Methanex Corp (MEOH) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation third-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, October 26, 2006. I would now like to turn the conference over to Ms. Wendy Bach, Director of Investor Relations. Please go ahead.

Thank you Colleen. Good morning, ladies and gentlemen. I would like to remind our listeners that our comments and answers to your questions may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking statements. Please refer to the bottom of our latest news release and to our 2005 annual report, for more information.

I would now like to turn the call over to Methanex's President and CEO, Mr. Bruce Aitken, for his comments.

Thank you Wendy, and good morning everyone. Welcome to the Methanex third-quarter investor conference call. I have a number of colleagues with me in the room and they will be able to help me out with questions a little later.

I am pleased to report that we've completed another excellent quarter. Our adjusted EBITDA in the third quarter is $201 million; substantially higher than our second-quarter EBITDA of $153 million.

Our net income was $113 million or $1.05 per share, gains substantially higher than our second-quarter result of $0.75 per share.

The most significant factor impacting our results this quarter was the dramatic escalation in methanol prices that occurred during August and September. You might recall that I stated in our second-quarter conference call, that demand for methanol is healthy and we expect the market to tighten and for prices to rise in coming months. I also noted that inventories were low on both the consumer and supplier side of the industry. These comments proved to be an accurate summation of the industry at the beginning of the third quarter.

The one element that we'd not forecast was the extent of unplanned outages that occurred during the quarter. The effect of these outages on an industry that was already in a tight situation was to create a genuine shortage of methanol. A number of suppliers declared force majeure, as they were unable to source methanol to supply contractual commitments and the price of methanol was rapidly bid up in August and September.

This escalation led to an increase in contract prices in the month of September in the US and Asia of about $100 per metric ton. The result for the quarter was average realized price of $305 per ton, compared with an average price of $279 per ton in the second quarter.

Those of you, who have studied our results closely, would have noticed quite a significant decrease in the apparent discount from our announced prices. The average discount in the third quarter was 13%, compared to 18% in the second quarter.

There were two factors that influenced this result. Firstly, we were able to assist a number of customers with sales volumes above contract maximums. All of these sales were made at the prevailing spot methanol prices with no discounts. Secondly, we were in the process of moving away from some MTBE customers in the US to other markets. We've been very successful in increasing our market penetration in the Pacific Northwest, in advance of the announced shutdown of Celanese's methanol plant in Edmonton.

Mostly because of geographic remoteness, sales prices are higher to those customers than to the MTBE segment. This action means about 500,000 metric tons of annual sales at a substantially high methanol price, and represents a positive, sustainable impact on our earnings. This action has also reduced our effective discount. I'll make some more comments on this topic when I offer some views on the future outlook of the Company in a few moments.

We also experienced very strong sales volumes during the quarter. As a number of our customers were left short by other suppliers, we were asked to supply contract maximum volumes which increased our level of sales. The combination of higher prices and higher sales volumes substantially explains our excellent result for the quarter.

Production from our large plants in Trinidad has been excellent during the quarter. We produced a total of 470,000 metric tons, which is about the designed capacity for those plants.

Production from our site in Chile was however, disappointing during the quarter. We completed a planned turnaround of our Chile I plant in July, which reduced production by about 30,000 metric tons. During late July and August, we then experienced a major electrical outage and a series of smaller operating problems that reduced production by almost 146,000 metric tons.

Disruptions to our gas supply from both Argentina and Chile contributed to a further 118,000 metric tons of lost production. These combined losses represented about 30% of the capacity of the site. I'll comment in more detail on our gas situation in Chile, in a few moments.

We also demonstrated in the third quarter, the value of our flexible assets in New Zealand. We shut the 530,000-ton Waitara Valley plant down for maintenance in mid July, at a time when we had also consumed all of the natural gas that we had contracted to buy. As events unfolded in the third quarter, we secured a further [tranch] of natural gas and restarted the plant in mid August.

This action allowed us to offset some of the production losses from Chile, and maintain a continuous supply of methanol to our customers.

We have sufficient natural gas to operate in New Zealand, through to the end of November 2006; and our in discussions with our gas suppliers to secure further volumes to allow the plant to operate into 2007.

We continue to operate in a very positive environment that we expect will produce an excellent result for us in the fourth quarter and for 2006 calendar year. With the exception of MTBE, demand for all major methanol derivatives continues to be very healthy. We have observed no significant variation in demand as a result of high prices.

Inventories in the industry continue to be low, and it will take many months of high industry operating rates to recover the lost production from Q3. There are a number of planned outages in Q4, and it would be unusual if there were not also some unplanned outages.

Spot methanol prices are high and relatively stable in North America and Europe, and increasing in Asia. The European is price is set for the quarter, and non-discounted list prices for October in the US and Asia were set at $599 per ton and $550 per ton, respectively. Yesterday we rolled our non-discounted reference price in North America for the month of November.

With the assumption that reference prices remain stable for the balance of the year, we expect our realized price for Q4 to be above $450 per ton.

I'll now switch topics and talk about some of the opportunities and challenges that we face. First, the natural gas supply to our plants in Chile; I provided a few moments ago, an analysis of production losses that we experienced in Chile during the third quarter. Just to remind you, we lost about 118,000 tons of production as a result of gas-supply issues.

To break this number down further, only about 25,000 tons of this was as a result of Argentinean government natural gas ordered curtailments. This is somewhat lower than the level of curtailments that we experienced during 2004 and 2005. The reason for this is that some of our gas suppliers in Southern Argentina were able to deliver higher quantities of gas over the last year, and were therefore better able to manage their contractual obligations to us and the requirements of the Argentine government to supply the domestic market.

The disappointment for us during the last quarter was the level of technical problems which caused disruptions to our gas suppliers. A number of our suppliers have suffered unplanned outages, which affected their ability to fully supply us under our contracts.

While these losses are not government-ordered curtailments, the gas supply-demand environment in Argentina is certainly a contributing factor to these short deliveries of natural gas.

To offer some guidance for the future, we expect that we will continue to lose some amounts of natural gas in the fourth quarter. But these losses should be lower in the Southern Hemisphere summertime, when gas demands in the domestic market are reduced.

The second more-recent challenge for us with regard to natural gas for our plants in Chile has been the imposition by the Argentinean government of export duties on natural gas. Just to remind you of some of the facts, today we source about 60% of the natural gas for our plants in Chile from Argentina. In July, the Argentinean government significantly increased export duty that impacts about half of this gas. And two weeks ago, they extended this duty to cover all of the gas that we receive from Argentina.

With this increase, the total cost of this duty is now a little less than $200 million per annum. Also as a reminder, all of our gas contracts provide that gas sellers should bear the cost of any duties and taxes imposed by the Argentinean government. So on the surface, there is no impact on Methanex from this decision. However, our gas contracts represent long-term relationships with our gas suppliers, and it is good business for us to be sure that these relationships are sustainable through time.

We've explained to our suppliers that we are not obliged to pay the tax, but also understand that they do not want to pay the tax. There is therefore, a basis for a sensible discussion around long-term solutions to our gas-supply needs. We are in discussions with all of our gas suppliers and making good progress. It will be difficult for me to say more on this subject without prejudicing our commercial position.

However, as a matter of principle, we are prepared to make a contribution towards the tax when the price of methanol supports such a contribution.

As I've described in prior conference calls, our long-term solution to both gas-supply security issues and minimization of any tax impact on either us or our suppliers, is to source more natural gas in Chile. The news regarding gas exploration in Southern Chile continues to be positive. In July I reported that ENAP, the Chilean state-owned oil and gas company, was about to start drilling a third well into the Lago Mercedes reservoir. They have advised us that this well is proceeding to plan and that there is now a further plan, to drill a fourth well.

In early October, the Chilean government announced that it will open bidding to the private sector by the end of this year to explore for oil and gas in Southern Chile. We are also aware of considerable interest from the private sector, in participating in this program. While we are not experts in oil and gas exploration, we have employed consultants who advise us that there is considerable potential to develop gas reserves that would supply Southern Chile, including our plants, for the foreseeable future.

We are pleased with the level of activity occurring and, in short, I’m optimistic that there will be medium to long-term solutions to our gas-supply challenges in Chile. However there is no doubt that it will take a few years before this issue is behind us.

The second opportunity I wanted to provide you an update on was our project in Egypt. We continue to make excellent progress in achieving our various milestones. In the last couple of weeks, we have finalized the shareholding structure, which is now flexed at 60% ownership for Methanex. We have a number of Egyptian partners who are contributing towards the development costs of the project.

All of the major commercial agreements have been signed and we are working to secure an underwriting commitment before the end of the year.

The Egypt project is a unique opportunity that on completion, will be our lowest-delivered cash cost operation in the world. We are developing our capital cost estimate for the project, and subject to finalizing some financing details, expect to be in a position to make a final decision before the end of this year.

The third opportunity I would like to address is the potential for methanol to compete in the energy markets. I explained in the July conference call that methanol has historically mostly been sold as a feedstock for the chemical industry. However, methanol has value as energy; and at high crude oil prices, methanol's energy equivalent value is considerably higher than the historical 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, there is a large potential market for methanol.

Since July, we've continued to make good progress to finalize methanol supply arrangements to two substantial opportunities; one for fuel blending, and one related to DME. And we expect to be in a position to announce details of these arrangements in the coming months.

Certainly the progress that we have made has reaffirmed to us that there is substantial demand for methanol emerging in non-traditional markets.

I'll change topics now and make a few comments about our liquidity. Our cash flow from operating activities during the quarter was $153 million, compared to $130 million in the second quarter.

During the quarter we returned $47 million to shareholders via dividends, and share repurchases. As of today, we've repurchased 2.8 million shares under our normal course issuer bid which commenced during the week of May 23rd.

We continue buying back shares every day. We have a number of potential uses for cash. But as part of our consideration in managing our balance sheet, as I've mentioned, we're close to committing to proceed with the project in Egypt. And we think it is sensible to maintain a strong a cash position at the time of making this commitment.

I've also stated publicly a number of times over recent months, that we would be receptive to investing to improve the security of natural gas supply to our Chilean plants. We do not have any particular projects before us when making this commitment. But clearly there is value to us in accelerating the development of gas reserves in Southern Chile.

We are open-minded on how we might participate, but certainly recognize that we are not an oil and gas company and we have little appetite for risks that we cannot understand or manage.

In the strong cash flow environment that we are operating in, we are well-positioned to invest in an expansion of our methanol franchise, to improve gas security to our existing assets, and to continue returning substantial amounts of excess cash to our shareholders.

So before stopping for questions, I'll make a few comments regarding our expectations for the fourth quarter. I've already mentioned that our plants in Chile have experienced some loss of natural gas supply and we would expect some further, albeit lower losses, in the fourth quarter.

Methanol pricing is strong, and as is normal, we expect to see some volatility. I've also indicated earlier our price expectation for the quarter. We expect sales volumes to be about 150,000 tons lower in the fourth quarter than the third quarter, mostly because we start the quarter with low inventories. We expect the changes in inventories will have an impact on our fourth-quarter results. We began the third quarter with relatively high inventories of low-cost methanol; and as noted a moment ago, we start the fourth quarter with much lower inventories which are also carried at a somewhat higher cost.

Most listeners will know that our gas contracts in Chile and Trinidad escalate with the price of methanol. So as expected, gas prices are increasing, and cost of sales are also increasing. Most of this increase in gas prices occurred late in the third quarter and had little impact on our results for the quarter. However, there is an impact on the carrying cost of inventory.

To offer some guidance, inventory values on our financial statements are similar between Q2 and Q3. However we have almost 240,000 metric tons lower inventories between these two periods.

One other factor that will influence our result is the discount that I discussed a little earlier, between realized methanol price and listed prices. The guidance that we've offered historically is that about 20% of our sales volumes are sold under fixed-price or [cost-plus] type arrangements. These types of contracts tend to increase our average discount at high prices, and reduce the discount at low prices.

I referred a little earlier to our marketing initiatives in the Pacific Northwest. The strategy in this region was firstly to be positioned to supply customers who have historically been supplied by Celanese, and secondly to divert volume away from cost-plus MTBE sales in the US.

This strategy has delivered two very positive results under the current high-price environment. Firstly, it has reduced the volume of sales that we expect to make under fixed price and cost-plus contracts. And secondly, as I mentioned earlier, it has increased our market exposure to higher value customers. Both of these factors have the effect of reducing the average discount that we have recorded in the last couple of years, and increasing our revenues and margins.

As has become common for us, there are a lot of variables that make forecasting something of a challenge. However, the factors that I have elaborated should be expected to generate an outstanding result for us in the fourth quarter.

So at this point I will stop and take any questions that you might have.

Thank you. [Operator Instructions]. Sam Kanes with Scotia Capital, please go ahead with your question.

Good morning, Bruce.

Good morning, Sam.

Congratulations on a great outlook short and medium term.

Long term, as well.

Long term, maybe too; sure if you connect into oil and gas prices, directly. I noticed Terra reported this morning a significant contribution from their methanol arrangement. I believe that's with you, is it not? And how much further does it go in terms of how you share with them -- anything you can elaborate on that for me?

Well, we've never discussed the details of that arrangement. For listeners who are unfamiliar with what we've done here, we did acquire Terra's customer list, I guess, two years ago? And the agreement we have with them runs another two years. There is some basis on which we share some of the upside between the cost of producing methanol in the United States and the selling price of methanol. But that's about all the detail we've ever disclosed. But I guess it has made something of a difference to Terra's results and it certainly turns up on our cost of sales as well, Sam. But it's relatively small for us, though.

Sure. One quick follow up; purchased methanol, you've historically given us some guidance as to what you made or lost on that, in the quarter. You chose not to this time around; any special reason--?

Well, I'm guessing it's immaterial if it's not disclosed. I would say on the fourth quarter we are going to have significant contribution from purchased methanol and that will be typical in a period of rising prices.

Okay. Thank you very much.

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

Thank you and good morning. How many days of sales of inventory have you in Chile?

Well, I don't really think about it in geographic regions when we're much more concerned about how much inventory we have in the markets close to our customers. So our total inventories are about -- we have about 30-something days -- I'm just looking at my colleagues here. We have around 800,000 tons of inventory in total, Win. And we work very hard to make sure it's positioned close to our customers. So we aren't really focused on a location-by-location basis.

Okay. I hope you can help me with a bit of a puzzle. When I'm looking at your quarterly sales and production of methanol back to 2004, in each and every quarter you had higher sales than production. Why is it that third-party-supply producers of methanol are happy to supply you with methanol rather than selling it directly into the market and cutting out a middle person?

Well, it's very simple; because we do a great job for them. We are able to realize higher prices and higher margins for them by utilizing our global supply chain, than they are able to do for themselves. And one of the things the customers love is reliability of supply. And they will trust us with more of their business because of that reliability, whereas a small producer is unable to offer the same sort of value proposition to customers.

Okay, thank you. And regarding Egypt, assuming this plant goes ahead, which I'm assuming, when do you expect commercial production?

Well, it would be really near the end of 2009. So I think from a modeling point of view, you should expect it to be operating in 2010.

Okay. And approximately what is the size of your -- the cost of your 60% interest?

The only guidance we've offered so far is that we expect this plant, which is a 1.3 million-ton plant, to cost more than $500 per metric ton of capacity. Now we're going through a process right at the moment, with our engineering contractors, updating our capital estimate. So I don't want to update the guidance we've offered. Albeit this plant is going to be a lot more expensive than anything that we've done anywhere else before, but the total economic package that we have in Egypt, I think is an outstanding package, and we're very committed to proceed.

And how optimistic are you that you will be able to continue producing methanol in New Zealand in the New Year?

Well, we've tended to have quite a short-term focus in New Zealand. We've been contracting gas on a quarter-by-quarter basis. I would say I'm very optimistic that we will be producing in the first half of next year and we could well be producing all of next year and into '08. So it's always a function of the amount of natural gas we can secure at an economic price and our look forward on the demand-supply balance for the methanol industry.

And how far are you away from making a decision on DME?

We have one really interesting project in China and I think we're within months of making a decision on that.

And just my last question, I might have misheard what you said but; did you say that at the moment you will cease production of methanol in New Zealand at the end of November?

We have enough natural gas; our current supply of natural gas allows us to run through November, and we're working to renew that gas position. So, as I said a moment ago, I'm very confident that we can renew that into '07.

Okay. So would then be sort of -- December be a down month?

Probably not. We would expect to be able to secure that gas in sufficient time to enable us to run the plant continuously.

Thanks very much, then. That's all I have for now.

Good. Thank you.

Jacob Bout from CIBC World Market Toronto, please go ahead with your question.

Good morning.

Hi, Jacob.

Can you comment on -- methanol price is obviously up 60% roughly in some markets, just what the demand destruction has been or any evidence of that to date?

I've got John Floren here as Senior VP of Marketing and Logistics, Jacob. So I'll pass it over to him and ask John to make some comments on that.

Good morning. With regard to demand destruction, the MTBE on-purpose people that we would have expected to go down in the fourth quarter as a result of the current prices in North America, have all announced and have shut down. In addition to that, we have seen some minor turndowns on the edges, although I would caution to say that the inventories of our customers' products and their derivatives are really on the low side at this time. So we haven't seen any significant impact due to the higher prices on various derivatives. We've seen a little bit of -- acetic acid demand in Asia/Pacific be affected. That's more a factor of the acetic acid price which is lower than anywhere else in the world and we would expect that to correct.

When we look at all of the main derivatives, most of our customers have announced significant price increases through the fourth quarter. And we wouldn't expect to see any additional demand destruction other than the MTBE I talked about.

Okay, great. And then just turning to taxes, effective tax rate, it was 30%. What are you expecting going forward in the fourth quarter and 2007?

I'll ask Ian Cameron, our CFO, to respond to that, Jacob.

Jacob, the tax rate, as you know, for the third quarter was about 30%. In this high-price environment, we would expect to see tax rate in [similar] levels for Q4. Having said that, I have provided guidance in the past around a structural tax rate of around 35%, and at a more moderate price environment it would still-- I still believe that is the right tax rate and right guidance for analysts.

Okay, great. Thanks.

[Operator Instructions]. Bob Hastings from Cannacord, please go ahead with your question.

Hi, thank you and congratulations on an outstanding quarter. Looking at just -- at Egypt for a moment, I know you have answered some of the questions there. You mentioned that it would be the lowest cash cost -- and I want to make sure that I've got this right-- of Methanex's facilities in the world?

That's correct, yes.

Okay. And do you have any other metrics -- we have the higher CapEx -- is due -- how does that impact in terms of the all-in cost?

One element of the package is a tax holiday [spot] -- again it would reduce our average tax rate and that means that our net margins, our margins after tax, so that's quite attractive as well. Our logistics costs are very cheap from Egypt into Europe, so it's one of the elements of the cost structure. And our gas contract is a very competitive gas contract.

Sorry, did that answer your question, Bob?

I was just looking at -- if we at some point -- with the higher CapEx it sort of offsets -- it might have cheap cash costs like if you looked at the [AAMCO] plant for instance, with 25-cent gas; it was pretty cheap but it was a pretty high CapEx plant.

The effective tax over there is equivalent to about $100 per ton of CapEx, so that's a significant offset against high CapEx. I guess I'd be concerned if we were building in an environment where I thought we were going to be uncompetitive long term. But I think, in fact, the opposite. I think we're seeing -- I think Egypt is a lower capital cost as anywhere else in the world. We've done a lot of benchmarking against other process industries and we think that building in Egypt, while it's expensive because everything is expensive, we think it's as cheap as anywhere else in the world.

One last question is -- and a confirmation maybe of what you said with Sam and I didn't quite catch it -- was the spot purchases that you had in the quarter, did you say that basically they would have been at break-even, it wouldn't have cost you any money, you wouldn't have made any money?

No, we actually made about $4 million, so it's a modest amount of money; which is again, a bit consistent with what we've done historically. I did say that we expect to make more money in the fourth quarter as a result of the escalation of prices.

Right. Okay, good. Thank you very much.

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

Thank you. Historically Methanex has had higher operating rates at really all of its methanol facilities. And I find it somewhat out of character that you would have had lower operating rates than I had expected in Chile. And you mentioned electricity outages or so -- might they be recurring and what was the cost and could you just comment generally on where you expect operating rates to be at your Chilean complex?

We set ourselves a target every year Win, of about a 97% operating rate. So we've certainly fallen short of our own target. And I indicated some disappointment with that. The electrical outage was a most-unusual circumstance. The event that occurred should probably have only taken one plant, but it ended up tripping all four of them. And we've undertaken quite a thorough review now of the interconnectivity between all those plants. And I think there's a [inaudible] that here as we've added plants in Chile, we've also added a bit of complexity and it takes a little bit of time for our operators to understand the complexity and to come to grips with it. So I think we will return to the sort of operating rates that we've seen in the past.

The other thing that I think is a fact of life, that when you go to a new plant, it takes 12 to 18 months to iron out all the little peculiarities of that plant. And Chile IV now is only been operating for about 12 months. So we have had just a little [inaudible] affecting the operations at our Chile IV plant.

And what was the nature of the technical problems that plagued gas supply and might they be recurring.

Again, you'd hope not. The most recent one with one of our largest suppliers who is a reputable, global oil and gas company who had a major problem with a turbine; now having problems with turbines is not that unusual as those things are -- do have issues from time to time. And when you have issues, they tend to take a long time to repair. But I think that the sort of companies that we deal with, are substantial, reputable companies who also pride themselves on their ability to operate their facilities at high rates of utilization. So again, I think it's been a bit unusual. But that said; there has been a whole series of these over the last three or four months and we've certainly seen them continue to a much lesser extent, in October as well.

So over and above the turbine problems, there have been other problems, I take it?

Bits and pieces with compressors, with pipeline infrastructure. Our supplier in Chile is in fact, building a second pipeline across the Strait of Magellan, and that's been something of a bottleneck in their system. So that was due for commissioning towards the end of October. So we expect that to improve reliability in Chile. So there are a number of things happening that I think give us cause to think that our gas supply will be more reliable. However, it won't be -- the likelihood of receiving 100% all the time, certainly in this quarter is low.

Okay, thank very much.

Sam Kanes from Scotia Capital, go ahead with your question.

Bruce, just in general, you said that you have 800,000 tons in your inventory. What is the world's average inventory level? When is it low? When is it high? When is your own average, low, high?

This is not a number that's reported, so I think you have to make some estimates around it. And I think that the world needs to have probably 45 days of sales in inventory which is something around 4 million tons. Now we think that with outages that occurred in the second quarter and the third quarter of this year, that that number was depleted by up to 1.5 million tons. So certainly, for a period, the world was operating down at 2.5 million tons, which I think is completely unsustainable.

For ourselves, the number I've used over the last year or so Sam, has been -- we like to have around 1 million tons of inventory. And we know that when we have that, we can run our supply chain a lot more efficiently and we can reduce costs. So we're down to 800,000 tons and we would like to rebuild inventories back to closer to that 1 million tons in order to improve our own efficiency.

So in hypothetical terms, you never want to sell down below 800,000 tons then?

Well, you get to a point where you simply can't supply customers. And I mentioned reliability before; that you're then beginning to sacrifice something that customers place high value on. So that's something we would prefer never to do.

And that point is now I guess, right?

Well, we've been right on the edge now for three months. So our marketing and logistics people have done a first-class job in keeping customers fully-supplied during this period when others have been declaring force majeure. So I think we have again distinguished ourselves in an industry where, as I say, customers value reliability and we've been able to supply that.

But not from your minimal inventory levels?

Well, you're talking about going forward now, I guess the challenge going forward is to keep our plants operating and keep our inventories in such a state that we can continue to supply our customers fully. But certainly we've done so to date, Sam; during a very trying period.

Shifting horses and one follow up; but Chile DME got kind of some attention in a European Isis Magazine lately in that -- somehow it's going to get interconnected. I think it was you Wendy, that were quoted, into a gas arrangement into something else with the government Chile into, into--. Can you give us a bit more color on-?

I think that's possible. I think one of the things we've looked at is some of the strategic issues for Chile as a country, and clearly energy supply and energy security is one of the big issues. To the extent that they find [inaudible] gas or oil in Southern Chile, it's very difficult to transport that to Northern Chile. So we've been working with a number of people in that country to look at ways of transporting energy from the South to the North. And one very good way of doing that is via DME. There's an LPG extraction facility adjacent to our plant in Chile. So it would be very easy for us to build DME on our site and to blend DME with LPG, as I say, across the road; and then immediately then into the distribution system.

So it is just one way of transporting energy molecules from the Deep South of Chile to the North, where there is the high demand for it. I think methanol offers a sale opportunity. We could transport methanol and there's a number of things we could do with methanol to help Chile become more energy self-sufficient.

Would you own that DME plant outright or would you join back with the LPG-?

It's probably a bit early to say that, Sam. In Chile, this is all a bit conceptual. And it seems like a good idea. But it's all a bit dependent on more natural gas.

Thanks, Bruce.

Fai Lee from RBC Capital, please go ahead with your question.

Thanks. Bruce, I was just wondering if you could maybe help me with this discount rate. I'm just trying to understand this a bit. As you mentioned, I guess as the prices go high, normally we would expect that discount to rate to whine, but that didn't happen this quarter because I guess a shift to the Pacific Northwest. And I wonder if you can maybe help me going forward. It looks like it's going to be a little lower than it was previously. But looking in the fourth quarter, like your $450-per-ton realized price, what kind of discount rate are you assuming in the realized price assumption?

I think the guidance that we'd like to offer, Fai, is I think the [inaudible] was unusual this quarter. It was unusual because we had such a high volume of spot sales at very high prices. So that's really what caused it to be so much lower this quarter. You're correct that in a much higher pricing environment, you would expect the discount to increase, not to decrease. So the thing that is causing it to decrease is the transfer of sales that we've made from the -- from cost-plus customers in the MTBE sector in the United States, into a higher-value segment in the Pacific Northwest.

And what that will do is cause the discount to be lower in the fourth quarter than it has been -- I think the words I used a few minutes ago -- than we've experienced over the last few years. So if you have a view of what our typical discount was over the last few years, you should expect it to be a little bit lower than that.

But not as low as in the Q3?

No, no I think Q3 was unusually low.

Okay, alright; that helps. And in your press release, you mentioned that you're willing to share, subject to conditions, but it didn't really specify what those conditions were. Can you elaborate on that-?

No, I don't really want to elaborate too much because we are in negotiations with all of our gas suppliers and they're at a difficult stage and I really don't want to say anything that's going prejudice our commercial position. I'll say I think we'll end up sharing, and we'll end up sharing because we can afford to. We're in a very high-price environment at the moment and our motivation is to maintain continuous supply of natural gas to our plants, until we're able to supplement those supplies with more gas from Chile. So that's our short and medium-term motivation.

Are you looking to get anything in return? When you say negotiations, usually it's a give-and-take process, but it sounds like with your contractual provisions that you could be in the driver seat. But I'm not exactly clear on that.

Well, flexibility is what we need in return. As we have take-or-pay commitments running out for 15 or 20 years. So we don't want to be take-or-paying gas which has a tax on it that leads our gas suppliers in a cash-negative position. So that doesn't make sense for our gas suppliers. It doesn't make sense for us. So I think having a look at the commitments around take is probably one of the other aspects that we need to consider in this discussion.

Okay. And what's your pricing outlook for '07?

Well, I've always assiduously avoided having -- making pricing forecasts. I would say that the demand for methanol remains healthy. On the supply side, there is some supply shutting downs; at the Celanese plant in Edmonton. It's due to shut down we think in November of this year, at the end of November. There are a number of small increments of supply coming on stream. The only big one that is eminent is the plant in Iran. And I'd say we have no privileged information on that. We only know what we read in the newsletters. I would say that the newsletters have been speculating that that plant will be starting up in a few weeks time for the last few years. So we certainly don't expect to see much volume out of that plant in Q1 and it probably will begin to have some impact in Q2.

So that suggests that the market will continue to be quite tight through Q1 of next year. And I've talked about the 1.5 million tons of inventory. It will take this industry some time of high operating rates, which typically it has never managed to achieve, in order to get producers and customers back to a level of inventory they feel comfortable with. So I can certainly get myself quite bullish about the first quarter. And I really don't like to be too speculative after that.

Okay. And I've seen some articles, and I don't know if this is just rhetoric, but I guess the Chilean Energy Minister has been quoted, I believe, as saying that gas deliveries from Argentina could end by 2010. What's your view on that?

Well, she's really talking about natural gas and the center north of the country. I think she's trying to prepare industry in that area for the reality that they need to find alternative sources of energy. So her reference really wasn't to the South. And I think the South is unique in so far as it's geographically remote. There are substantial natural gas reserves in Southern Argentina. And deliveries of natural gas will be constrained by pipeline capacity to the North. So there will always be -- certainly in the next few years there will be [surface] gas deliverability out those fields.

So I'm sure in making that comment, she was not really referring to the South of Chile.

Okay. Thank you.

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

Thank you. At your Chilean complex, what was the inventory low point in the third quarter?

What I said before, Win, we don't really track inventory at a site-by-site basis. We really track it on a global basis. We manage a very complex global supply chain and we move our ships and vessels around the world as inventory is needed to be either picked up or placed in different locations. So we never run out of inventory. We always have inventory there. And we manage to keep our customers whole through the quarter. So those are probably the two key metrics.

Okay, thank you.

Sam Kanes from Scotia Capital, please go ahead with your question.

Last week, Bruce, there was an agreement between Argentina and Bolivia for what appears to be a $50 billion-deal for 20 years and as of effective 1-1-07. That's about to change the price of gas in some form, apparently, the interconnected, "international fuel costs." Do you know anymore about that?

No; we only know what we read there. The only observation I'd have to say is that it doesn't start until 2010, which I thought was a curious--

[Inaudible]

It was quoted in the article. That's a curious stat, like planning in that part of the world-- I shouldn't say too much more -- but that part of the world is not noted for outstanding long-term planning.

Well, thank you.

[Operator Instructions]

It sounds like we're just about dried up on questions, have we operator?

Yes, there are no questions in the queue.

[Inaudible]- well that's probably a good place to call a halt to this. So I thank you, everyone, for participating in the call. We have delivered another outstanding quarter of strong cash flows and earnings. And the fourth quarter will be even stronger.

The methanol industry is in short supply and this environment is conducive to continued high pricing, as I've discussed. We've got some complexities in Chile. I think we're very well-positioned to deal with those. We have a unique opportunity in Egypt and some plans around energy that we think have the potential to transform our industry.

So thank you for your continued support and I wish you all good morning.

This concludes the Methanex Corporation third-quarter results conference call. Thank you from [TELUS].