Methanex Corp (MEOH) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and as a reminder this call is being recorded on Thursday April 26, 2007. I would now like to turn the conference over to Mr. Jason Chesko, Director of Investor Relations. Please go ahead, sir.

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 forecast or projections which are included in the forward-looking information. Please refer to the bottom of our latest news release and to our 2006 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 first quarter results will be posted later today on our website, www.methanex.com. I would now like to turn the call over to Methanex's President and CEO, Mr. Bruce Aitken, for his comments.

Thank you, Jason. And good morning, everyone. Welcome to the Methanex first quarter investor conference call. I have a number of colleagues with me in the room and they will be available to help ask questions a little later.

I'm pleased to report that we've completed another excellent quarter. Our adjusted EBITDA on the first quarter is $237 million, substantially higher than our 2006 first quarter EBITDA of $167 million. A net income of $145 million or $1.37 per share. Again, substantially higher than our 2006 or $0.79 per share.

Over the last couple of quarters, I discussed the global shortage of methanol and the causes of this shortage. The major consequence of the shortage was a record escalation on the price of methanol which has had a significant positive impact on our results. Methanol prices in the fourth quarter of 2006 average $460 per ton while in the first quarter prices averaged $444 per ton.

Also, during the last two quarters I've mentioned that at these levels, prices were abnormally high and unsustainable. I described a number of changes that had the effect of increasing supply and reducing demand which could be expected to lead to a more balanced environment. This is exactly what has happened during Q1. And this has led to a return to pricing levels that prevailed before the methanol industry shortage.

I will our outlook for pricing in methanol in a few moments. Production from our large plants in Trinidad has been very good during the quarter. We produced a total of 405,000 tons which is lower than the prior quarter mainly because of planned maintenance at our large Atlas plant. This plant commenced the maintenance turnaround in mid-March and successfully resumed production on April the 18.

Production from our site in Chile was more or less as expected. It continues to be disappointing. We produced a total of 751,000 tons which is a little less than Q4 2006 but still well below capacity production for the site of 947,000 tons.

There were two primary causes for this lost production. Firstly, we lost about 130,000 tons as a result of technical failures and labor disruptions effecting our Argentinean gas supplies. The labor strike has been resolved and the repairs to address technical failures are ongoing. We are advised that these repairs are proceeding well but will take some months to complete and that we should expect continued disruptions until the third quarter.

And secondly, our main gas supplier in Chile continues to deliver less than contracted quantities of gas as a result of technical problems. Over the last couple of weeks our Chilean site has been operating at between 80% to 90% of capacity. Rather than operate at this constrained rate with low gas efficiency on all four plants, we've taken the decision to shut down one plant until the gas supply situation improves. We lose only a small amount of production as a result of this decision but improved gas efficiency substantially offsets this lost production from an economic point of view.

I'll comment more on our outlook for natural gas to our plants in Chile in just a few moments. Our plant in New Zealand has operated at full production rates during the quarter. We produced 118,000 tons of methanol in the first quarter which offsets a good part of the volume and earnings lost as a result of our production shortfalls in Chile. We've agreed the terms for perfect natural gas purchases in New Zealand and expect to be operating this plant until at least the end of this year.

The market environment in which we're operating has changed during the quarter. High methanol prices over the last six months encouraged some high cost incremental supply and encouraged some increase in exports of methanol from China. China went from being a net importer of 300,000 tons of methanol in the third quarter of 2006 to becoming a net exporter of more than 200,000 in the first quarter of 2007. This was almost solely the result of price differentials between the Chinese domestic market and export markets. There was a huge incentive to export that we believe only exists in a high price environment.

High prices also suppressed on demand, particularly in fuels applications. Most supply and less demand are what led to a rebalancing of the global methanol market. It was our observation of these changes that led us to the decision to reduce prices back to a level where we felt supply and demand were likely to be in better balance. It is interesting that over the last three weeks we've seen the announced shutting of about 1.3 million tons of methanol supply which is no longer economic at reduced prices. And we have seen announcements of increased demand for methanol in energy application like MPB and bio-diesel as a result of lower prices. So lower prices have reduced supply and increased demand. And while it's normal that there will be some volatility in pricing, we would expect prices to remain at a high level relative to historical norms.

Contract pricing in all regions in April is about $330 per ton. Spot pricing has been soft in recent weeks as some producers were confronted with high inventory levels; however we believe that spot availability is a minimum and prices have increased over the last week. We have earlier this week rolled our North American contract price and we expect stability in contract pricing for the balance of the quarter. At current price levels and promotional discount reducers, we would expect our realized price for the quarter to be in the range of $280 to $290 per metric ton.

I'll switch topics now and talk about some of the opportunities and challenges that we face. Firstly, natural gas supplies to our plants in Chile. During recent conference calls, I've explained the issues related to the imposition of Argentinean government export duties on natural gas exports. This duty represents a total cost to our gas supplies of about $200 million per annum. I've indicated our view that it is good business for us. To be sure that the relationships from that gas supplies are sustainable through time and that we were therefore prepared to share this burden. We have short-term agreement with all of our Argentinean suppliers and so far in 2007 with the exception of disruptions caused by technical failures and strikes we have been receiving all of the contractual gas entitlements from Argentina that we're entitled to.

As I explained before, the short-term agreements are confidential; however, the principal underlying the agreements is that so long as we can afford to do so, we are prepared to share the cost of duty. In exchange, we have gained considerable flexibility to take gas depending on the prevailing methanol market conditions.

In the pricing environment that prevails in April, it is still good business for us to secure our contractual entitlements from Argentina; however, should methanol prices trade much below the low point of recent weeks in the U.S. Gulf we will have an incentive to buy rather than to manufacture the quantities of methanol that we require to supply our customers.

Our long-term solution to both gas supply security issues and minimization of any tax impact on either us or our suppliers is to secure more natural gas from Chile. The news regarding gas exploration in southern Chile continues to be quite positive. Our primary Chilean gas supplier has continued exploration activities in two reservoirs but there is no further public information on their progress. They have committed to spend over $60 million in exploration in southern Chile this year.

We understand that next month the Chilean government will open bidding to the private sector to explore for oil and gas in southern Chile. We are aware of considerable interest from the private sector, both large and small companies, in participating in this program. I was interested to read just a few weeks ago the CEO of Apache expressing keen interest in observing that southern Chile is under explored.

And in March we announced the alliance that we have arrived at with Geopark. This is a very interesting development for us. Geopark is a small company but they have a wealth of experience in oil and gas exploration in the Patagonia region and have demonstrated success in identifying and commercializing resources. They have recently imported a new drilling rig into the region and have an extensive drilling program planned for the next two years. We are pleased with the level of activity occurring and we actively encouraging increased levels of exploration. I fully expect that we will commit some of our own chemical to the acceleration of the development of gas reserves in southern Chile. I think that the opportunities to invest are excellent and I believe that we need to take some control over our own destiny.

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 that I wanted to provide an update on is our project in Egypt. We are planning today to sign the EPC contract for this project which is the final substantial commercial issue. The project has been approved by all participants. We have committed to spending on long need items and are accepted to close the financing in the next few weeks. This is a unique project and an exciting growth opportunity for Methanex and I'm very pleased that we can now begin to focus on the successful construction and start-up of this facility.

The last opportunity I wanted to touch on was our investment in DME in China. We have devised our pattern that we would like to take up the option to participate in this project which represents an investment of less than $10 million. We will own 20% of 200,000 ton plant and we will supply 100% of the 300,000 ton methanol supply to this plant.

Our partner has approval to increase DME capacity on the current site to 1 million metric tons and has a number of other potential sites around China that are suitable for DME developments. The first project is therefore a small spend to what we expect to be rapid growth and demand for DME. The project is expected to be complete and operational before the end of this year. This is another exciting development that we expect will demonstrate the viability of DME to compete in energy markets.

Also in the last week we have signed an MOU -- a Memorandum of Understanding to study the development of a DME project in Egypt. Egypt is a large importer and consumer of LPG so we see this as an excellent opportunity to further align ourselves with that country.

I'll change topics now and make a few comments about liquidity. Our cash flow from operating activities during the quarter was $179 million compared to $130 million in the same period in 2006. During the quarter we returned a total of $58 million to shareholders, buyback dividends, and share repurchases.

As of a couple of days ago we have repurchase 6.5 million shares under our normal cost issuer bid and we expect to complete this bid before it expirary in May. 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 are intent on proceeding with the project in Egypt and we're well-placed to meet our commitments on this projects.

I've also mentioned that we expect to invest to improve the security of natural gas supply to our Chilean plants and to expand demand for methanol in the DME market. In the strong cash flow environment that we are operating in, we are well positioned to grow that business, improve gas supply to our existing assets and to continue returning substantial amounts of excess cash to our shareholders.

Before stopping for questions, I'll make a few comments regarding our expectations for the second quarter. Firstly, I've already mentioned that our plants in China -- sorry, in Chile have experience some loss of natural gas supply and that we are planning to temporarily shut down one plant. Secondly, we expect sales write ins from our own production in Q2 to be a little higher than in Q1 and I have already discussed our pricing expectations. Thirdly, you will note from our disclosures that as the price of methanol declines the amount of export duty that we share with gas suppliers effectively increases in percentage terms. This effect will reduce our margins for the Chile plants in Q2. And fourthly, in transitional pricing periods, especially when methanol price movements are large, it is normal that our earnings will be impacted either positively or negatively by the cost of inventory whether this inventory was produced at our plants or purchased from others.

The transition in Q2 from higher pricing to the current pricing environment results in sales of higher cost inventory and we expect this will have a negative impact on our second quarter earnings of approximately $35 million. All of these factors will produce a result that is a little ordinary compared to what we have achieved in recent quarters; however, I would remind listeners that methanol is trading at relatively high prices and that we will produce very acceptable earnings and cash flows when we have worked through some of the issues that I've mentioned.

So at this point, I'm happy to stop and take any questions that you might have. Is the operator available?

Thank you. For questions, please queue up now. And our first question, Fai Lee, go ahead please, RBC Capital Markets.

Great. Thanks. First I just want to clarify a little bit about this -- your share arrangement. I know you have a limit on what you can say. But I just wanted to clarify what you have said. In terms of the methanol prices, if they drop below $250 I guess in your presentation you mentioned that you'll be paying 100% of the export duty?

No, it doesn't work exactly like that, Fai. There are two -- there are two moving pieces here. One is the export duty and the other is the sharing mechanism that we have with our gas suppliers. So those are the two variables that we've negotiated with gas suppliers. So we've reduced or substantially eliminated the upside sharing and in return for that we pay a duty. It was effectively a sliding scale. Now I guess in a high priced environment, we've described that as sharing and that sharing you could've worked out was roughly 50-50. So clearly in a lower priced environment, that percentage increase substantially.

Okay. So somewhere between 50% and 100% is what we would expect?

That's correct.

Current pricing levels? And if it's below $250 it has all the sharing -- you said all the sharing is essentially eliminated then?

Yes. It has. It has been completely eliminated.

Okay. Now -- and if pricing dropped below you said current Gulf Coast levels -- are we talking about $200 per ton? Is that what you're thinking?

No. The number -- I think the low point that we've seen in the last few weeks is $0.65 a gallon. So that's a little higher than that. And I would say there's not too much precision about this fine. I think there's a band of pricing at which we may make decisions around buying as opposed to manufacturing and it's all around our views on the length or the shortness of the methanol markets, what influence prices will our activities of either manufacturing or buying have and our objective will be to maximize value over this period.

Right. But at $0.55 then it's less -- it's not economic to produce from Chile rather than --

No. No. No. You're just putting words in my mouth there. I didn't say that. I said we're getting close to a point where it makes sense. Now, you've got to think about our leverage to the price of methanol. So if we decided -- for example -- to produce 500,000 tons less and purchase that on the spot market, what impact does that have on the price of methanol? What leverage do we get out of that?

Okay.

It's more complicated than saying, "Okay, we're now not making any money. Let's go and buy methanol." I think you've also got to consider what leverage we have to the price of methanol.

Alright. Okay.

Alright?

That's it. Thanks.

Thank you. Our next question, CIBC World Markets, Jacob Bout. Go ahead, please.

Good morning. Just a question on the DME market. Maybe you can just outline for us what you're seeing or what your expectations are for demand growth of DME market over say the next three to five years globally? Maybe just break it down by jurisdiction? I mean, you talk a little bit about China, you talked a little bit about Egypt. But maybe you can talk about Chile as well?

Yes. I think the demand growth you see in China, Jacob, is exponential. There are a lot of people building DME capacity. We think from the work we've done, the partner we have in China is better positioned and has the best positioning of all the other projects that exist. Our site is very close to Shanghai. It's a very large market there. Our partner has existing market share with LPG and DME distribution.

So we're already very well connected into a large and growing market. I think from memory the market for LPG in the Shanghai city alone is around 1 million tons of LPG and I think they produce around 20,000 tons. So it's all imported. So there's huge upside here for DME consumption in the Shanghai market. The Chinese government has been proactive in supporting DME developments and they see this as a way of - mostly of turning coal into a clean energy product.

Now I think there are other drivers here. The world bank is involved in some of these projects and one of the drivers that the world bank has is to improve indoor air quality so that people -- a lot of people in China today who burn coal in order to heat their homes and to cook on. Their strategy here is to displace the use of coal as a cooking and heating fuel in peoples home and replace that with a product like DME or LPG. So a big impact on emissions from open coal fires inside homes and clearly on the environment. So there are a lot of drivers that are supporting what I think is exponential growth for DME capacity in China.

Outside of China, when we talked to the people in Egypt, Egypt is a big imported of LPG. People in Cairo use LPG mostly as a cooking fuel and if you drive around the streets of Cairo, often you'll see large trucks with LPG pressurized cylinders on the back of those trucks and they drive up and down the streets selling those cylinders to households and people rush in and out with empty and full cylinders. So there's an existing infrastructure there of people using LPG. The interest from the Egyptians is that this is a way of taking Egyptian natural gas, turning it into a useful product that displaces imports and helps energy self-sufficiency for the country.

I would say -- I've had conversations like the ones I've had in Egypt in three of four other countries and I think there is tremendous global potential to grow DME. Chile is another country that we've talked about before, has some similar characteristics, not exactly the same as Egypt but they're big importers of LPG and I think that's another interesting potential. So our objective here is -- our first investment is a small footprint. Our objective is to learn enough to take our learnings and grow this market globally and I think we're sitting on the cusp of tremendous global growth for this particular derivative.

And if you were guess-timate on the demand number -- if you were to peg that say over the next three to five years, you have some kind of a range in mind?

Not really. Just to give you some idea, the site we have in China, we have it approved to produce 1 million tons of DME. So it's 1.5 million tons of methanol. We're doing it in stages. And we're doing our first stage right at the moment. But it will be multiple millions of tons in the next three years.

Okay. And then just turning to the gas supply situation in Chile. Looking out into 2008 what type of split are you expecting assuming you operate at 100% capacity, gas supply from Chile versus Argentina? I mean, right now you're somewhere between 60-40?

Yes. We are. And I did mention that we've been a bit disappointed with our supplies in Chile. There have been ongoing technical problems that we find are very frustrating. The supplier has been working hard to resolve these and I'm optimistic that they will find -- that they will improve the reliability of supply that we've managed to us. But we're -- I'm actually down there in two weeks time almost specifically to maintenance people regarding this issue that we want to ensure that existing contracts are honored and that deliveries are made according to the contract terms.

Are you expecting any type of up tick in 2008 from Chile?

Yes. We are. I talked about our arrangement with Geopark. Geopark's plans are to move the amount of gas that they're supplying to us over the -- before the end of this year or by the end of this year. So today they're -- it's around 2% of our gas supplies. It'll be between 5% and 10% of our gas going into 2008. So I think there are some interesting increases in gas and another exploration well that I think I've talked about before that's very close to the natural gas infrastructure in Chile where they've had -- we are told some interesting results. But as I mentioned in my comments, there's nothing public on this. So I'm constrained from saying too much as well. But I think there's a lot happening here that causes us to be optimistic that there will be incremental supply of Chile before the end of this year and then more again in 2008. But I'd be being a little bit speculative to give you numbers, Jacob.

Okay. Thank you.

Okay?

Thank you. And Canaccord, Bob Hastings, please go ahead.

Hi, guys. Good results in the quarter.

Thanks, Bob.

Going back to Argentina, I was maybe -- just didn't quite understand what you were saying to Fai. You said in your release that at $250 a ton, you would be getting almost 100% of that $200 million of tax or at $225 per million BTUs. Is that correct?

Yes. That is correct. But if you look at it from the gas supply point of view, they're giving up all of the upside sharing. So if you -- it would be wrong to say that our incremental cost is $200 million placed on that because we've clawed back upside sharing.

Exactly. So what I looked at when I look at it, it seems to flatten your gas cost curve out of Argentina, meaning that you used to walk with higher methanol price and you shared some of that margin. Now it looks more relatively flat through the say -- from anything below $280 - $250 a ton probably up to $450 a ton.

That's substantially correct, yes.

Can you give us any indication on Chile for with these new gas -- and obviously you can't talk anything about your arrangements here but if the original gas supply is made available to you, would they be in line with your previous Chilean arrangements or are we looking at sort of a higher cost because it's deeper cost?

I think there's two elements here. Of the gas suppliers who supply us today, a number of those -- and I've mentioned Apache -- in our discussions with Apache we say to them that the easiest solution for our disagreement over what pays what is for you to find some gas in Chile and supply us under our existing contracts. So we have a number of gas suppliers who have an interest in drilling and finding gas in Chile and that's a way of continuing to supply us under existing contracts and removing any impact of Argentinean duties. So I think that's number one and that could represent a lot of the gas we get in the future.

The second is new gas from people like Geopark and others. We've been very clear to them that long term we need a cost structure that allows us to survive and be viable. We're certainly prepared to share upside revenues as we have with other gas contracts. So to the extent that methanol prices are higher in the future which I think they will be because of the energy crisis, then the sharing mechanism allows people to get more from their gas than they ever had historically. So I think -- I think it's very realistic to expect that the sort of gas pricing that we will get is reasonably comfortable with what we've had in the past. Maybe not the floor price to the extent that we've had it historically but then I'm -- because I do recognize that costs have gone up. So I recognize that people who are investing in exploration today need a higher return at lower prices. So I think that is certainly a factor that we need to recognize. But I think from all the conversations that we've had, we can get back to a cost structure that's very acceptable to us, very comfortable with Trinidad, that is going to return us to the sort of economics we've been accustomed to in the past.

Bruce, conceptionally would it be fair to say then that if we have a methanol price which has got a new trough level instead of $100 a ton at the trough, whether it's $220, $250, sort of the economics of before our plying through the trough, meaning we have a higher methanol price and we have a higher gas price but you sort of retain that same level of profitability.

I think that's a reasonable way to look at it and I think that's -- endangering to all of these investments we've made in Chile. It's that level of profitability through the cycle that we need to achieve in order to make an acceptable return on capital. So that's exactly the way we approach our discussions with our gas suppliers.

Thank you. And one last technical question. I didn't quite hear you when you said your stock buyback. Did you say you'd bought 6.5 million?

Yes. I think it was a few days ago we were at 6.5 million shares and I think the total is a little under 7 million shares that we have?

7.5 million and we're going to get into the end.

We will finish that before the bid expires.

Okay. And would you consider any Dutch auctions or anything with your good cash positions?

We review with our board regularly and the management of our balance sheet and the distribution of our cash. So I've talked a little bit and the comments, Bob, around our plans. I think there's two ways of looking at this. We could do a Dutch auction which produces an immediate return to shareholders. Alternatively, we can continue doing what we've been doing which is I think reasonably aggressively buying back shares through the normal cost issuer bid. I have a bit of a bias towards the second approach because I think it gives us lots of flexibility and allows us to increase and decrease our bids as our cash flows may fluctuate. But I certainly will not dismiss it at Dutch auction and I would emphasize that it's part of our discussion with our board when we talk about distribution to shareholders.

And I would remind you how successful your last Dutch auction was.

It was extremely successful wasn't it? I remember that as well.

Thank you.

Thank you.

As a reminder, if you wish to ask a question, please queue up now. Next question, Scotia Capital, Sam Kanes, please go ahead.

Good morning. You had a very good result from making money on purchased methanol in Q1 -- 375,000 tons were purchased in your financials. Your history over the past probably few, I guess, Bruce, at times the way the methanol price moved during the quarter or at least late in the quarter would've probably meant losses. What's changed in strategy in how you're purchasing methanol here to make money as opposed to lose money in a falling market?

Yes. We're -- we're tending to buy methanol I think a lot smarter than we used to and it's one of those things companies learn to do over time. We try not to repeat mistakes. So we tend to buy either on a net basis -- whatever we get less the commission. So that eliminates our losses. You remember also that our deal with Celanese existed during Q1. So that gave us relatively low cost methanol relative to the stock price of methanol that prevailed during the quarter. So that was almost quite profitable for us. So that was another factor.

But I did mention that we will always be in the situation of having a leg going into a quarter after a period of very high pricing or a period of very low pricing. So whenever there are big changes in price, inventories will tend to adjust on the first and second month of the following quarter. So that's as I mentioned $35 million. I wanted to provide that as just a real guide that if you normalize our second quarter earnings, you would add $35 million to what we will end up achieving.

Okay. Thank you for that. Could you guess-timate what the Celanese contribution was because it's now closed? Or is it confidential?

That's a bit confidential. Yes. I think it was a good deal for both the companies. I think it was a real win-win. They made incremental earnings and we did as well. It was, as I say, relative. You could probably almost work it out, Sam. I'm sure you'd know what the price of natural gas in Alberta was during the Q1. And we paid a facility fee that represents the cost of running that plant. I'm sure you could work it out roughly and calculate what that number was.

Okay, Bruce. Moving forward, transportation has been a big advantage for you on these long-term leases with ships like the Millennium. Could you update us a little bit on where your positioning of your global logistics network is? And you mentioned cost of course of diesel. Everybody's suffering on that.

Yes.

But how things might roll over here or what you have extended I guess?

We have an average tenure on our shipping fleet of 12 years so we were I think very scruple in negotiating and locking in shipping at a time before shipping costs escalated. So the last vessels that we brought into our fleet were I think in 1994, 1995 before costs went crazy. So I think we have locked down a substantial cost advantage relative to leasing today. What I understand if we went out to replace our fleet today we'd be pay 40% to 50% more as a daily hire rate to replace what we currently have.

And going ahead with our project in Egypt, we think we need to add one more vessel to our fleet. So we have lots of flexibility in this fleet. We've also begun very successfully over the last few years to bankroll other cargoes. So no longer are our ships empty half the time. The utilization rate on our vessels is now much higher than it ever used to be which has allowed us really to maintain the same sort of freight and logistics costs today that we saw three or four years ago. Now that's in an environment where everything has escalated dramatically so I think we've done a first class job of managing the advantage we had with our freight and logistics.

What products are you backhauling?

Clean petroleum products and there's lots of opportunities particularly up around the equator. So east, west, and west, east around the equator. Ethanol's a nice, interesting product for us.

Thank you for that. Final question, Bruce. I'm quite aware of DME prospect and current strong MTBE markets but you mentioned power generation. I have seen much of that on the power side. But there must be certain areas of the world you are noticing that to make note of methanol use for power generation. What areas of the world are you watching?

People have talked about this for years, Sam, and nothing's ever much come of it. And I understand that GE turbines are rated for methanol operations and I think there have been some trials done but no one's ever really picked up on them. There is -- there's some interesting work being done by our competitor in Trinidad at the moment, TTNC. Or even MHTL, Methanol Holdings Trinidad Limited. And they have a small turbine, a German turbine on their site and they're generating electricity using methanol. Their objective, and it's part of a Trinidad government objective is to help some of the neighboring islands in the Caribbean to generate electricity, firstly, more cleanly and, secondly, less expensively. So they're on a mission to put gas turbines on islands throughout the Caribbean and to fly these turbines on methanol. Now I don't quite know what progress they're making but I know there's a turbine there and I know it's operating and I know they've had this strategy for a year or so and they're pursuing it quite aggressively. So I think it's a very interesting development that could well end up identifying a real niche market for methanol as a source of electricity. And I think that's what this is about. It's about niche markets. We will never -- we will never be making electricity out of methanol in mainstream markets. But I think on small isolated islands where LNG doesn't make any sense and people want a clean alternative, then methanol of DME make a huge amount of sense.

Thanks, Bruce.

Thank you. And our next question is from Raymond James Company, Patrick Yung. Go ahead please.

Good morning. I just wanted to turn our attention a bit to Egypt. Can you update us on what your expectations are in terms of production capacity when it might come online and also CapEx requirements on your end?

Yes. The project is a 1.3 million ton plant. We own 60% of it. Our partners who are these three Egyptian state-owned companies, our gas supplier is one of them, the owner of the gas infrastructure is another one, and a company called ECHEM who have a business to develop petrochemical projects in Egypt. They're the third Egyptian partner. We have one other shareholder, a company called Epicor, a Pan-Arabian investment bank who invest in a number of projects in the Middle East. So I think it's a very interesting combination of shareholders with lots of alignment of interest and incentive. As I mentioned before, we're signing the EPG contract today. We have actually started. We've order long lead items. So we've actually started the schedule. It was a 37 month schedule that kicked off on the first of March. So we should be in commercial production in Q1 of 2010 but we'd expect to be producing our first methanol by the end of 2009.

And I think all the things I've talked about before remain intact for the project. It has an excellent gas contract that's very comparable to the contract that we have in Trinidad. We have a low gas -- a low base price that helps us in the event that methanol prices are low and there's upside sharing with higher methanol prices. And I think that formula works extremely well for us and it works very well for owners of gas resources. The logistics on this project are outstanding. We're very close to Europe so this will be a primary supply point to the European market and we had some interesting opportunities to enter into new niches around the Mediterranean that we haven't previously saw into which again I think it holds the returns for this projects. There are very -- there is a very attractive fiscal regime in Egypt so this project will reduce our overall average tax rate.

So lots and lots of positives. Now what I've talked about before and one of the reasons it's taken so long to get this project to fruition is the capital costs. It is a lot more expensive that we've -- than we've -- it's a lot more money than we've ever paid before. We will talk a little more specifically about capital when we've got the financial closed but the costs are in excess of $600 per ton of capacity. Our equity commitment to the project is a little over $200 million a year.

Yes.

So a little over $200 million which we will spend -- we've begin spending some of it now. We'll spend some of it this year, some of it next year, and some of it in '09. So I think that's about it. I fully expect that we're going to turn a chunk of the methanol into DME and sell that into the Egyptian market. I think it's a fantastic package for us and we're really excited about the opportunity that it represents and ascribes for our Company.

That's very helpful. Now, switching our focus a bit on the older assets. A look at New Zealand and maybe Kitimat. Do you see any residual assets you have that are redundant that you can monetize in terms of real estate or old equipment or anything you've identified?

Kitimat, we have put options to sell that site to EnCana and that would -- I don't think we've talked about the numbers there but we've said that it would recover all of our shut-down costs. So if you look back a couple of years you'll know we spent some tens of millions of dollars in shutting that site down. So we have an ability to recover that money by putting the site to EnCana. We haven't decided whether to do that or not yet. We're operating that site as a terminal today, terminal to import methanol and import compensate into that region. And that business is working very nicely for us but we'll continue to look at how we manage that going forward.

As far as New Zealand is concerned, you know it's funny how the world changes. We always used to regard -- well, we have regarded New Zealand gas over the last few years as being quite extensive but the world has kind of caught up and with the higher energy prices, the prices at which we can buy gas in New Zealand today are a lot more competitive with other parts of the world. So we're beginning to see New Zealand as being a much longer term positioning in our asset portfolio. So it wouldn't surprise me at all to see us operating that plant for the next two or three years. And beyond that, who knows? We're over the horizon. I think we've generated more than $100 million on EBITDA over the last two years out of the New Zealand asset. I don't think anyone's any value against that asset in the evaluation models. It's offset a lot of the -- at least offset some of the losses that we've suffered out of Chile. So it's -- that's been a very important and key part of our asset mix that's generated a lot of value for us and I think will continue to do so.

Alright. Thanks for that. And one last question on Chinese capacity. You mentioned that there's been more Chinese exports as opposed to imports. Are you seeing -- do you view that as solely because of higher methanol prices or is it because the quality of the product's improving?

Several things here. One, there was a new methanol plant that was built on Hainan Island which is in the very south of China. It's based on natural gas. It's western technology. That plant started up in I think the third quarter or the fourth quarter of last year. We'd understood that their marketing plan was to sell most of that methanol into China. But as the plant came up, the price of methanol in China was in the $300 price range and they had opportunity to export that methanol for over $500 a ton. So it was a huge incentive for that plant to be export oriented rather than supplying the domestic market. And I think there were some other producers in China, mostly based on natural gas who also looked at that opportunity to arbitrage between the export market and the domestic market.

Now that situation existing in a high price environment. Today that arbitrage is closed. I think we've seen very low exports from China in the month of March and I don't think there's been -- I won't say there's been any in April because I don't know but I think they've gained a very low level of imports -- of exports. And we're beginning to see imports flowing back into China. So we're seeing a completely reversal to what we're more accustomed to which is this -- a level of net imports. And that's certainly what we'd expect in the current sort of pricing environment. S

So I think what we saw was a complete reaction to the extremely high prices globally and the China domestic market never followed that high price. So I think it doesn't have anything to do I think with quality. I think there were some - coal-based methanol still has all sorts of quality issues and I don't expect we're going to see coal-based methanol playing a big roll in the export markets going forward.

Okay. Thanks a lot. That's all I had, Bruce.

Okay. Thank you.

Thank you. And our next question, UBS, Brian MacArthur, please go ahead.

Good morning, Bruce. Sorry to go back to the Argentinean problem, but just so I understand the gas situation. Before we had a floating -- a base with a floating gas as the price went up, now we're going to have -- we're going to pay effectively even at low price the full $225 but the float on the way up is going to be a lot smaller. Is that sort of the way to look at it?

Yes. That's the way to look at it. That's exactly right.

So in the last quarter right -- fourth quarter you could calculate, you kind of paid at $1.60 to $2.25. This year you said it's 50-50. Now I get about $1.25 of the $25 for the export tax. Now you're going to pay the $225 of the export tax but that floating component underneath will be lower?

That's correct. Yes. I'm not sure I followed all your numbers, Brian, but essentially what you said at the end there sounded correct.

So then if we look forward like to the more positive say three, four year from now, you have lots of gas in Chile, you could get into the situation where the Chilean gas becomes more expensive than the Argentinean gas again if all the new Chilean contracts have pure floats on the upside. If you went in a very high price environment, you'd eventually want to be cutting back the Chilean guys to go back to the Argentinean?

Yes. I've got to think that will ever happen. I think we're of a mind that the Argentine government, I believe, wants to keep gas within their own country and satisfy demand in their own country. And I think we've got our minds around the fact we've got to -- we've got to find alternative sources of gas in Chile. And that's our future. We will sign up for long-term contracts that requires to take our base again in Chile.

Right. Okay. I just gave that example to make sure I understood exactly how it would work in extreme situations now. So then the final question is there's always been this lag effect on gas for the Chilean plants. And I can't remember. Was that both on the Chilean gas and the Argentinean gas and has that lag effect changed now with the Argentinean contract so that it will be matched more like Trinidad as opposed to the way it was for the - ?

It's a little bit complicated. It does cover both Argentinean and Chilean natural gas. So the lag effect is similar but given that now we've eliminated a lot of the upside sharing, the lag has a much lower fix now than it ever used to in the past. So you're quite right. It's -- export duties have not happened and were we in a normal environment, today we'd be talking a lot about the lag effect of natural gas. And really it's a non-issue for us because it's been overwhelmed by export duties.

Exactly. We won't have it. But we wouldn't even have it as much in the future because it just doesn't go up as much is the issue?

That's correct. Yes.

Great. So in a sense it's a much more matched supply now which ideal in many ways where we're matching revenues to cost.

That's right. Exactly. Yes.

Great. Thank you very much.

Okay.

Thank you. And our next question, EnTrust Capital, Adam Comora, go ahead please.

Yes. Hi. Great. Thanks. I have a couple. The first is, Bruce, what do we think we're going to spend on Egypt and those new natural gas projects in 2007?

I think in Egypt we'll probably spend between $75 and $100 million there. And as we spend -- as we spend more and more time in looking at the opportunities in Chile -- let me emphasize. We don't have to become an exploration and production company. That's not our business and I have a great weariness of getting into a new set of risks that we're less able to manage than other companies. But I think the opportunities for us to invest to accelerate gas -- they keep coming at us and there are a lot more than at first I anticipated. So we could spend up to $100 million on that over the next two years, Adam, in both pre-paying for existing gas reserves and in order to fund future exploration in terms of spending on infrastructure and in terms of participating in exploration as well. So there are a lot of opportunities and there is -- and I think, one, it represents a great investment because I would want to proceed if it didn't but also it helps accelerate the solving of the challenge that we had down in Chile.

What I'm trying to figure out is historically you said that the targeted debt to cash is 40%. I'm just curious when you think we're going to get there because even with this additional $75 to $100 million on Egypt this year our cash position at the end of the year is probably still higher than where it is today.

Remember also when we -- that we'll be drawing down project financing in Egypt. So the debt level will be increasing as that project is executing. So I did mention before that we've done a little bit of modeling around an immediate Dutch auction compared to -- to normal cost issuer bid and certainly by 2009 we will get ourselves to roughly the balance sheet that set ourselves as the target balance sheet. Then that requires some assumptions around methanol price and the rate of repurchase and the price of repurchase but we can certainly get there on a steady as she goes basis. But I wouldn't say that we're eliminating doing a Dutch auction. I'm guessing that that's the tone of your question here, Adam. I think there are two ways of getting to the same answer and we address both of them with our board frequently.

Okay. In the release you say that you can walk away from taking Argentinean gas if it's uneconomical. What's the definition of that? I mean if we're getting cheaper gas from Chile, can you -- do you guys get to decide what's economical?

There are some different causes and different contracts but generally -- I don't want to say too much here because I certainly don't want to put us in a position where we have gas supplies wanting to gain around what I've said here. But generally at high prices we -- very high prices we still have some take or pay obligations and as prices get to more moderate levels, those take or pay obligations drop away.

Okay. So in theory if you can get 100% of your gas from Chile at better prices than the Argentinean suppliers are willing to supply because of the tax, to me that sounds like it's uneconomical to take their gas.

Yes. Well, these -- the other thing I emphasized is these are short-term agreements so I think the -- on the expirary of these agreements if we don't want -- if we don't want to pay the duty then I think there's a very easy conversation to have with our suppliers around the accumulation of those contracts.

Okay. Terrific. And when I'm looking at the Egyptian capital cost of $600 a ton, what kind of return do you think that project is going to generate? What kind of capital return over the $600 a ton?

It's a function of the price of methanol of course that you forecast but I think if the sort of prices that most of the analysts are -- I can't say most of the analysts. Some of the analysts put into their models, that will produce a return on total capital in the mid-teens.

Okay. So is that sort of like -- so you think the project is going to return $90 a ton of sort of cash flow a year?

That's roughly right. That's not a bad number to use.

But if I do that and I think that it's a similar contract to the contract to Trinidad, it sounds like sort of a $230 a ton price assumption is how you get to the mid-teens return.

The -- the -- remember my words. I said if you use the price forecast that some of the analysts put in their models. I don't want to give you a long-term price forecast because I've got no idea where it's going to be. But -- we all have the same information on the future of methanol and I think we all need to make our own decisions around what we think the price of methanol is going to be. But I think at those prices, which I happen to think are not unreasonable assumptions, the sort of numbers you've mentioned are exactly correct.

Okay. Yes. Because you guys are making some sort of assumptions internally to decide to spend the money.

That's correct. Yes.

Okay.

And you can assume the assumptions that we're making provided for the return that we're very satisfied with.

Okay. Thanks a lot, Bruce. I appreciate it. And let me just reemphasize. I know I've said this in the past. But if you -- if that is correct and prices average $230 a ton over the long-term, it certainly seems like the Company is going to generate a [expletive] of a lot of EBITDA and free cash flow sort of and provide for excess cash above and beyond the sort of normal cost issuer bid that you guys are currently pursuing.

I think that's a very reasonable assumption to make. And I happen to agree with your point of view.

Thanks.

Thank you. Our next question, Iron Works Capital, Gary Linhoff, please go ahead.

Good morning. Thank you. Bruce, can you just repeat for my benefit your comments about what you're going to be doing with your Chilean production in Q2?

The Chilean production? We've been operating and we have four plants down there that we've been operating between 80% and 90% on various days depending on the gas that we receive. We've decided that when you operate a methanol plant at less than capacity, you end up wasting some gas efficiency. We prefer to run our plants at high rates of efficiency. So we've made a decision that we're better off to shut down one plant. It will allow us to do a bit of maintenance that we would otherwise do in the future. It will allow us to run three plants at close to 100%. And also improve our gas efficiency. The net effect of it is we end up losing a small amount of production and it's like a few 100 tons a day. Maybe less than that. I can't remember. We lose a small amount of production. Let me not get too specific. But the economic impact by using gas more efficiently is we're kind of neutral on it. So it seems to me that it's a very smart thing for us to do.

Okay. Can you tell us which of the four you'll be taking out and whether -

No. I don't know. I haven't talked to anyone about that. But it will be the one that probably has the most -- the most maintenance that we could do to improve the facility.

Okay. Is it likely that that will carry over into Q3 when you might suffer some of the issues you've had in the past with Argentinean gas and interrupt the supply due to their winter?

It's possible. And I think we're -- I've talked about these repairs that need to made to embassy pipelines in Argentina and what we understand those repairs will be complete in the third quarter and when they are complete we'll certainly have access to another 10% of that gas supply. So when those repairs are complete we can certainly contemplate how we operate our combined facilities. So I would expect we'll get back to four plants before the end of this year but when remains to be seen.

Okay. Thank you very much and thanks for doing such a great job running this business.

Great. Thank you. If there's one more question, operator, maybe I'll just take that. I think we've reached a full hour here.

Okay. Thank you. And our next question and last question from Gates Capital Management, Dax Vlassis, go ahead please.

Yes. If you could just review, I think at the end of last year in the -- in your annual report, you said that consumption was somewhere around 30 million tons. I think you said it's around 40 now. Can you confirm that and can you also explain since -- if you look at the production capacity, the industry at yearend, can you explain to us what's come on, what's come off and then what you expect over the next 12 to 18 months as far as the supply side to come on and come off and sort of high capacity?

Yes. Okay. I think I can cover most of those topics for you. Global demand is about 38 million tons in 2006. That's the size of this industry. And it's growing at around 4% per annum. So this industry needs a new world scale methanol plant, over 1 million tons every year in order to keep up with demand growth. The production capacity that's come on this year, there's really only been one plant and that's the plant in Iran, I think, Jason?

Yes.

Yes. So there's been a large plant in Iran, a 1.7 million ton plant. It was originally due to start up in 2004. It's been delayed a number of times. We understand now and I would say the only information we have is what we read in the media so information is a bit incomplete but we understand that there is a significant technical issue and that plant will be constrained to running at 50% of its capacity at least through to the end of this year. At the same time in Iran, the other large plant that they have there has gone -- has gone down with a significant compressor failure and that plant is expected to be offline for a couple of months. So we're not seeing any incremental capacity out of Iran and frankly I don't expect to see a lot of incremental capacity this year. I think there may be a few hundred thousand tons but I don't see Iran being much of a disruption -- disrupting effect on the market in 2007. T

here is a plant in Imam that is under construction and again, we don't have any privileged information on this but from reading the newsletters that we're seeing that that plant is on schedule to start up in the second half of this year so third and fourth quarter of this year. And that -- the product in that plant is being marketed by an existing global methanol marketer. So I would assume they have some marketing plans and some distribution plans and so those are the additions to supply.

On the other side, the Celanese plant in Edmonton that we were taking product from in Q1, Celanese shut that plant down at the end of the quarter. That was an 850,000 ton plant. Two other small plants -- there's a plant in Mexico owned I think by Pemex. 250,000 ton plant. They've shut down permanently for economic reasons. And another plant in Romania that was down for some maintenance and with the declining methanol price in Europe, in the second quarter they decided not to restart the plant again for economic reason.

We're also seeing in China a number of -- either shutdown or conversions. So a number of the small plants in China can manufacture either methanol or ammonia. Ammonia price is very high at the moment. So in the lower methanol price environment, again, there's an incentive for people to manufacture ammonia as opposed to methanol. So we are seeing a decline in supply in China. That said, there are some new plants starting up in China as well. Our view on that is most of that methanol will stay within China and be consumed by domestic demand growth in that country.

So I think that probably pretty well covers it, Brian. I think -

The Romanian plant -- what was the size of that? And does the 4% growth that you're talking about per annum include China? And if you exclude China, what is that number?

The plant in Romania is 200,000 tons. I would say the 4% growth includes some growth in China. This is where the forecasting of demand and supply in this industry gets a little foggy and the numbers we use in our investor presentation we credit to one of the independent analysts of the industry. So they would certainly do a good job of analyzing the traditional derivatives of things like formaldehyde and acetic acid. So it certainly includes that within China. What it appears not to include is some of the demand growth from products like DME that I talked about before. One of the other large uses in China is gasoline blending. So the assumption in that 4% is that there's no demand growth or very little demand in gasoline blending and yet gasoline blending has grown from nothing to a couple million tons in the last few years. So there's been huge demand growth for that particular use for methanol in China. It's a little bit of a murky answer I'm afraid for you but I think the 4% certainly includes all traditional demand and those are the sort of customers in China that we pursue with supplies of imported methanol.

Thanks.

Okay? Thanks everyone for participating on the call. It has been another really good quarter for us and we've had -- we had an excellent year in '06 and it's helping to start this year in a strong fashion. Certainly the Argentinean gas is a challenging factor that faces us and we have focused here on long-term success. In the short-term we're being very pragmatic. We're entering into agreements that provide us access to gas that we need when we need it. We also have a substantial amount of flexible capacity now in Chile and we can use this flexibility to maximize value as I've discussed.

We have a great project in Egypt which represents growth in our core low cost capacity and we're demonstrating growth in energy applications. So I think as a Company we face a very exciting and rewarding future and I'd like to thank you shareholders certainly for continued support and good morning to all of you.

And this concludes the Methanex Corporation First Quarter Results Conference Call. Thank you.