Methanex Corp (MEOH) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded on Thursday, January 25, 2007.

I would like now to turn the conference call over to Mr. Jason Chesko, Director Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen. I would like to remind our listeners that our comments and answers to questions may contain forward-looking information. The information by its nature is subject to risks and uncertainties that may cause stated outcomes 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 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 fourth-quarter results, will be posted next week on our website at www.Methanex.com.

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

Well, thank you, Jason, and good morning, everyone, and welcome to our fourth-quarter investor conference call. I have a number of my colleagues with me in the room, and they will be able to help me answer questions a little later.

I'm delighted to report that we have completed a record quarter and a record year. Our adjusted EBITDA in the fourth quarter was $279 million, substantially higher than our third-quarter EBITDA of $201 million. Our net income of $172 million or $1.61 per share, again substantially higher than our third-quarter result of $1.05 per share.

2006 was an extraordinary and successful year for us. Our EBITDA of $800 million and net income of $493 million or $4.41 per share were all-time records for the Company and I believe an affirmation of approach to the methanol business over the last decade. We have focused our efforts on building first-class efforts and a leadership position in our industry. It has been our focus on these broad strategies that has led us to the strong earnings and cash flow performances of the Company over the last seven years.

2006 was also a very satisfactory year for our shareholders. Despite the fact that we spent a good part of the year, as well as the (indiscernible) stocks with the lowest ratings from analysts, our stock was up over 46% for the year. I am certainly a very happy shareholder, and I expect that all of you that are also long-term holders will be equally happy.

In our third-quarter conference call, I discussed the global shortage of methanol and the causes of the shortage. The major consequence of this shortage was a record escalation of the price of methanol, and this has had a significant positive impact on our results. The result for the quarter was an average realized price of $460 per metric ton compared to an average price of $305 in the third quarter.

I will review our outlook for pricing in just a few more moments.

Production from our large plants in Trinidad have been excellent during the quarter. We produced a total of 497,000 metric tons, which is above the design capacity of those plants. However, production from our site in Chile continued to be disappointing. We produced a total of 766,000 tons, which was a 100,000 ton improvement over Q3, but still well below production capacity for the site of 960,000 tons.

There were a number of causes for this loss production, which are fully discussed in our MD&A. One of these causes warrants a little further comment. We lost about 79,000 tons of production as a result of delivery constraints by our natural gas suppliers. Two of our Argentine suppliers declared force majeur during the quarter, and at the end of the quarter, one of these suppliers who provides us with a little less than 10% of our gas needs is still in force majeur. The supplier has advised us that necessary repairs to the offshore undersea pipelines will take many months to repair, and we should expect continued disruptions through the first-half of 2007.

Over the last couple of weeks, our Chilean site has been operating between 85 and 90% of capacity. And assuming no other unforeseen events, we would expect to be able to maintain about this capacity during the balance of the first quarter.

We have demonstrated in the second half of 2006 the real value of our flexible assets in New Zealand. We produced a total of 111,000 tons of methanol in the fourth quarter, and during 2006 the earnings from our asset in New Zealand substantially offset earnings lost as a result of production shortfalls in Chile. We have recently discussed the terms for further natural gas purchases in New Zealand and expect to shortly conclude an agreement which would allow us to operate this plant at least until the end of 2007.

We continue to operate in a very positive environment that we expect will produce an excellent result for us in the first quarter of 2007. Demand for methanol continues to be good, although there are some areas of softening. For example, lower oil prices make the economics for products such as biodiesel and MTBE a little challenging. And a mild North American winter has negatively impacted some seasonal demand.

Inventories in the industry continue to be below normal, and we believe the industry would need to operate at higher rates for some time to return to a state of balance. In Asia we are observing increased exports of methanol from China, which we believe is directly related to the current high price environment. At today's prices we would expect that every producer in China is very profitable. Some producers are seeking to maximize their returns by exporting to higher value export markets. There are many constraints on the export of Chinese methanol, not the least of which is that most coal-based methanol does not meet the international specification. However, the new natural gas-based methanol plant in Hainan Island in Southern China and a number of other producers have been successful in exporting over the last couple of months, and this has changed some industry builders.

As I mentioned a moment ago, this activity is encouraged by high methanol prices, and we believe that in a lower pricing environment, exports will diminish and imports into China will increase.

A few comments now on methanol pricing. The Methanex European prices set for the first quarter at EUR420 per ton is about $546, an increase of EUR20 per ton compared to the fourth quarter. The Methanex nondiscounted list prices for January in the US and Asia were set at $599 and $520 respectively.

Last week we reduced our nondiscounted reference price in North America for the month of February to $549 per ton and just yesterday our Asian price to $490 per ton. We have done this to create better pricing alignment amongst the various regions.

I mentioned during our last conference call that we believe that current levels of pricing run normally high and are not sustainable. And, as I have mentioned, we are beginning to see some changes in demand and supply that are impacting pricing. We would expect that our realized Q1 price will be about 5% lower than our fourth-quarter price of $460 per ton.

Those of you analyze our results in more detail will notice that our sales volumes were lower in the fourth quarter than they have been in recent quarters. There is nothing much that should be read into this decline. It is normal for us to have some variability between quarters as timing for shipments is not linear. We also ended the quarter with very low inventory and purposely planned to rebuild inventories to more manageable levels. We expect that sales volumes will increase in Q1 and depend on new business in the Pacific Northwest and additional MTBE demand from one of our large customers who has recently restarted his plant in North America.

I will now switch topics and talk about some of the opportunities and challenges that we face. First, the natural gas suppliers to our plants in Chile.

During the third-quarter conference call, I explained the issues related to the imposition by the Argentinian government of export duties on natural gas exports. This duty represented a total cost to our gas suppliers of about $200 million per annum. I indicated in our view that it is good business for us to be sure that our relationships with our gas suppliers are sustainable to return and that we were, therefore, prepared to share some of this burden.

Over the last couple of months, we have been in dialogue with all of our gas suppliers. I'm happy to report that we have reached short-term agreements with all of our Argentine suppliers. Over the last few weeks, we have been receiving all of our contractual gas entitlements from Argentina, except in situations where suppliers are in a force majeur position.

It will be difficult for me to say too much more on this topic without prejudicing our commercial position.

However, as a matter of principle, we're sharing the cost of duty and have gained some flexibility to take (indiscernible) depending on the prevailing methanol market conditions. This increase to our gas costs has had only a small impact on our earnings from the fourth quarter as most methanol produced under these agreements is still in inventory at year-end.

A consequence of this is that we will be selling higher cost methanol in Q1 2007, and this will impact our earnings in that quarter. While it is disappointing to us that our long-term arrangements in Argentina have been disrupted, I would observe that our experience is similar to experiences in many other parts of the world today. Even in the an methanol industry, we are aware of gas supply challengers in China, Indonesia, Iran, Saudi Arabia and Russia that impact the ability of producers in those areas to operate their plants at capacity and impose increased costs. I believe that this is an issue that will confront the supply-side of our industry for a number of years.

Natural gas has become more valuable and will tend to be diverted to higher value end uses in a number of regions of the world. This in turn can be expected to impact methanol balances and methanol prices.

As I have described in prior conference calls, our long-term solution to both gas supply security issues and minimization of tax impact on either us or our other suppliers is to source more natural gas into Chile. The news regarding gas exploration in Southern Chile continues to be quite positive. Our primary Chilean gas supplier has continued exploration activities in the Lago Mercedes reservoir, and we understand they are sure to make development decisions in the next couple of months. They have also commenced exploration activities and a second natural gas prospect close to our plants.

In early October, the Chilean government announced it will open biddings to the private sector to explore for oil and gas in Southern Chile. We understand that this process is about to commence. We are aware of considerable interest from the private sector of participating in this program, and while we are not experts in oil and gas exploration, we have employed consultants who advised us that there is considerable potential to develop gas reserves that would supply Southern Chile, including our plants for the foreseeable future.

We're pleased with the level of activity that is occurring. In short, I'm optimistic that there are 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 an update on is our project in Egypt. We achieved all of our milestones for the development of this project in the fourth quarter. We have substantially found large oil commercial arrangements and have received a commitment letter from our banks.

The one area of the project that continues to be a challenge is the capital cost. It is clear that there has been considerable escalation in engineering procurement and construction costs, driven primarily by projects that are seeking to capitalize on high energy prices. In the Middle East alone, there are several hundred millions of dollars of potential spending on new projects over the next five years. We have benchmarked our capital estimates against other projects and observed that other industries have also reported substantial escalation of costs. We're still very enthusiastic to proceed with the project in Egypt; however, we believe that it makes good sense for us to continue to review the project's scope and procurement alternatives in order to reduce capital. This process is likely to last a few more months, and we are committed to making a final decision before the middle of this year.

I will change topics now and make a few comments about liquidity. Our cash flow from operating activities during the quarter was $218 million compared to $162 million in the third quarter. During 2006 we returned $239 million to shareholders by both dividends and share repurchases. As of a couple of days ago, we have repurchased 4.3 million shares under our normal course issuer bid, which commenced during the week of May 23.

We continue buying back shares everyday and expect to complete the bids in the first quarter. We have a number of potential uses for cash that is part of our consideration in managing our balance sheet.

As I have mentioned, we're close to committing to proceed with a project in Egypt, and we think it is sensible to maintain a strong cash position at the time of making this commitment.

I have also stated on earlier calls 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 comment, clearly there is value to us in accelerating development against reserves in Southern Chile.

We also have some interesting potential energy-related investments, including the DME project from China. In the strong cash flow environment that we are operating in, we're well-positioned to invest in 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.

Before stopping for questions, I will make a few comments regarding our expectations for the first quarter. I have already mentioned that our plants in Chile have experienced some loss of natural gas supply and that we would expect some further losses in the first quarter. I have already commented about pricing expectations, sales volumes and increased costs of Argentina natural gas. Another factor that influences our results is the discount between realized methanol price and listed prices.

There are a lot of factors that influence this discount. You might recall that I discussed these factors during our last conference call and provided guidance that we expected the discount to be higher than the number we reported in the third quarter. The actual discount in the fourth quarter was 18%, and in the current pricing environment, we would expect the discount to remain at about this level.

As this became current for us, there are a lot of variables that make the forecasting of our results something of a challenge. However, even with all the factors that I have elaborated, we should expect an excellent result in the first quarter of 2007.

So at this point I'm happy to stop and take any questions that anyone might have.

(OPERATOR INSTRUCTIONS). Jaret Anderson, UBS.

Could you provide us with anymore details on the time period that the $26 million payment, the sharing of the export tax, relates to? Is it for just the fourth quarter? Is it for all of '06?

Yes, I do want to be very wary on anything I say around this topic because we are in discussions with our six or seven guest suppliers down in southern Argentina, and I don't want to say anything that puts us in a position of commercial disadvantage. So I'm going to be very, very cautious about anything I say on this topic. More or less, it is the fourth quarter. So I think that is a reasonable assumption that you can make.

Bob Hastings, Canaccord Adams.

Great results. Those prices are awesome, Bruce.

Thank you, Bob. Yes, we're very pleased with the results.

I just want to get a clarification on that last point is that I thought you were sort of had -- the earlier comments said that you had sort of completed discussions with producers and were about to sign. But are negotiations still going on?

No, we have indicated that some of those discussions are short-term, and we've got six or seven parties down there. A few of them we have reached one and two-year agreements on. Others, it was clear that we needed a bit more time and particularly with Christmas intervening. So we have reached very satisfactory interim arrangements, and that is as we have described them in the MD&A. All the gas is flowing, so I think it is an indication that there is lots of goodwill and plenty of room for compromise and reasonable negotiation. So I'm just indicating that some of the arrangements we have are quite short-term.

Okay. Great. That clears that up. When you're looking at maybe investing in new gas supply or encouraging others or incenting them to do that, obviously that will have some impact on what you think you would be paying in Argentina. Do you see from the consultant reports you have seen does it look like you will be able to buy gas as cheaply as Argentina, or are you just trying to defray your risk here?

I think what we have been told by the Chilean government is that they will not take advantage of the predicament that we're in, that they are embarrassed on our behalf, how we have been treated by the government of Argentina, and they don't intend to take advantage of that. Now I think a reasonable interpretation of that is that they will sell natural gas at a price that provides them a reasonable return on capital, and I think that is a very reasonable expectation for them to have.

Now that is probably a price that is higher than what we have been accustomed to in Southern Chile, but I think it is substantially lower than anything we're playing in Argentina today.

Now they will gather a little factor that is part of our discussions and again it is clear in our MD&A that we have gained some flexibility on take-or-pay provisions, and I think that is important from two points of view. Firstly, to the extent that the methanol price declines, we may well choose to prefer to buy methanol rather than make it, and secondly to the extent that we are able to source more gas in Chile rather than Argentina, they would then displace Argentinian gas. So I think that flexibility is key to this.

Okay. So you can actually displace even if you can just get gas at a cheaper price?

Well, what we have got is flexibility around the take-or-pay provision, so we have no obligation to take gas in certain economic conditions.

That is great. Can I just get one more clarification? You made a comment on China that the higher prices certainly attracted them to export, and you thought that might disappear. Have you looked at sort of the economics of what kind of price is required to get them out of that export market?

I have got John Floren, our Senior VP of Global Marketing and Logistics, on the call, so I will ask John to make a comment on that question.

There's a couple of factors that I should just remind you of. The supply is growing in China as you are well aware, and demand is also growing rapidly. In the short-term here, we have seen a large arbitrage situation where Chinese producers can export into places like Korea, Taiwan and a little bit into India. It is also a factor of the Middle Eastern producers not having product to satisfy those traditional markets because of their own shortage and production issues. We have talked about the cost curve in China being stratified, and our recent analysis shows that above $250 a ton there is about 4.2 million tons of capacity in China that has a cost above that. So that gives you an indication.

Okay. Thank you very much. That is helpful.

[Adam Maray], [Amtrust Partners].

Yes, thanks, and I will congratulate you on the results as well. I'm curious inventory levels -- where are we in terms of how much slack we have in our supply chain? Are you comfortable where we are such that whatever we produce in the first quarter we should in theory sell, or is there also an opportunity maybe for us to reduce some of the inventories that we have currently?

You will recall I have talked about inventories probably every conference call on the last four or five conference calls. We have been really struggling with low levels of inventory. And what we know is when they get too low that they impact the efficiency of our supply chain which impacts the reliability of supply to our customers, which we think is one of our key differentiators in this industry. So we have purposely wanted to go out and try and rebuild inventories to a point where we could regain the efficiencies in our supply chain that we have had historically. So (indiscernible). I might just ask John to see if he has any comments on inventory going forward as well.

Sure. Just to put it in context, 100,000 tons of inventory is five to six days sales for us. So when we are looking to plan our inventories, when we have uncertainty around our own production and then we have some demand side situations and really there's a number of reasons why there were large sales. Bruce has commented on those. But there were some orders that have slipped into Q1 that were supposed to be in Q4. We had some of our customers have unplanned outages at their own plants. So you total up these differences about weather, etc., 100,000 tons is five to six days sales in our chain.

Our target inventories we have said are around 1 million tons around the globe. That includes what is on ship. What is at the terminals available for customers, as well as what is at our plants. And if you take what is available at any particular time available to sell to customers, you're really talking about 15 to 20 days of inventory in any particular part of the world. And when you get down to around 800,000 tons, it gets down to more like 12 days, and that is really too skinny to service customers the way that we want to. So we have made them on purpose to build inventories in the fourth quarter by about 200,000 tons. I think you will see from our results we have overshot that a little bit, and I would say as we go through Q1, our goal is to get down by about 100,000 tons.

Okay. That is very helpful. I appreciate it. I have got a question more on terms of efficient capital structure here at the company. I am just curious, it looks like our stock buyback program was not as aggressive as it usually is in the fourth quarter. I'm curious why that would be and also just what we think is really the appropriate capital structure? Here we are sitting with $350 million of cash today going to who knows, 500, 550 by the end of the first quarter. We are paying 8.5% on $200 million of debt, and certainly there is a negative arbitrage going on there. Just want to get your current thoughts on it on those issues.

Well, I think (indiscernible) your observations are all correct that we have a lot of cash and it is building up. I did make some comments a little earlier on this topic. I do continue to believe that Egypt is a really unique opportunity for us. We have a first-class gas contract bid. We have great partners and great relationships with those partners. And I think if we can get competitive capital costs to build that plant, I think it's just a first-class opportunity that shareholders will be delighted with. It will be our lowest cost plant in the world.

So here we are going into what is a major capital spending commitment, and I think before we do that, we want to be a little cautious. We want to make sure that we have a very strong balance sheet. We want to make sure that we can finance that project very easily so that that does not become an impediment to proceeding.

Then I have indicated that I think there are some interesting opportunities down in Southern Chile, and I have not elaborated on any of them in any great detail. But they are all designed to accelerate the development of natural gas in that part of the world. I'm sure all of our shareholders would agree that more cheaper gas sooner is better than patience and waiting. So again, I think there are some very interesting development opportunities that may require some capital.

Then we have talked about China and energy, and I certainly have not dwelled on that quite as much in this conference call. But you should not read anything into that. The DME project we talked about before is proceeding on plan. We are planning to be selling methanol into that DME project by the end of this year. So again, there is some capital that potentially can flow into that.

So I think we have some really good opportunities that shareholders will applaud that allow us to grow and develop our business. At the same time, we are committed to continuing to buy back shares and committed to continuing to review the level of dividends that we pay. And I think in both cases we have further capacity to do both things. So we have always talked about a balanced approach between our (indiscernible) excess cash and development for our business, and I think we're being very consistent in our current behavior with the way we have behaved historically.

Okay. So we should anticipate your share buyback? It sounds like you have already done $500,000 year-to-date, so it should accelerate back to its normal pace this quarter?

Well, we will certainly complete this share buyback in the first quarter, and we will review with our board our plans beyond that.

Fai Lee, RBC Capital Markets.

Just a follow-up on Adam's question, with respect to returning cash to shareholders, has there been any consideration at the board level of a special dividend?

I would say we consider all options. Nothing is dismissed, and I think economically a special dividend is very similar to a share repurchase from a shareholder perspective. Now some parts of our shareholders have a preference for share buybacks, and I would say that my bias is towards share buybacks as well that we, if you at our share buyback program over the last decade, we have reduced our float by almost 50%, and I think that has a meaningful impact on the leverage that shareholders have to this commodity and the cash flows in the Company. So I kind of like the long-term effect of share buybacks. But I would say we are not completely wedded to them, and we consider all alternatives when we're thinking about distributions of cash to shareholders.

Okay. Great. My next question is regarding your desire to enter into longer-term agreements with respect to the Argentina export duty with your suppliers. I'm just wondering if there is any -- if you're looking to include any provisions for perhaps future changes in government policies and how you plan to deal with those?

Well, again, you're straying into an area where it is very difficult to comment without -- we have a broad audience on a call such as this, and I need to be very cautious about how I answer these questions.

I would say our motivation in the next couple of years is to make sure we get the gas because that's still a big incentive for us. We make a lot of money out of our Chilean assets, and I think helping our gas suppliers through this particular issue at the moment is a very smart thing for us to be doing. So it is in our best interest to do that.

I think longer-term I have said all along that our solution is in Chile, and I'm very optimistic that those solutions will emerge over the next year or so. So that is probably all I really want to say yet.

Okay. Just moving on, selling these offtake agreements, do you have any expectations on whether you expect to extend it into the second quarter?

Well, we had that option, and options are exactly that. They give you a lot of flexibility. You know, I think in talking about inventory and industry balances and pricing, you know, it occurs to us that this industry is still very much in balance. I think it is returning to a bit more normality. When prices of a commodity fly up in the way they have in the methanol industry over the last six months, that is very normal to get responses from the demand-side and the supply-side.

I think that is exactly what we're seeing today. We are seeing the Chinese incentivized to export more methanol and good luck to them. So we would all do the same in the same circumstances. We're seeing some pockets of softness and demand which I have talked about.

So the shortage that occurred in 2006 I think has been corrected by some changes around supply and demand, which is partly driven by the higher price of methanol. However, what I would say going forward is that we are still in a very -- this industry is still in a very delicate situation. The plants have tended to be operating quite well in the last two or three months, and if another event occurred as occurred in July and August last year where you have one or two large plants out for a few weeks, I think we could well be back into a shortage environment where prices could change again.

So it is one of the reasons we maintain lots of flexibility around the optionality that we have. And another little factor, we have in our Atlas plant in Trinidad, it is due for a turnaround in March of this year. So it will be up one month. So that is another fact that we will review in terms of our need for product and our need to keep our customers whole. So I don't want to give any due on whether I think it will operate or not operate. I think we will make the decision as close to the moment as we possibly can, and it will depend on our views around demand and supply at that point in time.

Okay. And based on your outlook, you mentioned you believe you are still going to be in a delicate situation. When do you think you would get out of this delicate situation?

Well, a lot of the news vendors talk about the plant in Iran, and some of them are insistent that the plant was going to start up during 2006. All the information that we had from customers and from the shipping industry suggested that that was not going to be the case, and I think that intelligence has proven to be correct. There is still not a great expectation in those parts of our industry that the Iranian plant will produce at higher rates of utilization this year. Iran does not have a great track record of bringing plants on stream and operating them with reliability.

So I think that that plant will start up. There's no doubt that it has completed construction, and they are trying very hard to get it commissioned. But I think our expectation is that it will operate at quite a low rate of utilization. And when you contemplate that the Celanese plant may shut down at the end of Q1 or Q2, then I think those two things pretty well offset each other. So I don't see that Iran is going to necessarily change industry balances a great deal.

So, as I say, I think the future is a bit dependent on if you're looking at the next six to nine months, it is a bit dependent on operating rates in the industry, demand and all the things that we normally talk about. And we don't have the crystal ball, but I still feel that the industry is in a very delicate balance and that any significant disruption to supply could well cause prices to flare up again.

Jacob Bout, CIBC World Markets.

I had a question on the demand disruption that you are seeing in the formaldehyde sector both in North America and in Asia.

I will -- (multiple speakers)

Any evidence (multiple speakers) of that at all?

I will ask John to answer that question as well.

Well, we're not seeing any demand disruption on formaldehyde in Asia at all. We are headed into the period of Chinese New Year, and we see traditionally not a slowdown but a tempering off of demand, but that is normal, so we're not seeing any demand disruption.

We are seeing some softness in demand in North America. There is a number of factors for that. I think people follow things like housing starts. There was a prediction of five hurricanes this year by the weather services, so there was an inventory build on things like board and other products that are based on what happened the year before. As you know, that did materialize, so we had some inventories that we needed work through. We are continuing to see the phenomenon of Chinese box type furniture coming into North America. That has some impact. So how I would guide you is for '07 we reduced our methanol expectations in North America for formaldehyde by about 100,000 tons and for '08 by about 200,000 tons.

Great. And then just on the Argentinian gas supply-side, there has been a couple of news articles over the past couple of days talking about strikes for two of your Argentinian gas suppliers, I think it is [Totel] and Apache. Can you comment on that at all?

Yes, there was a strike that impacted Totel, and I think we lost Totel supply for I think three or four days. It was not very much. There has been a lot of industrial disruption in Argentina within -- particularly within the oil and gas sector. So it is just another one of the things that we are having to cope with in terms of dealing with our friends in Argentina.

How often has that occurred?

Well, there was a big strike. I think we have described it in our MD&A as between 21,000 tons of production as a result of a more industrywide strike, and that would have been I guess in November. So, as I say, it is just a country that is a little bit chaotic, and this is another bit of the evidence of chaos.

And then just if you can comment on your ability to get more natural gas in Southern Chile, when is the earliest you think at this point that you could expect to get any appreciable more gas --?

Well, we have two suppliers in Southern Chile. One is the state owned oil and gas company, who is our major supplier, and the second is the small privately owned company. That company is stepping up production in relatively small amounts, but they should be supplying us about 5% of our total needs by the middle of this year. Today that is only about 2% of our needs. So there is a small and interesting incremental supply coming in there.

One of the prospects that ENAP are working on, they have suggested to us that they could deliver gas to us in that prospect in 2008. Lago Mercedes is another longer-term. That is probably more like 2009. It is a more challenging development with a longer time horizon. So I think we will get incremental volumes of natural gas coming in this year, next year in 2009.

Sam Kanes, Scotia Capital.

I want to focus on DME for a little bit. There is a string of DME projects all over China and coastal China. Of course, you are involved in one of potential four small ones. Could you clarify a bit more, Bruce, your capital -- I'm not sure if it's an option or a commitment -- and what happened to the Chile I guess musings -- whether that was yours I cannot remember now -- awhile back where you were considering putting up a DME plant on your own site?

Yes. Okay. Well, surely you're right. There has been a real surge of announcements really supported by Chinese government policy. And it is all about turning coal into useful clean energy products and DME is one of those.

Now in coastal provinces, imported methanol is competitive with a lot of coal-based methanol for the manufacture of DME. So we continue to believe that there are opportunities to grow methanol demand for imported methanol from coastal China cleaning up in the current price environment, so you know we are talking about in a more normalized pricing environment.

So I think we are going to see exponential growth for DMA demand in China basically as a substitute for coal and household cooking and as a substitute for diesel and LPG. So lots of potential growth there.

In terms of Chile, there probably was a musing. Not a bad way of putting it, Sam. We still think there's a lot of merit in that, but really we are focused primarily on ensuring that we can get supply from Chile as a priority.

I think to the extent that we can take some of the Chilean gas supply and turn it into a useful clean energy product and ship it to Northern Chile, I think that is a very useful thing to do for that country. So it's a way of taking some of their domestic energy and turning it into a useful clean product that can displace imports. So we see it as just a very good way of our Company having alignment with the country of Chile in terms of energy development.

John spent a lot of time working on it, on DME in the last eight years, so I'm going to ask John if he has to make any comments to make also, Sam.

Just one addition. I think we have indicated this before, but the methanol that goes into DME has a different price mechanism than the traditional list price less a discount. So it is actually linked to energy prices. So to LPG's and to oil. So even though methanol prices have flown up, when we're talking about DME projects, this is the kind of model we're using. So it is really because of the (indiscernible) in methanol prices it is not an impact on the potential demand for methanol as it is energy related.

Maybe shifting a little bit to the topic of renewable and nonrenewable, obviously there is a mania of political push for renewable, and we have seen a little bit of evidence in the methanol world through the Netherlands, some form of biomethanol project that would qualify I guess as a renewable methanol. Are you involved or aware of further developments at Edmonton, I speculate maybe looking at some form of conversion other than syngas-related products and/or biomethanol? Does it make sense to you? You have mothball plants? Is that possible for you to get involved in some form of renewable defined methanol?

I will take that. Just to talk about what is going on in Holland is they are looking to use glycerin, which is a byproduct of biodiesel, and you know, biodiesel is growing exponentially. They have patented a process where they can take glycerin, make syngas and then make methanol, and it qualifies, as you mentioned, for the bio-credits. They hope to have that technology up and running sometime in the third quarter of this year. As I mentioned, there is patents around that. We are unsure if that technology is going to be successful or not. If it is successful, you would have to think that that technology would be licensed in other parts of the world, namely North America, where there is going to be as well a glut of glycerin because of the increased use of biodiesel as well.

I would caution, though, that because there are some new applications for making biodiesel where you don't have glycerin as a byproduct and because glycerin is so cheap, you have things industries like the animal feed industry looking to use glycerin as a source in animal feed products. So I think there will be competing uses for glycerin. So the model works if you have a zero cost for glycerin. As you get to a more normal level or even some charts for glycerin, the economics become challenging. Now if you have credits like you do in Europe, maybe the economics work, but we don't have the similar situation in North America.

I think, John, we don't really see biomethanol really competing in the traditional markets. It is really they are going to compete with ethanol and MTBE. So they are competing for the subsidies, not against traditional markets for ethanol. So we don't really see it as much of a threat. It's kind of an interesting opportunity more than anything.

Okay. Then maybe the final question then on how ETBE has taken out some MTBE in the plant for that very same reason. If you could just talk to the competitive threat that you have within methanol demand vis-a-vis renewable going forward?

Well, I think we have seen a lot of demand stretch-up for MTBE, so the worst of that is behind us I think. Still a little bit of this ETBE growth in countries like Japan, which never consumed MTBE in any event. Still there has been some conversion in Europe, John?

Just to give you the numbers, yes, we are expecting ETBE to continue to displace MTBE in Europe in 2007. We're aware of a large customer that will convert, and we would expect some other conversions. So we are expecting about 5 million tons of demand from ethanol in MTBE in '07, which is about a 14% decline versus '06 or around 800,000 tons. We think past '07, depending on this, biomethanol could display some of the ETBE back to MTBE, and that is yet to be confirmed and seen if that works. But beyond that, we are not expecting much more European destruction.

Daryl Swetlishoff, Raymond James.

Actually my questions have been answered.

[Adam Maray], [Amtrust Partners].

Just two quick follow-ups. You had mentioned a planned turnaround in Trinidad. Can you just give us a ballpark of what you think production might look like in the first quarter given what we know today about assuming that 85 to 90% run-rate in Chile plus that planned turnaround?

Well, I think our current forecast taking only our share of the Atlas plant, we're expecting between 1.2 and 1.3 million tons of production. (multiple speakers) -- production of what we have narrowed to 1.4 in the fourth quarter. So the whole difference is Atlas.

And my second question is, you guys have been more than honorable in terms of dealing with your suppliers and renegotiating contracts whether it be tax sharing or what have you. You guys also have a set of contracts with customers set at prices well, well below where the current market is and I'm guessing or maybe even breakeven to maybe slightly losing money today given some of the cost escalation from natural gas and taxes.

We have been honorable with those projects, too. Sorry. You're right, but I would say it is not as though we have been -- I would say we haven't been unduly generals with our Argentinian gas suppliers. There is a bit of self-interest here. I mentioned earlier we still make lots of money, so yes, we want that gas to flow, and they want to continue to sell to us. So I think there has been a basis for a very useful dialogue with our gas suppliers and we have had that. So, as you say, I think we have been very honorable, but in terms of our customers, we signed a deal and a deal is a deal, and we are not going to go back and talk about that until we have an opportunity to renegotiate.

Do we even know if things are changing in terms of your supply contract? You don't feel that is enough of a reopener to go back to some of those guaranteed price contracts that you have given people, saying making some adjustments on -- (multiple speakers)

Some of those contracts have cost flowed through, so to the extent that we are paying more costs,then some of those costs flow through. So in a number of them, there is no basis for going back and having a discussion.

You know, I would first remind you also that we inherited probably most of those sales contracts when we acquired our businesses in Trinidad. So most of those sales contracts are really attached to our Trinidad plants rather than our Chilean plants. So to build a tough argument to say to a customer that because we have had an increase in a different geography, that there needs to be a reopener on their contract. I think that will be a tough argument to have and not a very fair one.

[Aaron Whitman], [Barusa Management].

Good quarter and good to see you guys still buying back shares. First off, I was wondering on your natural gas costs for next quarter, do you expect to see another jump up from the sharing agreements?

Well, again I don't want to say anything here that could prejudice our discussions, but I think I talked quite a lot about the -- (multiple speakers).

I'm not speaking of the Argentine tax sharing. I mean -- (multiple speakers) sharing.

Okay. Well, I think most shareholders are aware that we do share high methanol prices with our gas suppliers. And in Chile's case, there is a 12-month lag on the calculation of that gas price.

So, over the next couple of quarters, we will be getting some increases. Now they tend to be modest, but there are some increases occurring in gas price as a result of that 12-month lag. So we need to work through this period of very high prices before we saw a decline in the Chilean gas price. Does that answer your question?

Yes. For the tax sharing agreements, for your long-term contracts with those suppliers, did they have substantial guarantees from the subsidiaries themselves?

Yes, they did. (multiple speakers)

And why have not you pushed them further on that because it's a long-term contract? (multiple speakers). Sometimes you lose money; sometimes you make money.

Yes, you are quite right, and I think I described in earlier conference calls that we had -- it is very clear in the contracts that the obligation to pay taxes since was the Argentinian gas supplier. And I think we could have taken a very hard line, and we would have ended up in court. We do have strong guarantees. Most of these contracts are north of the (indiscernible). So we could have ended up in the courts in New York arguing for our contractual rights.

Now, as an alternative, we could agree to some sort of compromise with our suppliers and continue making methanol and continue making lots of money, which is exactly what we have done this quarter. So, as a businessman, I would rather make methanol and make lots of money, rather than pay lawyers in New York more than they deserve to be paid.

Okay. Also, have you seen any substantial changes in legislation and proposed legislation in America, in China, particularly with I guess Bush saying that he wants to do alternative fuel, including methanol versus renewable fuel as the past standard, as well as potential uses in China? And will they allow substantial exports of product?

Well, there is a lot of hot air around renewable fuel, and clearly it is a hot topic, and it's become hotter in the last few days. And if you want my personal views, there's a lot of nonsense talk about it. You know, (indiscernible) Canadian listeners that announced a very interesting article in The Globe and Mail in the Business section of The Globe and Mail this morning on ethanol. I'm glad to see the Canadian media taking I think a very objective and balanced approach to this whole topic.

So I'm got a little bit off-track on your question there. We did talk about and John talked a few minutes ago about renewable methanol, and I'm guessing if President Bush was talking about methanol, he was probably talking about renewable methanol.

So there's no question you can make renewable methanol, but it is a little like renewable ethanol. The economics don't make any sense. So requires a lot of tech plant support, and if that is what governments want to do, then I guess they will do it, and demand will grow accordingly.

But I don't really think it has a huge impact on the methanol business as we see it. We see the very traditional methanol demand and formaldehyde and (indiscernible) sort of derivatives, and then we see a lot of growth in countries like China for products like DME. You cannot describe DME as renewable, but it is certainly a very interesting way of taking fossil fuels and turning them into a nice clean fuel that improves urban air quality in particular. So it's a bit of a rambling answer to your question there, but I think there are certainly interesting growth opportunities for methanol in this whole area of energy diversification.

Okay. One final question. Do you see the increasing cost of new build that you guys are seeing affecting other producers that are considering projects? (multiple speakers) -- projects that have been announced?

Yes, without doubt. Everyone who is looking at building any sort of purchase equipment today takes a big gulp before they do it. So what we're observing is a global phenomenon. Interestingly, I just saw an announcement out of Alcan just a few days ago that Alcan have just announced a big cost driver on a project that they are executing in Australia, a project that started with a capital budget I think around $1.5 billion. It is going to end up at $2.3 billion, and much of that escalation has occurred in the last 12 months.

So it's not only, this is not just the methanol industry; this is I think a global phenomenon, and it is a shortage of anything from steel to other metals to EPC contracting resources and to skilled resources for (indiscernible). So there's huge demand, and it is driving up prices. So I think it is becoming increasingly difficult to think about building plants in any industry like methanol.

Now I think we have some unique advantages. We have brought a lot of these things before. We know a lot about this industry, and I think if anyone can do it, we can do it. So that is why I'm very confident about Egypt. But I do think it is very tough for others to contemplate spending the amount of capital you need to spend today to get into this industry.

[Greg Helman], First Wilshire Securities Management.

I think my questions have been asked, but could you just comment on the so-called energy? I mean for your current production of methanol, what percentage goes into energy replacement uses internally?

Do Ewe have percentages on the energy replacement in terms of (multiple speakers) -- sorry, we're just having a little side-by here to try and come up with that answer for you. Like I said, it is quite low. Certainly in China there is a lot of ethanol ends up being blended into gasoline, and that is a very viable thing to do. But in the rest of the world, other than MTBE, today that number is quite large. What higher energy prices are doing is creating a lot of demand for the future.

Okay.

Okay. We are just about on an hour, so I don't know if there is one last question, but we try normally to limit this call to one hour. So if there is one last question I will answer it, operator.

Jaret Anderson, UBS.

Bruce, can you talk just a little bit more or provide some of the other details regarding this deliverability issue that one of your gas suppliers is having in Argentina? Specifically what sort of challenges they are facing, and what is the timeline for them to address it?

Well, they have the main gas distributor offshore in Argentina, so they are pumping oil and gas from an offshore platform to a treatment facility on the mainland, and they have some issues very similar to the issues that BP were confronted with up in Alaska with corrosion of the pipelines.

So I think in the whole oil and gas industry there is a huge sensitivity towards the sort of issues and the desire not to create environmental issues. They have been very cautious and have advised us that there is a significant program of refurbishment that is necessary for some of their undersea pipelines. So that in itself sounds like a big job.

Now we're talking to them about alternative sources of gas supply, and they are sourcing other gas to satisfy their contractual commitments.

In terms of the repairs to their facility, I mentioned earlier that they have told us that we should expect that should last at least through the first half of this year. In terms of replacing some of that capacity with gas from other sources, we're talking to them on that subject on a daily basis. So I would certainly hope that we can mitigate with other gas sources, but we don't have that today. And that is why we offered the guidance that production capacity will be impacted by this issue in the first quarter.

Is there any scope in your contracts for liquidated damages in the event that it takes them a number of years to address this issue?

No, I think both the buyer and seller have force majeur rights. So, to the extent that this is an event of force majeur, and superficially it seems to be (multiple speakers). So, to the extent that it is an event of force majeur, they have a right to declare their inability to supply. Now they also have obligations to mitigate, so that is what they are trying very hard to do at the moment.

Very helpful. Thank you very much.

Okay. All right. Well, thanks, everybody, for participating on the call. I would say we're delighted to have produced a record year of earnings, and my screen this morning and so I haven't the share price, I would hate to have opened my screen and there have been a (indiscernible). Because sometimes it is difficult to understand how the share price reacts to what has been an unbelievable announcement in terms of earnings and scale.

I know that we have some challenges going forward. We have been very open and I think very transparent on these for a long time. I think a lot of people who follow our Company tend to focus on the cost side of the business without really trying to grapple with the implications on the revenue side of our business, and I think what we have managed to demonstrate over the last few years, that despite the challenges we have, we found ways to continue to improve the performance of our Company, and we have found ways to continue to manage our margins and produce great results for our shareholders.

So I would like to thank you for your continued support and wish you all a good morning.

This concludes the Methanex Corporation fourth-quarter results conference call. Thank you from Telus.