paint a rather bleak picture of the product. So there are rumblings around the world, but none -- Australia would be one example where the Australians have moved, I think, to ban MTBE, but they never consumed much in the first place, and so it's a wee bit like some of the bans in the Midwest. So it's something you have to worry about, Jacob, when a product gets a poor reputation and it has a way of spreading. I say today that is not actually happening, but it is a risk for us.

Excellent. Thank you, Bruce.

Is that it, operator?

Yes. Thank you, sir.

That's great. Okay. Well, thank you for your participation in the call. I'm sorry it didn't work quite with the clockwork smoothness, but thank you, TELUS, for doing your best to get us through this.

We have three more questions in the queue. Would you like me to proceed, sir?

Well, I've got a little over five minutes. Let me see. I'll take one more and see how we're getting on for time.

Very good, sir. The next question is from Bob Hastings.

Hey, Bruce. I'll be real quick here. Just -- there is a depreciation increase in the second quarter up from first quarter due to Titan, I guess. I'm just wondering, is that the kind of level we can see going into the third and fourth quarters, or is that a one off?

I'll just ask Ian Cameron to answer that question, Bob.

Hi, Bob. The depreciation rate on a status quo basis would be in that range. I guess I should remind you that Chile IV is now in production, and so on an annualized basis we will start incurring depreciation charges on that plant as well. And that rate would probably be around $3 million a quarter if all the inventory that was produced was sold.

Right. But I should be using the second quarter as a base plus that 3 million then?

Well, I think you have to watch -- the depreciation charge gets attached to molecules, and depreciation is released to earnings when the molecules are sold.

Okay.

So it will depend on when the production is sold.

Okay. And with Chile IV starting up now, I assume the capitalized interest is over and we'll get that interest cost as well?

That's right.

Okay. And the tax rate. I know there are a lot of moving parts here, particularly with Chile down. Going through the second half, sort of what's the best estimate based on your look?

Yes, Bob. We think that it's around the current rate. I would use 30 percent as a target for the rest of 2005. I should say when you go past 2005, there is a slight trend upward in our tax rate, and it will trend up towards the 35 percent level.

Okay. Great. Thank you very much. I appreciate your help.

Thank you. We have one more question from Adam Kimora (ph) in Trust Capital. Would you like to proceed?

Yes, I'll take that as the last question. Thanks, operator.

Thank you, sir. Our last question is from Adam Kimora in Trust Capital. Thank you.

Hey, how you doing, guys?

Hi Adam.

My question is really one just more about the business model. I mean, there is a lot of noise right now when looking at the financials, because you have some high cost production still in the financials, and we've had I guess a couple of start-up difficulties and whether they be gas curtailments, but historically in your presentation, you guys have talked about what the Company looks like after you're going to be through all these expansions. You know, if you have 5.7 or 5.8 million tons given $150 a ton of methanol pricing, you forecasted whatever the number was, $330, $340 -- $330 or $340 million -- So can you just -- I know that maybe some of the costs have moved around since then, maybe shipping costs are a little higher, but can you give us a sense, if we look out to next year under various pricing assumptions, sort of, where does EBITDA shake out? Because it's very difficult to do that now, because it sounds like maybe we'll be shutting down, you know, Kitimat at the end of the year, or maybe New Zealand goes away, and we're going to replace that high cost production with some lower cost production. So if you could give us any thoughts on that, it would be great.

Well, it's complicated and I don't want to give you a Excel spreadsheet over the telephone. What I can say is, you're right in the number that you quoted, $340 million of EBITDA at $150 a ton, and that's based on 5.8 million tons of low cost capacity. So today we have 5.8 million tons of low cost capacity and subject to our friends in Argentina giving us the gas that we have a contractual entitlement to. We will run New Zealand as long as it makes a positive cash margin, so to the extent that we're running that plant, it might confuse the numbers, but it will make a positive delta to EBITDA.

The Kitimat plant, we have made no decision on Kitimat at the moment, but I mentioned before we are paying, I think today somewhere around $7.50 for gas. I also mentioned the North American plants are cash negative, so we are the owner of one of those cash-negative plants. So we are losing cash on Kitimat; we are obliged to continue to run it until the end of the year. And certainly if the environment stays as it is today, then it doesn't make much sense to carry on, but I would stress that we have not made that decision. We want to wait a little longer and make a judgment on what is happening with methanol prices and gas prices. So to the extent that Kitimat is operating, again it will make a positive contribution. So in terms of modeling, I wouldn’t spend too much time worrying about it other than to think about what positive contribution it might make.

So, other than that, we've given, I think, some help on what methanol priced sharing looks like. We've given some examples on our initial presentations, and then we really haven't gone beyond that, Adam. So that's probably not a very [inaudible] answer that allows you to complete it, but I think there's a lot of data there that does allow you to make some calculations that will not be too far away from reality.

Right, okay. And my other question is also more capital structure here. I mean, given the fact that it does look like we are in -- I know you don't want to go out too far and talk about how sustainable these higher prices are, but certainly it seems like higher methanol prices are here until some additional large new facilities get online, and who knows how long that's going to take. What do you really feel is the optimal debt structure on the Company?

Well, we targeted 40 percent debt to book capitalization, and today our net debt is somewhat lower than that, so we certainly have talked in prior calls about our growth plans. I haven't mentioned much today, but we're still working away very hard in Egypt, and quite encouraged by the progress we're making there. So to the extent that we have some interesting ways to grow our business, we will want to preserve some financial flexibility to do that. Again, I reiterate, we've been very disciplined around our capital spending, and next we can get the economics to work and the risks satisfactorily managed, then only in that situation will we go ahead.

Right. Well, I would just reiterate that I guess a prior caller had talked about not really understanding why you necessarily have to suspend the share buy-back, because it certainly looks to us like we're overcapitalized right now, and given the share price pullback, now it seems to us like an opportune time not only to continue to buy back, but maybe an accelerated buyback, and we'll follow up later on, you know, why it doesn't make sense to actually do something on a larger scale given where the equity is trading and given what should be robust cash flows over the next couple of years.

Certainly the biggest driving point is refinancing risk. While -- I would agree with any comment that sounds like it's a low risk. It is a risk and it feels a wee bit foolhardy to be buying back shares when that risk exists. So, let's get over that and we'll decide what to do after that.

Okay. Thanks. Take care, guys.

Okay, thank you very much. Thank you for your participation. As I said, I'm sorry that it didn't work like the well oiled machine it normally does, but hopefully TELUS have overcome their labor difficulties before our next conference call.

During the last month, I feel as though we've been thrown a few curve balls, and it's disappointing that these events have occurred at a time when we're so well positioned to capitalize on our new low cost efforts. However, as I've mentioned a number of times, the industry remains in good position, our earnings and cash flow are still very good -- $100 million of cash flow in the latest quarter. And I'm confident that we can and will find a long-term solution that will allow us to extract full value from our low cost efforts. So thank you for your continued support and good morning to all of you.

Thank you, everyone. This concludes the Methanex Corporation's Second Quarter Results Conference Call. Thank you from TELUS.