Methanex Corp (MEOH) 2007 Q3 法說會逐字稿

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

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

There are comments and answers to your questions that may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome.

Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections which are included in the forward-looking information. Please refer to the bottom of our latest news release and our 2006 Annual Report for more information.

I would also like to remind listeners that the most recent version of our quarterly investor marketing presentations, updated with third quarter results, will be posted on our website early next week.

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 the Methanex third quarter investor conference call. I've got a number of colleagues with me in the room, and they will be available to answer questions a little later.

First, a few comments on our third quarter results. In the quarter we generated EBITDA of $69 million. This result was comparable to our second quarter EBITDA of $76 million, and came in an environment of slightly lower methanol pricing and low production through our plants in Chile. Sales volumes were slightly lower in the third quarter as we offset production losses from Chile by drawing on our inventories and purchasing spot methanol.

Looking ahead with the recent escalation in methanol prices over the past month, we're positioned for a strong fourth quarter of cash flow and earnings. I'll comment more on fourth quarter pricing environment and our earnings expectations later in the call, but first I'd like to provide you with an update on our operations during the third quarter.

Production from our large low cost plants in Trinidad during the quarter was once again excellent. We produced a total of 481,000 metric tons, which is the same as design capacity for those plants.

However, production from our site in Chile continues to be disappointing. During the third quarter we produced 233,000 tons ,which is well below production capacity for that site of 960,000 tons per quarter. We did not receive any gas from Argentina and we operated only one of our four plants throughout the quarter.

On the last conference call, I commented that we expected to see gas supply restored from Argentina in the third quarter, as the majority of the typical issues with Argentine gas suppliers were resolved, temperatures were warming, and gas balances in Argentina were improving, however, this has not yet occurred.

I'll comment more on our outlook for natural gas through our plants in Chile in just a few moments.

Our plant in New Zealand continued to operate well, at full capacity during the third quarter, and produced 122,000 tons of methanol. In the fourth quarter we were required to complete some routine maintenance work on the plant to meet statutory regulations, which will result in the plant being offline for approximately one month.

Our commitment of capital to the New Zealand plant to complete this maintenance work is consistent with our view that this plant has a longer-term future, as the cost position continues to result in significant cash flow generation for our shareholders.

Switching topics now to the industry and pricing outlook, I mentioned on the last conference call that entering the third quarter ethanol markets were relatively balanced, and we would have expected a stable pricing environment (inaudible) if the industry operated at normal rates. However, the industry operated well below normal rates during the quarter, due to significant unplanned and planned outages.

We estimate that about 1.7 million metric tons of production was lost as a result of these outages. I mentioned earlier our own facility in Chile operated only one of four plants during the quarter. In addition, there were significant outages and production shortfalls at other plants, including ones in the U.S., Germany, Norway, and Iran. There were also a considerable number of planned maintenance outages, particularly in the Middle East.

This significant supply shortfall in a period of continuing strong demand resulted in a sharp drawdown of global inventory, which has lead to a severe shortage of methanol and a significant escalation of spot methanol prices towards the end of the quarter.

As a result of the very tight market conditions, contract methanol pricing increased significantly in all major regions in October, and our non-discounted methanol price across the various regions was set at an average price of approximately $550 per ton.

Global methanol markets continue to remain very tight, and spot methanol prices have escalated even further in recent weeks. We believe that methanol prices in the short term may well have derived further in order to restore the balance between demand and supply.

Entering the fourth quarter, overall global methanol demand continues to be healthy. In particular, methanol demand growth in China is very strong, with both domestic production and the imports increasing during the quarter. Demand for energy applications in China has increased considerably during 2007, particularly for pure blending and DME. Our own DME investment, which I will discuss later in the call, is on track for startup in a matter of weeks.

In the fourth quarter we expect that the high methanol prices will lead to some decline in methanol demand, primarily in the energy related uses, as the economics for some of these derivatives become more challenging at current prices. Also, if the Chinese methanol industry behaves as it did earlier in the year, where prices were in a similarly high environment, then we expect the operating rates in China could increase and net imports into China could decline, to assist in bringing some balance to the global market. However, in a lower pricing environment we continue to believe that China will become a large net importer of methanol.

The recent announcement by the National Development and Reform Commission of China adds further support to this view. In late August the NDRC announced that it had banned the use of natural gas in new methanol projects in China, based on the policy that natural gas usage should be prioritized for residential uses and not for the production of petrochemicals.

I'll switch topics now and talk about some of the opportunities and challenges that we face. Firstly, natural gas supplies through our plants in Chile. As I mentioned earlier, we have not received any gas from Argentina since mid-June and have been limited to operating one plant in Chile since that time. We are in continuing discussions with our gas suppliers and various Governmental authorities to try and resolve this issue, and we continue to believe that we have at least, that we will have at least some gas supply restored.

Some of the technical issues with gas supplies in southern Argentina have now been resolved, and there is sufficient gas production capability in the region to supply us with our full contractual entitlement. All pipeline capacity to transport natural gas in Southern Argentina to the more populated areas in Northern Argentina is full and gas today is either [shortened] or being reinjected.

All parties, including our gas suppliers and the National and Provincial Governments in Argentina are being adversely impacted by the reduced gas production, which we believe drives an incentive to resolve the situation. We have been hopeful for the last few weeks that some gas supply would be restored and continue to think that once the national election in Argentina is over at the end of this week, on Sunday, in fact, some gas exports may be reinstated.

As we have discussed on previous calls, our long-term solution to the challenges related to gas supply from Argentina is to secure more natural gas from Chile, and on this front things are progressing well.

In late September, as a result of some increases in gas supply from both ENAP and GeoPark, we changed our production in Chile from Train 1 to Train 3, which allowed us to produce almost 200,000 metric tons more on a per annum basis. As well, both ENAP and GeoPark are continuing their extensive gas exploration, drilling, and development programs near our plants, and both have also announced new gas discoveries in recent months.

In addition, on October 10, final bids were submitted to the Government of Chile for its international bidding round of oil and gas exploration blocks. Interest in the bidding round was strong, with the Chilean Government announcing that 14 bids were received for 9 of the 10 exploration blocks put out for tender. All of the blocks are situated in Southern Chile in the Magallanes Basin, close to our plants. We are the only significant gas consumer in the region.

Bids were received from a number of companies, including major international oil and gas companies, and current gas suppliers, Total, Apache, and Pan American. The bids submitted also included three from our own consortium with GeoPark and Wintershall. The blocks are expected to be awarded on November the 15th to the successful bidders, with exploration activity expected to commence shortly thereafter.

I'm optimistic about the potential for gas exploration and development from these blocks, and I believe the interest in the bidding round is a positive development. The Magallanes Basin has the same geological formation as the Austral Basin in Argentina, where our Argentina gas suppliers' source and where significant gas reserves exist.

We are encouraged by the level of gas development activity that is currently occurring in southern Chile, and as I've said previously we plan to allocate some capital to initiatives to accelerate gas development in this region.

I mentioned a few moments ago that we are participants in a consortium that has submitted three bids in the bidding round. We are a minority participant in this consortium, and assuming that all or one of our bids is successful we will be committing some capital during 2008 to exploration activities.

We are also working on several other initiatives that are designed to accelerate natural gas deliveries to our plants, and expect to make some further announcements in the next few months. And while I'm optimistic that the gas development activity in Chile will improve our gas supply situation in the short to medium term, there's no doubt that it will take a few years before this issue is totally behind us.

The next opportunity I wanted to provide you an update on is our project in Egypt which continues to progress well and is currently slightly ahead of project schedule. After reaching financial close at the end of May we are now in the early stages of construction, including site preparation, the establishment of roads and other infrastructure, and plowing activities. The detailed design has well progressed and most long lead items of equipment have been ordered.

We continue to be very excited about this first class project in Egypt, which we believe will be amongst the lowest cost plants in the world and will contribute significant excess cash flow to our shareholders after completion in early 2010. We would observe that there seems to be little recognition of this value in our current share price.

The last opportunity I wanted to touch on was our joint venture investment in the DME plant in China. The project is on schedule with commissioning of the plant expected in the next few weeks. DME from the project will be sold to LBG distributors in China through the existing distribution business of our joint venture partner, XinAo. We are very encouraged about the demand growth outlook for DME and the significant impact this would have for the methanol demand in the future.

Referring to a recent report from the International DME Association, there's now over 1 million tons of DME capacity operating in China, with an additional 4.5 million tons under construction, and a further 7.5 million tons in the planning stages. Outside of China there's also over 1 million tons of DME under construction or in planning stages, and around Japan, and our own DME project in Egypt. In total, these projects represent approximately 15 million tons of DME capacity, which translates into more than 20 million tons of methanol demand, or roughly half of the existing global methanol industry.

I'll change topics now and make a few comments about liquidity. Our cash flow from operating activities during the third quarter was $132 million after changes in working capital. During the quarter we returned a total of $55 million to shareholders, via both dividends and share repurchases. As of a couple of days ago we had repurchased 3.2 million shares under our normal course issuer bid, and we continue buying back shares every day.

From the beginning of this decade we have reduced our share count from about 173 million shares outstanding to now less than 100 million shares outstanding. This substantial reduction is a reflection of both the Company's ability to generate cash and our commitment to return excess cash to shareholders.

Going forward, we have a number of uses for cash as part of our consideration in managing our balance sheet. First, we are in a strong position to meet our commitments on the Egypt project. Second, we continue to assess some opportunities to invest to accelerate development of gas in southern Chile and to improve the security of natural gas supply throughout Chilean plants. And, finally, we also continue to be interested to invest to expand demand for methanol in the energy markets.

In the strong cash flow environment we are operating in we are well positioned to meet all of these objectives, while continuing to return excess cash to our shareholders and reduce our share count even further.

Before stopping for questions, I'll make a few comments regarding our expectations for the fourth quarter. Firstly, with the recent escalation in methanol prices we will have a significantly higher average realized price in the fourth quarter. As I have commented on in the past, our discount off of posted methanol prices widens when methanol prices are higher as a portion of our sales were sold under fixed price and cost-to-serve contracts. Accordingly, with the assumption that referenced prices are at our total levels over the fourth quarter we would expect our average realized price to be in the $440 per ton range, or at a discount of approximately 20% of the current average contract price of $550 per ton. I did note a little earlier that the trend for methanol prices is still upwards, so this number may be a little conservative.

This is a comparable environment to the first quarter of 2007 when posted prices were similar and we had an average realized price of $445 per ton, and we generated EBITDA of $237 million. Compared to the first quarter, our results in this fourth quarter will be negatively impacted as a result of our production challenges in Chile, which will result in lower sales of purchased products. With our current operating status of one plant in Chile we would expect total production from all of our global facilities to be about 875,000 tons in the fourth quarter, and this should also approximate our level of produced product sales. Assuming that we are successful in restoring some Argentine gas supplies in coming weeks, this production would mostly remain in inventory at yearend and have little impact on our immediate accounting results.

As has become normal in times of volatile pricing, our cost structure will be a bit complicated. Argentine export duties will have little or no impact on our earnings as a result of the Argentina gas (inaudible). However, these cost savings are mostly offset by other changes in our sales mix and cost structure.

Overall, I would expect that EBITDA in the fourth quarter to be somewhat less than we achieved in the first quarter of 2007, but significantly higher than what we've achieved in the last couple of quarters. And with the close to $400 million of EBITDA year-to-date through the third quarter we are on track, once again, to complete an excellent year of earnings and cash flow generation for our shareholders.

At this point, I'm happy to stop, and I'll take any questions you might have.

(OPERATOR INSTRUCTIONS.)

The first question is from Jacob Bout, CIBC World Markets. Please go ahead.

Good morning.

Good morning, Jacob.

Just to -- if you could expand a little bit on DME? I mean, you talked quite a bit about China and then you said there's another 1 million of DME capacity, and you talked a little bit about Egypt -- can you expand, first of all, on what you have for DME in Egypt, and what the outlook looks like for DME expansion outside of China?

Well, our project in Egypt is a 200,000-ton project, and we're continuing to make progress on it. I see Michael Macdonald, our Senior VP of Corporate Development in the room, and I might just ask Michael to make a comment on DME in Egypt.

Sure. Thank you. Thank you, Bruce. Egypt is a large importer of LBG, and the opportunity the Egyptian Government sees is to use their gas via methanol and then to produce DME to substitute for imported LBG, so this was an excellent opportunity for Methanex to partner, again, with the Egyptian Government to focus on the needs of the Government and reinforce some ethanol demand growth in a country that doesn't use much methanol gas.

And I think most of the other volume that we mentioned here is within China are taken, and I guess the burning question that -- if you're not going to ask, I expect someone else will, is what the DME economics look like in the current environment?

There's two things that have been happening in recent months. The price of crude oil has continued to escalate, as we all know, and of course the price of methanol has escalated more recently. So both products have been going up. I would say that at current prices DME production is quite marginal in China, we calculate at $90 a barrel oil, LBG equivalency is somewhere a little less than $400 a ton, and the spot methanol price in China today is somewhere a little bit over $400 a ton.

So the margins are quite close, and it's not a significant losing proposition today. I would say our view on this, we take a very long-term view. We think that DME is a first class product and we're in this for the long term, and we will certainly discuss with our joint venture partner the operation of our plant in the coming months, but we continue to be very optimistic about the long-term prognosis of the DME as a methanol derivative.

And so just from the timing of Egypt and what the capital costs are with DME?

Yes, the capital costs with DME are relatively modest. It's not a particularly complicated process, so it -- we -- the number we've quoted represents about 10% of the cost of building a methanol plant. So if you talk $600 or $700 per ton of capacity that would suggest $60 to $70 per ton of capacity for DME. So, as I say, it's relatively inexpensive. It doesn't take very long, so we would think, our ambition, I guess my thought would be to have that DME plant up and operational before we started up our methanol plant in Egypt.

Yes. Well, right now, the schedule is about exactly that, where it's just before (inaudible).

Yes, and clearly the Egyptians are also talking about the next expansion of DME, as well, so they are particularly enthused about this opportunity to create another useful fuel to serve their domestic markets.

And then when you take a look at the relationship between DME and methanol production within China, are your thoughts still that going forward China will still be a net importer of ethanol to the 1 million to 1.5 million tons and DME will basically sop up the excess methanol capacity?

Yes, or gasoline fuel blending is the other major derivative in China. You know, I think we all talk about China as though it's one homogenous market, which it isn't, it's like the United States, there are a whole lot of different markets in China and the significant distinction I think is between the coastal markets, which can be supplied by imported methanol and the inland markets which can be readily supplied by coal-based methanol.

So a lot of the supply growth that's occurring in China is occurring in the inland markets, and that's supply that is going to either DME, gasoline blending, or methanol developments, methanol to propylene sort of projects. So a lot of those projects people don't even think about, formaldehyde, or ascetic acid, or the traditional derivatives, they're thinking about how they can turn coal into a useful energy product.

Okay.

So that's why we continue to believe that coastal China in periods of normal methanol pricing, and don't ask me what normal means in this current environment, that methanol imports will continue to grow in that country over the next few years.

Okay. And then just a last question on inventory levels, what are your current inventory levels? Has the drawdown on inventory been essentially at your maximum level, i.e., can you continue to drawdown inventory levels for the remainder of the year if you don't get --?

Yes, you can see from our balance sheet that clearly our inventory is at the low level, and part of the release of working capital that I mentioned in my comments, evolve from the release of inventory. And we are at a point where it's very difficult to manage. We were actively purchasing spot methanol throughout the second quarter, throughout the third quarter in order to meet all of our contractual arrangements, and it's becoming increasingly difficult to identify sources of spot methanol. So that means that our inventories continue to be depleted.

So if the gas is not turned back on in Argentina post the election, at what point would you have to declare force majeure?

Well, I don't know, that's speculation, Jacob. I think, you know, we have some customers saying to us, "We don't care what the price of methanol is." And I don't mean to say that too glibly, that they're more concerned about supply than they are about the price.

And I think that's one of those things that is continuing to drive the price of methanol, but in a lot of downstream applications methanol is a small element of the cost structure, and supply and availability is far more important than the relative price of the commodity.

So I think that's one of the things that will continue to drive the price of the commodity upwards, to a point where some customers may say that we're better off taking an outage or doing some maintenance or reduced consumption of methanol, and that's what will turn demand and supply back into some sort of balance and bringing the market back to some sort of normality, because we're certainly in a situation at the moment that is not sustainable.

Okay. Thank you for your answers.

Okay.

Thank you. The next question is Sam Kanes, Scotia Capital. Please go ahead.

Good morning. I'd like to come right back to what happens mid-November once the -- these concessions or blocks are allocated, Bruce? And the speed with which people can mobilize and get to drill? And, obviously, if I was going to win, and you're the only buyer, then I'd want to talk to you before I'd start drilling, I would think, on price. I would imagine that's imminent or has it already started? Can you give us a little more color on that?

Sure. I think one thing I'm very encouraged about is that four of our -- no, actually, five of our (inaudible) and gas suppliers from Argentina are participating in some way in the bidding round. Companies, like Apache, have bid on a block in Chile that is adjacent to a block that they are working on in Argentina. So I imagine, and I'm speculating on their behalf, so I would apologize if I have this wrong, that it's very easy for them to move equipment and resources across the border and begin to aggressively pursue an opportunity to identify gas resources on the Chilean side of the border.

So I think, so the people who are already active in Argentina, they already have equipment and resources available. I would think that most of our Argentine gas suppliers would recognize that they have, under our contract they have an obligation to mitigate our losses, and that participating in this bidding round is their effort to mitigate our losses, and to the extent that they're successful, then they will begin to supply us from Chile as opposed to Argentina.

Under the same terms and conditions?

Yes, well that's the basis of the contract. So I think the good news is that the high price of methanol and I think the long-term future price of methanol that I think most analysts have now got at a much higher level than it ever was historically supports a much higher methanol price. So when we think about the long-term price expectations that those people will have under those gas contracts, it's a lot higher than the base price that we've always talked about historically, so I think it continues to look like very good business for them and for us.

Thanks for that, Bruce. A follow-up, traveling over to New Zealand, some consultants believe your catalyst there, I guess, have been exhausted in terms of what you can produce there from your one small plant?

Yes.

If you could just talk to that for a second in Q4 and whether anything is new with Papua, New Guinea and possibly relocating one?

Sure, yes. Well, the catalyst is exhausted. It's very old. The plant we have in New Zealand has an annual capacity of 500,000 tons, and we've been consistently producing less than that for the last few quarters, and that's because of catalyst. And this plant we've talked about it being a flexible plant, and we've stipulated on when or if it might close down for years now, and we've continued to just operate the plant and look [longer] with almost zero capital spend and just trying to maintain the facility.

Now, I think the good news for us in the environment that we found ourselves in with Argentina is that we've been successful in continuing to find natural gas in New Zealand, so it has allowed us, it's certainly allowed us to continue supplying our customers a lot longer than would have been the case had we not had that plant. So I'm really glad that we've managed to sustain that operation through some quite difficult times. And we think now it's time to start spending capital on it because we see that, as I mentioned earlier, we're not going to solve this Argentine gas situation this year or next year, it's going to take a few years.

So I think similarly about the New Zealand plant, that we have probably a few years of life left on that. We're continuing discussions with our gas suppliers over there. Our view is that the gas market has gone from a few years ago from being short to now being at least balanced and probably a little low. We think there's a continuing opportunity to source new suppliers of natural gas.

In terms of turning to the question on Papua, New Guinea, we really see that as a long-term opportunity. There's lots of natural gas in New Guinea, and people have talked about projects there, in my knowledge, for 15 years, and nothing much has ever happened. So I wouldn't hold my breath on rapid changes, but I think we're very well positioned, we have good relationships in that country, and it seems like a very nice place to relocate a redundant asset. And we've got a few redundant assets around the world today and so there are some opportunities, and I think Papua, New Guinea represents one of those, but this is a 2011, 2012 opportunity, it's not something that's going to happen too quickly.

Thanks for your answers, Bruce.

Good.

The next question is Bob Hastings, Canaccord Adams. Please go ahead.

Oh, yes, thank you. Just in terms of going back to Chile and the gas supply, you mentioned that you're optimistic there'll be a lot more, there'll be some more gas coming, and that GeoPark and ENAP have both added to the reserves. Can you give us some more color in terms of what the reserve increase has been, and how many years that would supply you with how much methanol?

Well, I can't really, Bob. You know, both those, ENAP, as you know is a state owned company, so what they've published in terms of reserves is not much, and they have been not that forthcoming in terms of public statements around the reserves that they've discovered and the reserves that they have, that are available to them.

A little bit the same with GeoPark. I think in the case of GeoPark they forecast deliveries to us, and today they're delivering, I think, a little less than 500,000 cubic meters a day. During 2008, and that's early 2008, they should be getting up close to 1 million cubic meters a day, and they believe that the block that they're working in has capacity to get up to 2 million cubic meters a day.

I can't tell you what the reserve numbers that underpin that are. There, this is mostly gas that comes out of a formation that has been very productive in Argentina and they're drilling into the same sort of zone in Chile. So that's probably all of the public information that's available, and it's probably all that I know, frankly, as well, Bob.

Okay, thank you. And just sort of following that, I think you'd mentioned to Sam that the Argentina producers that supply you now, some of them are looking for gas in Chile, and you've had conversations with them that encourage you to believe that you'll get it on the exact same terms as you're getting out of Argentina?

Well, you know, I think there's always discussions to be had on these topics, so we've certainly had discussions with them that say that they have today a contractual obligation to supply us gas from Argentina, and we all know what's happening in Argentina and with those events our event of force majeure is something I wouldn't even speculate on.

I think that if they were, the companies have an obligation to do, to mitigate, and one way to -- one very easy way to mitigate is to substitute gas supply from Argentina with gas supply from Chile, and then everybody is a winner. We don't have to pay export duties, our gas suppliers don't have to pay export duties, we can continue to operate our plants, they can satisfy their contractual requirements, so it seems that there's a very nice commercial win/win there.

Now, to the extent that they came to us and said, "Hey, listen, the world has changed and it's much tougher for us, we need to change the rules," we're not commercially naive, but I think our first response is, "There's a contract, and read the contract." But at the same time we're not completely inflexible on that either, so I think we've demonstrated with our gas suppliers in Argentina that we're a company that looks at solutions, not rushes to the courts at the first opportunity.

Okay, good, thank you. And just you obviously have been talking to Argentina, given the gas situation, and looking for, I guess, an increase in the export tax. How -- you know, in your discussions, does that give you any kind of timeframe on when you might expect the gas to come back?

No, I think, you know, the election, the presidential election there is on Sunday, and what I'm told is that nothing much is happening in Argentina other than the focus on the election, so, and Argentina is no different from any other country in that regard, that these events tend to cause a lot of distraction at the political level.

We've certainly had indications that the Argentinean authorities are interested in reinstating gas exports under certain terms and conditions, which we don't know what they are, and we don't know when they will do that, but we continue to think, I think I mentioned in my comments, that we've been hopeful for several weeks now, and our hopes have been for naught, unfortunately, but we continue to push away. And I think when the election is out of the way that some sense will prevail.

And at the moment, again, as I mentioned in my comments, everyone is a loser here, the Government of Argentina, the problems that gas comes from, our gas supplies, no one, no one is winning as a result of this gas not being produced, so I think a sensible commercial solution will emerge.

Okay. Thank you very much.

Okay.

The next question comes from Fai Lee, RBC Capital Markets. Please go ahead.

Thanks, Bruce. I just want to clarify something with respect to Argentina and I guess the wording in the press release, and I think you mentioned in your prepared remarks was you expect some gas to come back. Is that just -- wording just being conservative with respect to the word "some," or is there something behind that wording?

No, not really, no, it's just, as you know, there's an issue in Argentina with gas reserves, and the gas reserves have been depleted over the last few years, so in some areas there is more gas than in others. Now in one particular area, which is the island of Tierra del Fuego, where we get a lot of our gas from have actually been adding to and increasingly their reserve, and that's gas that is truly trapped and remote. There's no pipeline, or there is a pipeline to the north, but it operates at capacity.

There has been talk of a second pipeline being built that would be, I would say, a couple of years away, at least. So there is natural gas available on the island of Tierra del Fuego, that it simply has nowhere to go other than to us to supply our contract or it remains shut-in for years. And I don't think that's fair to the gas suppliers, and I don't think that's what the Government of Argentina wants to do.

So I think that that gas is very easy to say its integral to reestablish exports. I think it's perhaps more difficult to speculate on the reestablishment of exports in some of the more northern provinces where gas has been dedicated to domestic and residential markets. So our words, don't read too much into them, but I think today we'd be delighted if we got some gas back. We'd be even more delighted if we got all of our gas back.

And if it just came from Tierra del Fuego, how much gas would you actually have (inaudible) resumed?

It's -- it would be roughly one plant, it would be about 2 million cubic meters a day.

2 million cubes?

Yes.

Okay. And in terms of contingency plans, given this ongoing uncertainty --

By the way, that's the delivery capacity pipelines rather than delivery capacity via the gas fields. The gas fields have a lot more capacity to deliver than that, so I just wanted to clarify that. That 2 million is limited by, today, by pipeline capacity.

Okay. And you talked about the second pipeline, but there's no timing on that?

No.

Okay. And what about contingency plans given the ongoing uncertainty for Argentina? Is there -- is it just waiting to get more gas from Chile, or are there any other potential contingency plans in place?

Well, you know, we're in constant discussion with our customers and these are very difficult times for them, and I'm very sympathetic to the environment that they find themselves in, partly, and I would say partly as a result of our problems with Argentina. So I've made a few references in my comments. We actively purchased spot methanol whenever we can get access to it, and we're still trying to find alternative sources of supply, and we use our global supply chain. We try and purchase anywhere in the world that we can and move molecules to meet our contractual commitments.

I, you know, I do think that we've tried to be very flexible with customers and say to them that to the extent that they want to vary their purchasing terms outside of the realms of their contract then we're flexible about that. If they can identify alternative sources then we would release them of the obligation to buy from us while we're suffering these problems.

So, you know, we're trying very hard to avoid a declaration of force majeure. But if we cannot buy spot methanol and we cannot produce more than one plant in Chile we will have no choice other than to begin allocations to customers, and you know that's I think would be an unfortunate event for us as a company, and I know how much pain that puts our customers in, so this is not a -- this is not a very nice thing for us to have to think about.

Okay. Thanks.

The next question is [Leanne Carnes], Polestar Capital. Please go ahead.

Hi. Thanks. I have two questions. I noticed that the sales volume sequentially is down a bit, is that purely because of Chile?

Yes, yes, it is purely because of Chile, because you all notice that the sales volume it produced of purchased product is actually higher, so it's produced product that's lower, and we, we are not able to make-up those lost sales with purchased product.

You're not seeing any loss on the demand side?

Well, I would say as you come into the fourth quarter, with prices now have gone into this $500 a ton level, we are beginning to see some losses of demand. And, you know, that's the way commodities work. That if there's a shortage the price goes up, begins to constrain demand or encourages new supply, and then the prices moderate again. So I think we're just seeing what's typical commodity pricing behavior and, as I mentioned, it causes a lot of pain within the industry, but this is not the only commodity that's seeing volatile pricing in recent years.

Right. And demand is really down minimally relative to the significant price increase?

Yes.

So it's not being elastic?

That's correct.

And the other question, I believe you mentioned on a previous conference call about the pipeline constraint in Argentina, moving the gas from the south to the north, and you had a potential solution to that, as far as being able to -- you were talking to the Government about supplying methanol to the north, and alleviating some of their energy problems. Can you elaborate on the mechanics of that? Is that an infrastructure change?

Well, it's a bit early to talk about that. I guess what I could say is that we're trying to be as innovative as we can to help Argentina find solutions, and I mentioned before that as a Company we prefer to think about solutions rather than to rush to the court and litigate.

So as part of the concept with Argentina is how can we -- they have an energy crisis, an energy shortage, how can we be part of the solution to help the country overcome its energy crisis? And there's no doubt that methanol has a role in energy metrics and on the supply side.

So we are in a few discussions, but I mentioned before the election is going on at the moment. This is not a very helpful environment to be talking to politicians or officials about new and innovative ideas, so we're not pushing very hard on that at the moment, but I think when the new Government is established, I think there's a basis for a very sensible discussion there.

Is that a long-term solution, that infrastructure change will be required in Argentina?

No, it could be quite short term. We've got a number of ideas that could help Argentina with incremental energy next winter, and so I think that's very interesting for them, but it would need some discussion before that can be -- can take place.

Perfect. Thank you so much.

Okay.

Adam Comora, Entrust Capital. Please go ahead.

Hi, great. I had one question on how our cash costs are looking these days, because there are so many moving pieces between taxes and where the production is coming from. What should we be realizing in EBITDA per ton here in the fourth quarter? Is it something around $190 to $200 a ton?

Yes, that's a really hard question, Adam. And I'm sympathetic to all the people on the call who are trying to type numbers into their model, but there are so many moving parts and it comes out of inventories that we build-up in the third quarter, some of them are relatively, well, some of them are low cost based on lower natural gas costs in the third quarter. We have purchased product that's come out of the third quarter, then we've got some purchased product in the fourth quarter, which is a dramatically different price, of course. And then our gas costs are going up as the methanol price goes up, so anything that goes into inventory this quarter is at a much higher price level and some of that will be released to sales, as well.

So it's a real -- so I guess I would just return to the comment I made in the -- in my prepared remarks that the costs are a bit complicated, and I think it's impossible for us to try and explain in detail all of those moving parts.

So the guidance that we've tried to offer is to try to give some view on what our sales of produced product are, which is where we earn our margin, some view on what the realized price will be, some view on the discount that is apparent, and then some view on the balance of things.

And so I think if you take all of those comments that I mentioned you can get to a number that would reasonably replicate what we think the fourth quarter is going to look like, but I don't want to kind of try to get into the detail of individual cost elements, I just don't think it's very helpful.

We've also heard from people down in Argentina that there are a number of people in the industry that are thinking that a price increase is going to be instituted on natural gas, domestic natural gas in Argentina, and that could take into effect sometime in the beginning of '08 and maybe that would spur development. What are your contacts telling you? Does that seem possible? And we're hearing that price increase could take it up into that $2.50 per BTU range?

Well, you know, residential gas pricing in Argentina today is $0.40 and, you know, I think there has been some discussion at political levels that some say that needs to change. Now, whether that's next year or in the future, I don't know, that's a question that I'm not an expert on, that's a political question. So I don't think any -- well, let me say today, if we were receiving Argentine natural gas today we'd be paying more for that gas than any other consumer in Argentina. So it's certainly not that we have a privileged position that is giving us cheap natural gas relative to other Argentinean consumers. So I don't think that any increase in the domestic price naturally puts pressure on to our gas price.

No, I was just thinking that maybe that could be something that would also spur a lot more production and investment?

It could, but you know that's a long-term thing, Adam, and by the time people start drilling wells and finding new reserves and tallying them into the system, a few years are going to drift by, just as they have for us in southern Chile. So I think it's a helpful thing, but that's a political decision that needs to be made in Argentina.

The next question is Fai Lee, RBC Capital Markets. Please go ahead.

Thanks. Bruce, I just have a follow-up question. I know in your press release, talking about the supply and demand fundamentals that you expect, the only capacity, new capacity you expect is the Saudi Arabia plant sometime mid next year. I just wanted to get your take on some comments coming from Iran about their [Zagros 1] starting up in March '08; what's your take on that?

Well, I think we only know what we read in the newsletters, as well. We don't have any privileged information on that. And what we understand is in starting up [Zagros 1] a number of significant pieces of equipment were cannibalized off [Zagros 2] , so they've now had to go back and reorder major equipment items that have long, long time delivery schedules on them. So I think the latest announcement from Iran was that that project is expected in early 2009, Jason, I think? Yes, and I think if you look at the track report of the Iranians they've never really been very good at bringing their plants up when they say they're going to bring them up, so it would seem to me that that's probably the earliest date, but I don't -- as I say, I don't have any information other than what we read, the same sort of stuff that you read in the newsletters.

Okay. And you haven't heard anything from your customers, talking to them?

No, no.

Okay. Thanks.

Okay. Well, I think that's probably a good time to call an end to the call, we're coming up to an hour, so I thank you for your participation. You know, these are challenging times, but I think we've continued to demonstrate an ability to generate cash flows through everything, and I think that's one of the strengths of our Company.

There's four things that we're really focused on. One is solving our gas problem in Chile and accelerating the gas development down there, and I think that's -- I'm very optimistic about the potential for that. The second is doing a really good job on executing our project in Egypt, because it will represent a great cash flow generation for us when that plant is operational. The third is continuing to sponsor demand growth for methanol and energy applications, because I think those demand drivers change this industry dramatically and I think that's good for our industry. And then, lastly, we're continuing to be focused on returning excess cash to shareholders, so we certainly haven't lost our focus on the value that that generates for the holders of our Company.

So thank you very much for your support, and good morning to all of you.

Thank you. This concludes the Methanex Corporation's third quarter earnings conference call. Thank you.