Methanex Corp (MEOH) 2006 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 Wednesday, July 26, 2006. I would now like to turn the conference call over to Ms. Wendy Bach, Director, Investor Relations. Please go ahead.

Thank you, Alice, and good morning ladies and gentlemen. 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 stated outcomes to differ materially from the actual outcome. Certain materials factors or assumptions were applied in drawing the conclusions or making the forecasts or projections which are included in the forward-looking information. Please refer to the bottom of our latest news release and to our 2005 annual report for more information.

I would also like to remind listeners that the most recent version of our quarterly investor marketing presentation, which has been updated with second-order results, can be found our web site at www.Methanex.com. I would now like to turn the call over to Methanex's President CEO, Mr. Bruce Aitken for his comments.

Thank you, Wendy, and good morning everyone. Welcome to the Methanex second quarter conference call. I have a number of colleagues with me in the room and they will be available to answer questions a little later.

I'm pleased to report that we have now completed another excellent quarter. Our adjusted EBITDA in the second quarter was $153 million, a small reduction compared to Q1, but a significant increase compared to adjusted EBITDA of $120 million in the second quarter of 2005. Our net income was $82 million, or $0.75 per share.

Methanol prices in the second quarter averaged $279 per metric ton, slightly lower than the $283 in the first quarter. This factor, together with some increases in supply chain costs driven mainly by high oil prices and some changes in shipping routes, explains the small reduction to our earnings from Q1 to Q2.

During the quarter, the operation of our large low-cost plants in Trinidad and Chile has been excellent. Until the end of the quarter, the reliability rate for all of our plants was more than 99%, which is an extraordinarily high number. However, as we reported last quarter, we had continued to lose relatively small amounts of gas in both Chile and Trinidad as a result of short-term natural gas delivery infrastructure constraints.

In Q2, we lost about 40,000 tons of production in Chile and 30,000 tons of production in Trinidad as a result of these constraints. In both locations, our suppliers are investing to improve reliability. However, we expect to continue to lose small amounts of gas for the balance of the year as a result of this issue.

Our production losses in Chile as a result of Argentinian government ordered gas curtailments were only a few thousand tons in the second quarter, considerably lower than the volume of losses that were experienced during the second quarter in 2005. We have also been successful in signing a small new gas contract in southern Chile which allowed a few thousand tons of incremental production during the quarter. I will comment more on our longer-term outlook for gas to our Chilean plants in a few moments.

The only other point worth noting regarding our production in the second quarter was the successful completion of a planned maintenance turnaround at our Chile 1 plant. This turnaround commenced on June 19 and was completed on July 13. The turnaround was completed on schedule, on budget and with an outstanding health and safety record. Following the completion of this turnaround, all plants in Chile were operational with no unusual gas disruptions. However, unfortunately this last weekend, we experienced an electrical outage that caused us to shut down the entire Chile site. The plants have been progressively restarted as we speak, but this (indiscernible) is expected to reduce production in Chile by 60,000 to 70,000 tons in the third quarter.

We continue to offer operate in a very positive environment for our business. Demand for methanol is healthy and we expect the market to tighten and prices to rise in the coming months. I would now suggest that the industry on both the supplier and consumer side is operating with low inventories. This is the result of multiple planned and unplanned outages that have occurred in recent months, and we see little relief in coming months.

Over the last week or so, we have seen increasing methanol spot prices in both North America and Europe and in the tight environment that exists, we think that the trend is for further prices strengthening.

Moving on to other topics, I will make a few comments about China. Demand for methanol in China is growing at much higher rates than we had expected and it would seem that demand growth this year will be in excess of 20%. This extraordinary rate is driven by continued strong demand in traditional derivatives and growth in nontraditional demand resulting from China's desire for greater energy self-sufficiency. China is leading the drive to utilize methanol in the energy applications. We are observing increasing volumes of methanol consumed in gasoline blends and are responding to interests within China to import methanol for energy uses. I will comment on this in more detail in a few minutes.

I will switch topics now and talk about some of the challenges and opportunities that we face. First thing, natural gas for our plants in Chile. I noted a few minutes ago that we have only lost a small amount of gas as a result of Argentinean government ordered gas curtailments. Our planning continues to assume that we will lose about the same amount of gas this year as we lost last year, which would result in 100,000 tons of lost methanol production. However, given our experience over the last month or so, we are optimistic that losses might be somewhat lower this year. I expect that many as of you are aware, that yesterday Argentina decided to increase its tax on exports of natural gas to Chile. The tax is $2.25 per Mmbtu, which represents an increase in tax of about $1.95 per Mmbtu. This export tax is applicable to about 32% of the total gas that we consume in Chile today. All of the affected gas contracts provide that the gas sellers must bear any increases in export taxes. So we believe that there should be no impact on Methanex from this decision.

I have described in conference calls over the last few quarters that we believe that our ultimate solution to supply issues to our Chilean plants is greater dependency on Chilean gas and less dependency on Argentinean gas. The change in export taxes that I've described only served to increase the importance of this solution, [although] news regarding gas exploration in southern Chile continues to be quite positive. In late June EENEP, the Chilean state-owned oil and gas company, publicly announced that production tests conducted in the [Lago Mercedes II] Well confirmed the presence of continuous gas and oil flows, and it also stated that they want to immediately began drilling a third well, which would help to delineate the size of the reservoir and to provide an estimate of reserves by early next year. We face a complex set of circumstances that we will need to work our way through before we can be assured of a long-term stable gas supply for our Chilean assets. However, I am confident that, given the strong relationships we have in the region, we will find solutions to this issue.

The second opportunity I want to provide you an update on is our project in Egypt. We continue to make good progress in meeting the various milestones and still expect to make a final decision to proceed with this project before the end of the year. While we are in a challenging environment that has dramatically increased capital costs for new methanol plants, we believe that Egypt represents a unique investment opportunity for Methanex. There are few places in the world today where the right mix of gas availability, gas pricing, access to skilled resources and a convenient location (indiscernible) to our customers. Egypt represents such an opportunity.

The third opportunity that I wanted to address was the potential for methanol to complete in the energy markets. Methanol has historically been sold mostly as a feedstock to the chemical industry. However, methanol has value as energy, and at today's crude oil prices, methanol's energy equivalent value is considerably higher than the long-term average methanol price. As a point of interest, methanol has never traded for any prolonged period below its energy value. It would seem, therefore, that if higher energy prices are likely to prevail in the future, then there is a large potential market for methanol. As I mentioned a little earlier, methanol is being blended into gasoline at increasing quantities today in China and we are currently responding to requests to supply methanol to blenders seeking to export gasoline methanol blends to China and other countries.

Another possible route for methanol to participate in the energy markets is [by our] product called dimethyl ether, or DME. DME can be easily and quite inexpensively manufactured from methanol and it has properties very similar to propane. DME can be blended with LPG, liquid petroleum gas, and is therefore readily integrated into existing distribution systems. There is a great deal of interest in DME in China and we're looking into how we might participate in a potential project in that country.

We're also interested in the potential for moving DME capacity alongside our existing facility with the thought that we could swing [cells] between methanol and DME, depending on relative economics. All of this work is at a reasonably preliminary stage. However, from the work that we have done, this would seem to be an excellent opportunity for Methanex and one that could fundamentally change the methanol industry in coming years.

I will change topics now and make a few comments about our liquidity. Our cash flow from operating activities during the quarter was $130 million compared to $114 million in Q1. During the quarter, we returned $66 million to shareholders via both dividends and share repurchases. As of today, we have repurchased 1.2 million shares under our new normal course issuer bid, which commenced during the week of May 23. We continue buying back shares every day. In the strong cash flow environment that we're operating in, we have the capacity to maintain and grow our company and to return substantial amounts of excess cash to shareholders.

Before stopping for questions, I will make a few comments regarding our expectations for the third quarter. I've already mentioned that our plants in Trinidad and Chile have been operating at a high rate of reliability and that we have experienced some loss of natural gas in both locations. With the exception of the current outage in Chile, more of the same is expected in the third quarter. This is the most likely scenario.

I have also commented on our expectations for natural gas curtailments from Argentina. Methanol pricing is strong and as normal, we expect to see some volatility. The European contract price was [settled] for Q3 at EUR250 per metric ton, which will result in a lower realization from this market during the third quarter. The July price in North America and Asia is lower than prices that prevailed through most of the second quarter. However, we have announced price increases in North America and Asia in August. As I stated earlier, we believe that the medium-term trend is for increasing prices. These factors point to a strong second half of the year for Methanex with excellent earnings and cash flows.

So at this point, I will stop and I would be delighted to take your questions.

(Operator Instructions). Fai Lee, RBC Capital.

Bruce, I'm just wondering if you can comment a little bit more about this Argentina export tax. I know you mentioned that you don't expect any impact to Methanex from this decision on the increase in the export tax. Could you may be comment on the assurances that have with your shippers? It seems a little untenable that the tax increase is going up by $1.95 per Mmbtu, and that's pretty much what you're paying your gas suppliers. And for them to eat that seems a little difficult.

Remember, first is that this tax was announced yesterday, so we have had no conversations yet because I guess everybody is studying the law and beginning to try and understand what implications it might have. I don't really want to speculate on what might or might not happen because I think that's not helpful. And I certainly don't want to say anything today that might prejudice our commercial position. What I would say is we have very long and cordial relationships with our gas suppliers and we would be happy to discuss mitigation strategies with them. But I think to out your question into more context, don't forget that a lot of this gas is associated gas. So when you look at the increase in taxes, while it might represent our largest number, it is a very small part of the total revenues that they would earn from the oil and gas fields that they are exploiting. So -- and our understanding is that this is a very small percentage of total revenues. So I think in that context, this is not just a matter of looking at what are the gas revenues they earn from us. Is more, what are the total revenues they earn from all of their oil and gas production. And is this significant in that context, and the short answer is -- we don't think it's very significant.

Okay, that's a fair point. Now the tax doesn't look like it's being applied evenly across all areas in Argentina. Is there any ability to switch to other sources where there is tax applied, or is that (MULTIPLE SPEAKERS).

You're correct -- it's not being applied evenly, and I would not like to suggest or think that there is a way to switch. I think the Argentine government would have something to say about that. So it's possible, but I think that's an unlikely scenario.

Okay. And I guess finally, the gas supply for Chile, it looks like at least it's a few years out before we see any incremental supply from Chile. Is that sort of your expectation?

We're still being told by EENEP that by 2008, they could easily be delivering us new volumes of gas. Now I did mention that we have a small gas contract. We have been receiving since May gas from our new supplier. That supplier is stepping up production, so by the end of this year, we expect to be receiving more gas from that supplier. So there are incremental volumes coming in from southern Chile. To say they are relatively small and certainly they don't solve the Argentinean problem today.

And that's a small supplier, just to clarify -- that's like [GeoPark], is that correct?

That's right. We haven't mentioned that name before, but I know that they've mentioned us. So the GeoPark is our supplier, that is correct.

Okay, thank you.

Bob Hastings, Cannacord.

So Bruce, can you clarify, you said that you had been buying back stock in the market every day. Is that still happening during the current period of uncertainty?

Yes it is. What uncertainty, Bob? Prices are going up and (indiscernible) are rolling in.

Yes, that has certainly been going on. There's still maybe a little bit of overhang of what the producers might say or do in Argentina of course, but we'll see on that one. Now New Zealand, I noticed was not producing or is shut down now. Have you gone all through the gas, consumed all of the gas that you had under contract there?

Yes, we have consumed the gas. We had some maintenance to do on that plant, so it was convenient to do that at the same time. And we continue to regard that as a taxable asset that may or may not restart. So we've continued to look at supply-demand balances opportunities to move that product and the commercial terms of gas that we might purchase in that country. So we might well restart that plan sometime in the next six months, but there's no decision made today.

And what it is the price of gas in the market today?

I'm not sure -- help me (indiscernible) I just want to be sure that I don't want to -- all of our gas terms are obviously commercially sensitive, Bob.

I realized that, but I believe that there's being more quotes in that market, and last I saw, it sort of like $7 or something.

No, it's nothing like that. You'd be talking about New Zealand dollars as well, and even that's too high. So I can assure you, it's less than $7 (indiscernible).

Okay. And it looked to me like when I was looking at your numbers that you were actually paying something maybe closer to 350 if I was backing out my numbers correctly. But would that be sort of the level that would be required to run the plant?

Well, you can certainly see if you analyze our numbers that we're making positive cash margins out of that facility. So it makes commercial sense for us to run it if we can source gas. But it's certainly a much bigger decision than just looking at how much money we make from that facility. It's about global demand supply balances and how we can most sensibly manage our entire portfolio of assets.

You said you did some maintenance on that plant. So was there -- is that just normal maintenance?

Yes, nothing special at all. It's just some small bits and pieces that need repair.

One of the things that you've talked about in the past is maybe whether it makes sense to move some of your well maintained plants out of areas where you have gas prices to other areas. I don't think Egypt would fall under that category. But are there other spots you're looking at currently that might fit into that category?

Yes, there are. We did receive a bit of publicity. We had a small group visit Papua New Guinea about a month ago and we received a little publicity out of that. It's at a very early stage. Papua New Guinea has lots of natural gas, but they don't have a pipeline yet and no commitments to develop that gas. So that would be one location we could potentially relocate a methanol plant. And certainly, we're looking at other parts of the world where you would hesitate to spend the capital on new greenfields for some of these, but you might decide that relocating an existing facility may make sense. And I think China is another opportunity. China, as I mentioned, there is a huge push in China on turning coal into energy, and methanol is clearly one of the roots to do that.

Okay. And if you had to put a time frame on a successfully entering the methanol to energy market?

Well it's happening today, so there's no -- and it's growing exponentially. I did mention in my comments that we're receiving requests for methanol volumes for people who are blending gasoline-methanol blends to export to China and to other countries. So it's happening as we speak, Bob.

Can you put a number on how big you think that demand is out there today and how long it would take you to maybe get into the DME market yourself?

I have John Floren, our Senior VP of Marketing with me, so maybe I'll just look at John and see if he would like to offer an answer to that question.

For fuel blending, we estimated around 1.5 million metric tons today. Going forward, we're getting inquiries of up to 1 million tons per annum from different companies so it's growing, like Bruce said. As far as DME, fairly low capital cost and relatively simple, so we could be in position mid next year.

You could build the facilities and have a decision made and be going full bore mid next year?

Yes.

Well that would be quick.

And that's hundreds of thousands of tons of methanol.

Okay, thank you very much.

Jacob Bout, CIBC World Markets.

Just revisiting the Argentinean gas issue here. What is the current length of time that is left in the Argentinean gas contracts, and how difficult would it be to renegotiate these contracts?

A long time, is the short answer. Our contracts expire in 2025 and 2029. I expect that one implication from the current tax position is that it will be much, much easier to renegotiate those gas contracts. And clearly, I talked before about mitigation strategies. We're very happy to work with our gas suppliers to look at ways of mitigating this tax. And if it means that we can source more gas from Chile and (indiscernible) Argentina, then that helps our gas supplies and it helps us. So that seems to me that there are win-win solutions here.

What is the likelihood that you would put on if they would declare a force majeur?

I think that it's a very low probability, but again, I don't really want to (indiscernible) on this. Our gas contracts are confidential. We have not had discussions, we would welcome, as I say, discussions around wick mitigation. But my short answer to your question, I think it's a very low probability because the contract specifically addresses this issue.

Got it. And then just on the Chinese demand for methanol side, what are the latest figures showing you as far as China being a net -- their position as far as being a net importer? Last I saw, they continue to see kind of 1.3, 1.4 million tons a year.

And it has continued to be very stable year-over-year, and it's all of the volume that is slowing into the coastal provinces, so the customers that we've historically supplied are also (indiscernible) on imports. There has been almost no substitution of domestic methanol into traditional markets. So all of the growth and supply that you've seen in China, most of it is disappearing into non-traditional demand. Is that fair, John? (MULTIPLE SPEAKERS) And growing traditional demands as well.

Could you give us some, just a rough breakdown between formaldehyde versus methanol as fuel blending, that type of thing as far as demand growth rates?

The fuel blending, Mark, it's John Floren, is difficult (indiscernible) because it's being done in many, many locations. For formaldehyde, you're seeing double-digit growth, upwards of 20%, and formaldehyde represents the largest single traditional demand use in China.

Would that be 75% of the market?

Between 60 and 75. And what you're seeing going forward is there's large acetic acid plants being built in Nanjing, so that will take more of the methanol in 2007, 2008, these are 600,000 ton plants by both BP and Celanese. But the fuel blending number itself is difficult to pin down exactly because a lot of it is happening in many different regions. But when we're looking at the balance as the market is growing a lot faster than we would've guessed this time last year. And even though traditional demand is growing quickly, even quicker than we would have expected, there appears to be a lot of product going into fuel blending. Recent tax increases in China on fuel and fuel increases as well is contributing to this.

Thanks for that. Turning back to Chile for a second, will there be any impact on future Chilean gas contracts going forward as a result of this Argentinean tax? I.e., base price is for argument's sake, let's say it's $0.90 per Mmbtu. Could you see that bump up 50%?

Again, I don't want to speculate on what might or might not happen in the future. I met last year with the President of Chile when we met to talk about EENEP's plans to explore in southern Chile. And the comment that he made to me during that meeting in EENEP's presence was that Chile will not take advantage of our predicament with Argentina. And it was a very clear message that they're not going to ramp up the price just because Argentina has changed the rules on us. So that is a commitment from the president of the country. Now that is not a price negotiation and we haven't had a price negotiation. But I think it leaves me with some level of comfort that Chile is not going to take advantage of that predicament.

And when do you expect to be meeting with your Argentinean natural gas suppliers?

I have no idea, Jacob. They continue to supply us gas and we continue to purchase it. So I guess as they make contact with us, then we are always willing to chat with them.

Okay, thank you.

Peter Butler, Glenhill Investment Research.

Is the Trinidad curtailment -- is this new news?

No, this has been around for awhile, Peter, you must have missed that one. The problem there has been, there has been a number of new facilities, gas consuming facilities start up in Trinidad over the last year. And what is apparent is that the investment in the upstream has not kept pace with the investment downstream. And whenever there is any sort of hiccup in gas supply on the island, all gas consumers get cut back a little. Now there are some days like today, for example, we've been running our plants at 100% today and we have been for the last few days. But then we'll get a call to say, can we cut back to 95% because something has happened somewhere. So the mitigation here is, they are bringing on new offshore platforms. We have met with major gas suppliers, the government people in Trinidad. What they assure us is there's no problem with gas reserves. There's lots of gas. The problem has been that upstream investment has not kept up with downstream consumption and they need to invest more in gas delivery systems. So it is a bit unfortunate, and it's a bit annoying, but it does seem that this is a temporary problem that's going to go away.

The thing that I'm worried about is first, say, New Zealand, surprise, they don't have the gas, and we have the problems in Argentina and then we have problems in Trinidad. And since you started this Egypt project, the situation in the Middle East has substantially deteriorated. And it's just worrisome.

Our business model is all about going to places where they have remote natural gas, which is lower priced than it is in developed countries. And I would say on balance, I think we've been extremely successful. Now what said, when you're in different locations, you are subject to some different circumstances. So the circumstances that we faced in New Zealand and Chile, Argentina and Trinidad were all completely different. And again, I would say in Chile and Argentina, there's plenty of natural gas in that area; that's not the problem. The problem is the development of reserves and the delivery to our plants. So it feels to me that the problems in both Trinidad and Chile, they're not long-term problems. There are solutions to them. And Egypt, I don't think you can take Lebanon and the Israel problem with Egypt. Egypt is positioning itself as a pacemaker in that region, rather than a protagonist. But that said, we are in locations where politics are a little more challenging and that will be part of our business model to manage our relationships in those regions.

Well, the other side of the coin I guess is, why don't you consider doing things like just running your business for cash, forgetting about Egypt, doing an LVO, enjoying the cash flow and not having to put up with people like me questioning what you're doing?

With just love you questioning everything we're doing here. And I would acknowledge that it's an alternative business model and we're always open-minded to looking at different business models. We're most focused on maximizing long-term shareholder value. Now we happen to think we have a very good formula, we have a leadership position in this industry. That brings us some unique opportunities. And as I mentioned, I think Egypt is one such opportunity. And I think that today, the best way to maximize long-term shareholder value is proceeding the way we are. But that said, we're not so focused on projects and our business that we will ignore opportunities to increase shareholder value.

Okay, thanks.

Winfried Fruehauf, National Bank Financial.

Thank you, good morning. You referred to cost increases in the quarter, and I'm a little bit puzzled because when I take your cost of sales and operating expenses and divide them by the tonnage of products sold, then I have $208.46 in the first quarter of this year and $173.17 in the second quarter. So I don't see an increase, I see a decrease.

The Chileans (indiscernible) accretion is our mix of sales comes from a variety of sources. We produce in both Chile and Trinidad at low cost and the cost of those regions is very similar. We produce in New Zealand at a somewhat higher cost, and then we still purchase methanol at probably the highest cost of all. And today, I think you can see in the reports, we either make a small margin or we break even on most of those sales. So it depends on that mix of sales in the quarter as to what the cost of sales looks like.

Yes, but if I take your total sales and divide them into your total cost, I still get a reduction compared to the first quarter.

There was one other factor I missed there. We did have inventory from Kitimat in the first quarter that was at $300 and something a ton, so that was an extraordinary cost structure for that product. Now it was reasonably small, but it certainly distorts the numbers. So that could be another factor in Q1.

But if I take the same cost of sales and operating expenses, and instead of dividing it by the cost of products sold by the amount of production, I get a decrease from $201.54 in the first quarter to $166.60 in the second. So again, I don't quite see the cost increase.

I don't know -- I'm struggling to follow the numbers and how to respond. I think it's better that we -- [very happy] that Wendy gives you a call after the conference call and can reconcile those numbers for you. All I would say that in comparing costs quarter over quarter and we do a detailed analysis of it that we see small cost increases mostly in our supply chain and shipping costs. But in terms of comparing apples with apples and production costs, there was nothing really significant there.

Okay, thank you very much.

(Operator Instructions). Sam Kanes, Scotia Capital Inc.

Good morning. I'm going to stick to tax rates on a run rate going forward because there has been a variety of incentives and adjustments lately in both Chile and Trinidad. If you could just walk us through that a little bit. I noticed that in the release, you had some form of incentive tax credit for Chile IV. There's different reinvestment rates for Chile, which I vaguely remember as being 15% tax rate if you reinvest in Chile, and 35% reinvest tax rate if you don't when you distribute money out. You mentioned and you referred to that in general. Then of course then the tax rate change in ,Trinidad as well as you may have some lingering amount left on Atlas that you do not have any more on Titan. Can you just take us through that and to where the normalized tax rate is going to be after all this is said and done?

It's Ian Cameron, if I could just answer that question quite briefly. Just as a reminder, first of all, that the guidance that we provided before previously I should say is that the tax rate, we would expect the tax rate to be in the 35% range, and there's no change to that guidance. We also provided guidance that we would expect to see the current deferred split to be approximately in the range that we're seeing today, which is on a year-to-date basis, about 80%. So that guidance has not changed. There really has not been any change in terms of tax legislation over the last little while in either Chile or Trinidad. So as a reminder, in Chile, we pay our tax, a 35% tax rate there in two phases. One is the first phase we pay it when we earn taxable income, and the second phase, the second part of that tax, we pay when earnings are distributed from Chile. That is when we pay the tax, but we accrue accounting tax in Chile at 35% and we have always done so.

In terms of Trinidad, we have two assets there of course. The Titan facility attracts tax at the full 35%, which is a statutory rate, and in Trinidad, in terms of the Atlas facility, there is a tax holiday that steps up over a period of time from 0% to 35%. Today, the tax rate is about 15% for 2006, and that progressively increases over that 10-year period from the time the plan started up in 2004.

That's helpful, thank you. Maybe I'll switch to something a little different. You refer to ocean shipping route changes. Is that -- I presume it's because of New Zealand, maybe it's not.

It's something that fluctuates from quarter to quarter, Sam. So there will be some quarters when maybe we have more long voyages and smaller vessels, and other quarters when we have shorter vessels, shorter voyages and larger vessels. So there's nothing significant to be read into that. The only thing that has really changed is [bunker] costs, of course continue to go up. And they represent a much more significant element of our cost structure than they did a couple of years ago.

I know you have a long-term portfolio on a long-term basis, that will eventually renew and roll forward on leases or otherwise. Is it 2010 where everything kind of rolls over, if you may, of your long-term leases?

I will ask John to just give you a bit of commentary on our ships.

We have over 20 ships in the fleet, and all of them are under different terms as far as lease rates, seven to 15 years with options after the expiring of those contracts. So we don't have anything in the immediate term coming up for renewal, and depending on the shipping market and what it does in the future, will either be higher or lower than our current rates and it's difficult to predict at this time. I would say though that if you're looking for new ships today, you're in a lineup that's around 2010 before you get your ship built. So the market remains extremely tight for ships and prices for new ships remain extremely high.

And I think if I remember correctly, we're 40 to 50% lower than current (indiscernible), so that's current cost of [dinars] that we enjoy for our fleet.

Thank you, gentlemen.

We didn't answer the question on incentive tax credit, Sam. We had that, it was a receivable, it was an incentive that the Chilean government provided to build facilities in the remote locations. And we had it as a receivable and we received the cash this quarter.

Okay, so it was already booked in.

Yes, that's right.

Fai Lee, RBC Capital Markets.

Thanks. Bruce, I just wanted to follow up on another issue with respect to this Argentine tax export tax. My understanding is Chile, the President suggested that the residential customers, they wouldn't be looking to seek recovery of the tax increase from residential customers in Chile, implying that the recovery will fall on commercial and industrial customers. Do you see this as a risk for Methanex, or is this something that will fall mainly to the distribution companies?

No, I don't think this is a risk at all for us. I think that the biggest impact of Argentina's behavior has fallen on Central and Northern Chile. And even this year, the curtailments in those areas have continued to be quite high, whereas ours have been very large. So the President's comments are much more around the electricity and gas distribution companies in Central and Northern Chile, and I think have no relevance to us at all.

Okay, thanks, just wanted to clarify that.

[Adam Komura, NTrust Capital Inc].

Two quick question. The first is, how much of the 32% of the gas that is subject to the tax is associated gas or a byproduct of oil production?

My understanding is, all of it is, Adam. I condition that just a little because my knowledge and I don't think our knowledge is perfect. But we're -- so maybe it's more accurate to say most of it is associated gas.

Okay, so that qualitatively does really help, in terms of who is going to be bearing the cost. My other question is -- I guess this is a question of your suppliers, but I assume now, they're going to try and go lobby and see if they can't get out of paying the taxes themselves. Are you aware of any of that?

No. Again, to reiterate, it was only yesterday that this was unannounced, so I guess everyone in studying the rules and trying to calculate their impact on these businesses.

Just a follow-up question for John regarding the DME market. I think you had mentioned that it could be perhaps hundreds of thousands of tons for Methanex next year. But what's your view on that entire market? How big could the DME market really be? And what would -- what is really sort of the economical equivalent in terms of a methanol price where you would be selling it to the DME market, rather than the methanol market?

Well, the DME market, there's different applications. The one that's really active today is to replace LPG and [town] gas in countries where they're paying a lot of money for LPG. DME can be substituted fairly easily at a rate of 20 to 25% to LPG. So the sky is the limit -- how big are the LPG markets on a global basis? And then it's a factor of economics -- how much does it cost to make DME from methanol versus the LPG prices, which is linked to crude. So it depends on what your energy forecast is going forward with oil and LPG to say what can you pay for for methanol to make DME.

Bob, let's just understand it a little bit. Let's assume oil is $65 a barrel or $70 a barrel. What would that mean in terms of an equivalent ton where you would sell into the DME market versus the methanol market?

I don't have those numbers in front of me, but I can get them for you.

Okay, but ballpark, I mean I would think it's got to be north of $300 a ton.

Let me get the specific numbers for you. We have gone through that exercise and we have the related LPG, oil and methanol prices. I would hate to give you the wrong number on the phone.

Terrific. Thanks a lot, guys.

(Operator Instructions). Winfried Fruehauf, National Bank Financial.

Thank you. What is your guidance for your aggregate income tax rate for 2007, and your guidance for the split between current and future?

As I said this earlier that our guidance for the tax rate is 35%, and our best guess today would be that that 35% would pull through 2007. In terms of the current deferred split, again, the year-to-date number was about 80%. It will fluctuate a little bit, but I think guidance would be somewhere between 70 and 100% going forward.

Thanks for that. I just calculated for the second quarter of this year the split, and it looks more like 59% current and 41% before.

Year-to-date, though, it's about though, Win. So it will fluctuate quarter to quarter. The biggest variable there is -- will depend on how much cash we repatriate from our Chile operation.

So that would mean that we're going to see a substantial shift towards a higher current rate in the third and fourth quarters of this year?

Well the year-to-date rate is 80%.

No, I'm saying is to -- if that is to be representative for the year and we were at 59% in the second quarter, that means that you have to repatriate quite a bit of cash during the balance of this year.

That means -- the current deferred split will ultimately depend on how much cash we repatriate from Chile.

We're making too much profit, Win, that's the big problem here.

It's a nice problem to have. All I was suggesting is that if the 80/20 split is representative for 2006 and 2007, then you have to repatriate quite a bit more cash during the balance of this year to get -- from the 58 in the second quarter to the 80 for the year.

Yes.

Thanks very much.

Currently there are no more questions in the queue.

It's a good opportunity to close to call. I would like to thank you all for participating in the call. We've had another excellent quarter with a strong earnings and cash flows, we're continuing to operate in a very positive environment and I expect we'll be able to continue to report very positively on the earnings for your company. We had some [completes] issues in Chile and I think we're very well positioned to deal with those. We have a unique opportunity in Egypt that I've talked about, we have had some plans around energy that I think have the potential to transform this industry. So I would like to thank you for your continued support and wish you all good morning. Thank you.

Thank you. This concludes the Methanex Corporation second quarter results conference call and thank you from [Telus].