Methanex Corp (MEOH) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation First-Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded on Thursday, April 24th, 2008.

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

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 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 to our 2007 annual report for more information.

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

Thank you, Jason and good morning everyone and welcome to our First-Quarter Conference Call. I've got a number of colleagues with me in the room and they will be available to answer some questions a little later.

I am pleased to report that we have completed another good quarter. In the first quarter we generated EBITDA of $127 million and net income of $65 million or $0.67 per share.

We achieved an average realized price of $545 per tonne in Q1 on sales volumes which was down compared to most recent quarters.

As has become typical in a transition pricing period, our earnings from quarter to quarter are volatile and this has been the case over the last couple of quarters.

In the fourth quarter, our earnings benefited significantly from the rising price environment and were much higher than consensus estimates; while in the first quarter our earnings were negatively impacted by the decreasing methanol price environment.

As I mentioned in the last conference call, there are a few factors mainly related to timing of inventory flows, which caused our first-quarter earnings to be lower than Q4 '07, despite average contract prices being similar in both quarters.

Firstly in Q1, our sales mix was less weighted towards sales of produced methanol and it's the sales of produced methanol that drives our profitability. Second, in the first quarter we did not benefit from the sale of low-cost inventories resulting from a lower methanol price environment, as was the case in Q4. And thirdly, as a result of the declining methanol price environment, we realized a negative cash margin of $19 million on purchased product in the first quarter, compared to a $35 million gain in the fourth quarter.

I'll comment more on the industry environment, second-quarter pricing and our earnings expectations later in the call, but first I would like to provide you with an update on our operations.

Production from our large low-cost plants in Trinidad during the quarter continued to be excellent. We produced a total of 510,000 tonnes, which is higher than design capacity for those plants of 481,000 tonnes.

Our site in Chile continued to operate at about 30% of capacity during the quarter, with gas supply sourced exclusively from Chile and we produced 309,000 tonnes. The only pleasing aspect of this performance is that the rate of production was higher than both Q3 and Q4 2007 which is a result of the fact that we had recently been sourcing more gas from Chile. I'll comment more on the outlook for natural gas for our plants in Chile again in just a few moments.

Our Waitara Valley plant in New Zealand operated well during the quarter and produced 120,000 tonnes of methanol. I mentioned on the last conference call that we were working on switching production to one of our larger 900,000-tonne plants at the nearby Motunui location. I'm pleased to be able to confirm that we have agreed to terms on a gas-supply arrangement which will allow us to operate the larger Motunui plant until at least the end of 2009, and will add about 400,000 tonnes of incremental production to our supply chain.

This agreement is subject to some final authorization procedures which we expect to conclude in a few weeks. But in the meantime, we are well-advanced in preparing to restart the plant. We plan for this to occur during the third quarter and we will continue to operate our smaller Waitara Valley plant until around that time. The capital costs associated with the restart is about $55 million.

With the restart of the Motunui plant, we've affectively replaced one Chile methanol plant at economics that are comparable to a plant in Chile in the current price environment. After startup, we will have up to 1.4 million tonnes of flexible capacity in New Zealand, which could operate in the future, subject to availability of gas on commercially acceptable terms.

It's perhaps useful at this point to provide some updated guidance on natural gas pricing. With increased capacity in New Zealand and new sources of gas supply in Chile, our natural gas pricing has changed a little. Based on our production mix with Chile at around 30% capacity and the Motunui plant startup; the overall average price we pay under our gas contracts is approximately $1.25 per MMBtu at posted methanol prices of $150 per tonne. And we share approximately one-third of the upside on methanol prices with our gas suppliers above their price of $150.

Switching topics now to the industry and pricing outlook; over the last few months we have seen some rebalancing in the industry and an improvement to the global inventory position. As a result, pricing has moderated, but remains at high levels with the average non-discounted price in April across the major regions set at about $490 per tonne.

As we had expected, the very high pricing environment led to China becoming a net exporter in Q1 and we believe that this was the biggest influence on rebalancing the industry. There has also been some softness in demand in some derivatives such as formaldehyde and biodiesel in some regions. However, overall demand remains healthy in both traditional chemical derivatives and in energy applications, as higher global energy prices continue to drive strong demand for fuel blending and DME in China.

In addition, high energy prices are continuing to support strong demand for MTBE. With the recent reduction in methanol prices, we've already seen some supply-side reaction, as prices are now at a level where high-cost producers can no longer generate positive cash flows. Natural gas prices are in excess of $10 an MMBtu in the US and in Europe, so the gas costs alone to produce methanol in those markets are in the $400-a-tonne range.

There are also producers in China who are faced with natural gas curtailments and escalating coal feedstock costs and some who have the opportunity to switch production from methanol to ammonia. As a result, the overall industry operating rate in China has recently declined. China has reverted to becoming a net importer of methanol and recently we have seen an increase in spot methanol prices, which reflects an increased tightness both in China and in other global markets.

I will switch topics now and talk about some of the opportunities and challenges that we face. Firstly, natural gas supplies to our plants in Chile; as I mentioned earlier, we continue to operate our plants at about 30% of capacity with gas supplied exclusively from Chile. Last month, the Argentine government announced an increase in export duty on natural gas exports to a level that represents the highest imported natural gas price into Argentina, which would currently be about $7 per MMBtu.

Given this level of duties, we do not expect to see any gas supply restored from Argentina. As I have commented before, a solution to our gas-supply challenge is to source more natural gas from Chile. Gas sourced from Chile is not impacted by this export duty and thus offers an economically more attractive and secure long-term gas supply source for our plants.

In this regard, we are continuing to see good progress being made on gas development in Chile. Firstly, with the support of our financing announced last quarter, GeoPark has accelerated development in the Fell Block near to our plants. GeoPark increased gas supply to our plants during the fourth quarter, and is currently supplying a little less than 5% of our total gas needs in Chile.

We expect further increases this year, as they plan to be supplying us about 7% of our total gas needs by the end of this year. Their ultimate goal is to supply about 20% of our total needs.

Secondly, our main gas supplier, ENAP, continues to make good progress with its gas development activities in southern Chile and we expect incremental gas supply to result from these initiatives before the end of this year.

And thirdly, the government of Chile is in the process of finalizing and signing the contracts for the nine exploration blocks that it awarded to international oil and gas companies late last year under its bidding round. We were advised that these contracts will be signed in the next few days and expect exploration activity in these blocks to commence in the coming months.

Based on the significant activity and monetary commitments related to natural gas development in southern Chile over the next few years, I'm optimistic that we can return to running our four plants in Chile in the next few years.

As I've stated previously, it is a key objective for us to accelerate gas development activities in southern Chile. And I expect we will be able to make further announcements on some initiatives in this regard over the coming quarter.

The next opportunity I wanted to provide you an update on is our new methanol project in Egypt. The project continues to be on budget and on schedule to start up in early 2010, with the project now about 30% complete. Piling activities are almost completed. Dry dredging for the berth has well progressed and there are currently over 1,000 people on the site involved in construction activities.

As this plant will be among the lowest cash-cost plants in the world, we expect that it will produce significant cash flow for our shareholders, after it starts up in early 2010.

The last projects I wanted to discuss are our DME projects. Firstly, our joint venture DME project in Egypt continues to progress well. A project team has been formed to develop the project and we recently have held meetings with the DME off-taker and the port authorities to address sales and logistics. This project is a good example of the viability of DME outside of China and we are continuing to pursue other similar opportunities.

Secondly, our joint venture DME project in Shanghai China in which we own a 20% interest, commenced operations in November and is operating well. DME demand in China continues to be strong with a high energy price environment supporting a high DME price, and thus methanol affordability into DME. DME produced from our joint venture is mostly being blended with LPG and sold to LPG distributors in China.

I'll change topics now and make a few comments about our liquidity. Our cash flow from operating activities during the fourth quarter was $110 million after changes in working capital. During Q1, we returned a total of $88 million to shareholders via both dividends and share repurchases. As of a couple of days ago, we had almost completed our normal course issuer bid, having repurchased about 8 million shares, and we expect to complete the bid over the next few weeks.

We have a number of uses for cash as part of our consideration of managing our balance sheet. Firstly, we are in a strong position to meet our commitments on the Egypt project. Secondly, we will continue to focus on opportunities to invest to accelerate gas development in southern Chile and to improve the security of natural gas supply to our Chilean plants. And finally, we will also continue to explore initiatives to invest to expand the demand for methanol in the energy markets.

With a healthy financial position and a strong methanol price environment, we are well-positioned to meet all of these objectives and continue to build on our track record of returning excess cash flow to shareholders.

Before stopping for questions, I'll make a few comments regarding our expectations for the second quarter. Firstly, as prices have trended down over the first quarter and into the second quarter, we would expect our average realized price to be lower in Q2 and this would have a negative impact on our earnings.

Secondly, as I mentioned earlier in the call and on previous occasions, in transition pricing periods it is normal that our earnings will be impacted either positively or negatively by the cost of inventory, whether the inventory is produced at our plants or purchased from others. This impacted our results negatively in the first quarter. And with lower anticipated pricing in the second quarter, we would expect this to also negatively impact the second-quarter results.

To provide some additional guidance on this factor, we calculate that there is about $50 million of deferred costs in inventory at the beginning of Q2, if we normalize Q2 earnings based on the April methanol price.

And one final comment I would like to highlight regarding our fixed price and cost-to-serve contracts; I've mentioned on previous occasions that these contracts make up approximately 20% of our total sales. Due to our current production challenges, our produced sales are currently making up a smaller proportion of our total sales mix, as we have to source more sales with purchased product at market prices.

Effectively what this means with our current production base is that we have a larger proportion of produced sales exposed to the fixed price and cost-to-serve contracts and we do not benefit as much from the high current methanol price environment.

Taking all of these factors into account will produce significantly lower earnings in the second quarter. And while this is disappointing, we believe that as our cost structure normalizes and we add additional production capacity in New Zealand and Chile, we can look forward to improved earnings later this year.

I should also remind you that the price of methanol has spiked upwards sharply in the last two years, and we believe that the circumstances that exist today could lead to further volatility in pricing later this year.

I'm also very optimistic about the future of our Company and the ability of our asset base to generate cash. As Chile sources more natural gas and Egypt comes online in less than two years time, we will be well-positioned to generate strong cash flows.

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

(Operator Instructions). And the first question is from Jacob Bout from CIBC World Markets. Go ahead, please.

Good morning.

Good morning, Jacob.

A question on Chile; what do you have operating there right now? Are you still operating two plants at partial capacity or is it just one? How are things going to fare through the winter in the southern hemisphere? And are you still comfortable with the -- I think you gave previous guidance that would operate in roughly 33% of capacity in 2008 and kind of 40% in '09 and 50% in 2010?

Okay, well for the very short we are operating one plant today at almost capacity. We have lost a little bit of gas supply as a result of cold weather starting to occur in southern Chile. But then we're operating still roughly at around our 30%, so the guidance hasn't really changed. But each week we are producing a little bit less than we were during Q1.

I was in Chile just two to three weeks ago and met with both GeoPark and ENAP. Both of them have plans to increase gas supply to us in the coming months and I think this will certainly offset any increased winter demand that we always observe in the southern hemisphere and may allow us to get back to running two plants and have increased capacity again.

So I think the guidance we've provided of 33% this year still feels quite conservative to me, Jacob. And I think by Q3 and Q4, as we come out of the winter time, I think we'll find ourselves operating at a somewhat higher rate.

Longer term, the numbers are a bit of a guess. But what we've said is that by 2011 we will be back operating four plants. And that seems, when I've looked at the activity that's occurring, the prospectivity in the various blocks; that feels to me like a very conservative estimate. So I'm a big optimist. I think we can get the equipment in there, but I appreciate that oil and gas exploration doesn't happen overnight. It doesn't happen quickly. And so we think 2011 is a very realistic view to have an expectation of running our four plants.

Okay. And then just switching over to China; do you have a sense on the delta between methanol prices coming down and how much capacity shut down? And then perhaps maybe you could layer in just with rising coal costs in China, how the shape of the cost curve has changed and what some of the new developments are?

Okay; I think lots of questions there; but as we're waiting, a couple of numbers that could help you. In Q3 2007 China was an importer of about 220,000, 230,000 tonnes in that quarter; so almost at an annual rate of about 1 million tonnes a year, roughly. In Q4 that declined to about 130,000 tonnes and as pricing went up, China begins to think about exporting rather than importing. And in Q1, they exported a net 170,000 tonnes. So if you go from the peak in China's import to 230,000 tonnes to Q1, there's about a 400,000 tonne per quarter swing there. Now that's equivalent to adding 1.6 million tonnes or a new world-scale plant to global supply. So that's the influence that China has had on the world demand-supply balance over the last couple of quarters.

Now in the month of April, we know already that China is back to being a net importer of methanol. We think 70,000 or 80,000 tons of net imports have flowed into China in the month of April. So we've seen a complete reversal with now -- you could say we've now gone back from having a new 1.6 million tonne plant, that's now just been turned off again. So I think that's part of why we're seeing higher spot prices for methanol in all of the world markets, because China is having this influence.

Getting to some of your other questions, coal prices have continued to trend upwards in the last six months and really it's following crude oil prices. We see the high-cost producers in China now are having cost structures in the $300 to $400-a-tonne range. As I mentioned in my comments, there is certainly quite a large number of small producers who have the capability of producing either ammonia or methanol; and many of them have now switched to ammonia because it's more profitable for them. And there has been some government policy in China that has also encouraged production of ammonia and urea. So my expectation is that those guys will continue to produce ammonia rather than switching back to methanol. So there's a (inaudible) if you like, loss of some production capacity as a result of that.

And then natural gas in China is a scarce commodity. The price is rising quite dramatically. A lot of the producers in southern China have been curtailed for some time and are still curtailed as a result of shortages in natural gas. A view that I've heard expressed by an official in China is that other than the Hainan Island plant that operates on the coast of China, most other natural gas producers will be shut down in the next two to three years; and that today represents 3 or 4 million tonnes of capacity.

So China is having an influence on our market in lots of different ways and I would say in most of it -- for a producer like us, most of that influence is positive.

Where are spot prices currently for methanol in China? And then the last question; just what is the DME capacity that has been ramped up currently in China?

Probably I can't answer the question, Jacob; or I don't have exact numbers on it. Do you have any exact data on (inaudible)?

The spot prices globally are anywhere between the high 300s -- $370-$380 to about $450-a-tonne. So today, China is towards the top of that range. It's in the $420-$430-a-tonne spot pricing range. Spot prices in the US Gulf are still the highest in the world, but China is second. The lowest prices today in the world happen to be in Europe, which we find that to be a bit extraordinary because a lot of the high-cost production that's really stressed in the world is in Europe. So we expect to see that situation change in the next month or so.

In terms of DME demand, the numbers that we've been quoting are probably a little bit old, Jacob. There was about a million tons of methanol went into DME in 2007 and we expect this year to see more like 4 to 5 million tonnes of methanol flowing into DME. So it's very dynamic in so far as there are a lot of plants under construction and they are coming on stream almost as we speak. I know that there is one on a site that's adjacent to our plant in Shanghai, that has started up in the last month or so and it's a 300,000-tonne plant that consumes 450,000 tonnes of methanol. So that's one that was not included in my numbers that's included in the growth in 2008.

So it's not a very precise answer for you. I'm sorry, but it's a very dynamic environment.

Thank you very much.

Thank you. And the next question is from Fai Lee from RBC Capital Markets. Go ahead, please.

Thanks. First I just had a few questions; one, I'll just start off with Egypt. And I just wanted to understand where the project was with respect to cost to budget. When the project was originally announced, I believe it was like around $800 million. And I just wonder -- it seems like you're on time. Are you also on budget as well?

No. We're actually on budget and I expect that maybe some of our disclosures have confused readers a little bit. But at various stages, we've had some costs and we've forecasted forward our remaining capital commitments so the number that we've had for our project has been consistent right from day one. We are absolutely on budget and the progress that we're making is right on schedule. So I'm delighted with how we're progressing in Egypt.

Okay, great. And just switching topics and with respect to new gas supply in Chile; have you had any discussions with suppliers to get a sense of what they maybe wanted to charge for the new gas supply?

Yes. Some discussions; I think the important thing here, Fai, is to realize that the [world] of methanol has changed and we can afford to pay more for natural gas than we used to pay in the past. In a world where the average price used to be $130-$140 a tonne; and we were very keen to be sure that we had a $1 base price and we had protection for our cost structure when prices went down to those levels. It feels to me that -- I always hate saying that the cycle is different from the last cycle, but it does feel that this is the case; that high energy prices have clearly driven the price of methanol and I don't think we're going to see $100 methanol prices again ever. But who knows? It wouldn't be the first time that I've been wrong about future forecasts.

So what that leaves us with is an ability to pay more for natural gas than we've paid in the past. When we look at the structure of our gas contracts and I've given you some updated guidance this morning; if you multiply those numbers through, if say a methanol prices of $300 a tonne, it delivers a very nice gas price for gas suppliers. So my belief and expectation is that we will be able to sign gas contracts that are very similar to our current contracts. And the methanol price sharing is what enables us to deliver a gas price to the suppliers that certainly meets all of their expectations and provides us with a very economic operation as well.

So I'm certainly not concerned that we're going to be -- that we don't have an ability to afford to pay the sort of numbers that gas suppliers will need in order to justify their investments.

Right. And just -- I haven't worked through all the math yet, but just as a ballpark in terms of like perhaps a dollar per MMBtu or Mcf -- are we talking maybe in the $3 range going forward? Is that the new paradigm with gas pricing?

Well, no I think at that $300 price if you work through my formula, it's roughly --$300 is $150 over our base of $150. So I think we're sharing one-third, so we're sharing about $50 a tonne which represents about on a per tonne basis, about $1.30 per MMBtu. So if you add that to the $1.25 that I mentioned was the base, we're at about $2.50. So at $300 methanol prices, the formula that I gave you will deliver around $2.50 and I think that delivers a very nice return back to gas suppliers.

Right. But I guess in the -- you're seeing gas prices from Bolivia and Argentina at significantly higher levels. Do you see that the producers might want to charge something more similar to what they might get around the region?

Well, I think there's a big difference in gas prices around the world, based on where that gas is. And gas that can be delivered to major urban areas and be consumed by residential consumers clearly has a higher value than gas that's in a remote location. So what we tend to look at is what gas suppliers net back long term to LNG or ammonia. And I think methanol competes mostly with those products. So it has a very different value than looking at Henry Hub gas prices, for example; because the market dynamics are quite different.

No, I understand that. But I'm just saying that even in -- like what pricing that Bolivia is charging for gas in that region is still is getting pretty close to what you might -- not right there right now, but it's getting closer to those Henry Hub prices.

It is, yes. But I think that Bolivia is taking advantage of a situation where Argentina is very short on natural gas and doesn't have too many choices, so good luck to them.

Yes; and you don't feel that the producers have that ability to do that?

Well, I think the other factor here as far as a number of these explorers are existing gas suppliers. So we do have existing gas contracts with them with pricing terms that have been agreed. So certainly in the case of one those suppliers, we have an agreement that the new gas will come to us based on the prices that prevail on our existing contract.

Okay; alright, great and thank you.

Take care.

Thank you. The next question is from Bob Hastings from Canaccord. Go ahead, please.

Hi, thank you. First, just on obviously with higher energy prices, methanol has gone higher and future production is going to attract higher gas prices than what's under contract now I would think; other than that one producer. So if you were looking at New Zealand, I assume they're not negotiating at $2.50 per million BTUs, but something higher than that. And we see problems I guess in New Zealand with the government there saying they'll want to use gas for power generation because of greenhouse gases in the future. Is that going to have a problem or a longer-term impact on your supply in New Zealand?

No, it's actually a positive for us. They have stated that they want all incremental electricity supply to come from renewable sources. So what's that done is dried up the potential demand for natural gas in the country at a time when supply is growing. So I think that's one of the reasons that suppliers have been coming to us and keen to sell larger volumes to us and lock us in for a period of time.

Can you remind us on what the greenhouse gas emissions are from a tonne of methanol produced?

I don't know if Michael, if you --.

About 0.6 of a tonne of CO2 for a tonne of methanol -- so yes, there are greenhouse gases emissions that come from it, but I think if a country New Zealand, for example, was looking at global greenhouse gases emissions, I think the valid comparison is how much CO2 is produced from a tonne methanol produced in China from coal, and that number is more like two or three times higher -- so two or three tonnes of CO2 per tonne of methanol. And so therefore there is not much point in turning off an efficient plant in New Zealand to save CO2 when the substitute is a much less efficient operation.

I know that's the argument my wife uses about not cutting back CO2 emissions.

It's effective in your household (inaudible).

Well, my wife always wins, but -- so when I look at this gas going forward of what's going on around the world, I see Egypt internally is excited by these -- what they now call cheap gas contracts that have been signed, in particular with Israel. And now I understand paying up to $4.50 plus per million BTUs for offshore gas. So I'm wondering if could there be any potential that Egypt could go the way of Argentina with political pressure -- that they might change those gas contracts somehow?

Well, there's always that potential that the -- one of the keys in Egypt is the (inaudible) gas prices are competitive with LNG prices in that country. So there's a lot more gas being dedicated to LNG than there is methanol. I think we've done a lot of things in that country to try and protect ourselves from random acts of government. For a start, we're a 60% shareholder and the other 40% are Egyptian shareholders. So there is an element of sharing in any good fortune or excess profit that come out of that project.

The way we've project financed this project; we have groups like the European Investment Bank who I think provide us a degree of comfort that Egypt is not going to change the rules on us. And then that's said, when we talk about this topic within Egypt, the Egyptians are very proud of their track record that they have never changed agreements with international investors in the past. They've had a very consistent approach and if they've agreed to something, they stick with it through thick and thin. And that's their track record and I take them at face value. I've observed the same thing and when we've talked to other current investors in Egypt, they would describe the Egyptian government as being a model of consistency. So I don't expect that to change, but this is a funny old world and you never know. But I think we've done a lot to protect ourselves in that country.

Okay. I'll let somebody else step in. Thank you.

Take care.

Thank you. And the next question is from Sumanta Biswas. Go ahead, please; from Polaris Capital Management.

Hi, I've got two very general questions. On the China thing and as we were discussing, it looks like there's a cap on the price because when it goes up they come in. Where would they put that cap at current market conditions -- around $600 maybe?

It's probably a little lower than that. I would think it's -- well it's probably north of $500, so maybe you are not too far away. There's no doubt we observed that when prices move very quickly to $700 and $800 a tonne, there's a very big incentive to throw in export methanol from China. Exactly what the trigger point is -- it's a bit hard to say. I would say it's probably over $500 a tonne.

That's fair enough. And the second one on Chile; now your resumptions of getting everything all back by 2011 is based on gas that has already been found and just needs to be taken out or the majority of that has to be found first and then to be taken out?

No, it has to be found first. There's been quite a lot of history and exploration in southern Chile and it's been almost exclusively ENAP, their state-owned oil and gas company, that have undertaken that exploration. And they have particularly been looking for oil, so they've never really been driven to look for gas. What they've told us in a number of the areas that they've explored for oil, that they've found natural gas and then they've shut the well and then moved on. So there's no doubt that gas exists. But because there was never a market for it, they've never had any dedicated program to develop that gas. And ENAP themselves were investing in southern Argentina, so they were anticipating supplying our gas contracts as of some of the prospects that they had in southern Argentina, without even contemplating the development of their own resources in Chile.

So the opportunity they've got now, now that things have changed in Argentina, is to go back to those areas where they've drilled before and develop the gas resources that exist. So I'd say one, the gas needs to be found and needs to be developed; but this doesn't feel like a green-field wildcat exploration program. There is a history of gas production in the area and the geologists would describe the area as gas prone.

Thank you.

Okay.

The next question is from Sam Kanes from Scotia Capital. Go ahead, please.

Thank you. Bruce, how would you answer the question or observation that now that (inaudible) is building an LNG terminal, ENAP under the government of Chile; would they not have to consider assuming great success I guess in the area of finding additional gas reserves to looking at putting up some form of liquefaction terminal in [Puertorinas]?

They've said that to us very -- in a very straightforward fashion, Sam, that to the extent that there are most quantities of gas found that gets clearly dedicated to our plant. To the extent that they are extremely successful in finding a lot of gas, then they would look at building liquefaction capacity in southern Chile. But in their minds, a lot of gas is something more than 5 Tcf. If there is 5 Tcf of gas in southern Chile, that will keep us going for 30 years probably, so a long time; past my retirement date, Sam.

Mine too, I guess. Bruce, switching horses; there's been some news, and maybe more noise than news, about LPG canisters exploding in China that were DME blended product. I assume DME has water in it, just like methanol and ethanol have water in it. This may be -- I don't know; somebody making something out of not very much. But how would you respond to what [Platt's] and others have picked up here over the last two weeks.

DME doesn't have water in it. It is different from the alchohols. It's an ether rather than an alcohol; so no it doesn't have water. There was a notice that was produced by a group for the general administration quality supervision inspection and quarantine service; where we're advised that this is an administrative notice, it's not [law]. It hasn't been widely acted upon in so far as people are continuing to blend DME with LPG.

Now we understand that there has been an issue with leaking LPG cylinders, but it's not at all clear that it has anything to do with DME. DME is a product that's been widely used in the personal care industry and has a long record of -- a very good record of safety. It's flammable, which clearly it is because it's a substitute for LPG, but we have never in other applications come across this issue. And our initial take on it is that this issue has nothing to do with DME or DME blending and it has a lot to do with the design of some new cylinders that have come into the market.

With that said, we take it very seriously because I'm sure as all of us must know, we care about health and safety and we don't want to be associated with any product that is potentially dangerous to our customers. So we want to make sure that if there are any rules or laws that emerge out of this business, then we want them to be based on good science. So we are spending a bit of time to ensure that we understand the impact that DME may have on LPG cylinders. But our first blush certainly is that this has nothing to do with DME.

Thanks for that, Bruce. Also a question on DME; with this rapid expansion of DME production in China is also of course, coincident rapid expansion of methanol production in China. Could you hazard a guess in saying in general that China's policy is to match one to the other or are you seeing some differences of one outpacing the other?

Well, China's policy is to turn its coal into useful energy and they're doing that by generating electricity with it. They're doing it by turning coal into methanol and then some methanol into DME. Some of the methanol ends up in gasoline and there is a lot of activity taking place with different gasoline blends right up to even 100 blends are being experimented with in Shaanxi province; that the Chinese auto manufacturer, Chery, is now producing methanol cars that can run on M-100. So China's policy is all around self-sufficiency of energy or greater self-sufficiency; less dependency on crude oil from the Middle East and other places. And I guess we can all identify with why that's a sensible policy for them.

So they're certainly not making methanol to make formaldehyde or acetic acid. Their strategy is all about energy.

Thanks, (inaudible) and Bruce and your other answers.

Thank you. And the next question is from Hassan Ahmed from HSBC. Go ahead, please.

Good morning, Bruce.

Good morning, Hassan.

So a quick question; I know we've chatted a bit about Egypt, but sort of new news seems to be coming out of Egypt talking about how the Egyptians are essentially going to raise the price for gas and electricity to certain industries by anywhere from 60 to 110% in August '08. Now essentially the charter is that slowly the Egyptians will phase out some of the subsidies over the next three to four years, but again; I'm fairly sure you've locked into your longer-term contracts. But I guess what I want to get a sense for is that once that contract does expire, how should we be thinking about the price of natural gas out in Egypt? I mean, even right now, the charter is that both these boosts -- the price of gas will go up to like $2.65 a million BTU.

Yes. A couple of comments; energy has been heavily subsidized in Egypt for a long period of time and that's a significant drain on their Treasury, so it doesn't surprise me that they're taking some moves to try and remedy that situation. And I would say, as a passing aside, I notice this on a lot of developing countries as we travel around the world; that gasoline prices and natural gas prices are being subsidized and this is particularly the case in oil-producing countries. So in places like Saudi Arabia or (inaudible) Argentina, where there are heavy subsidies that I think are not sustainable; particularly in places like Argentina and probably in Egypt as well.

So that is a little bit of an aside. And our gas contract is a 25-year contract so the price we've got is locked in for a long period. We did a little calculation for the Egyptians as to what sort of net back they would receive had the plant been operating during late 2007, and that produced a very nice price. And we calculated also the returns that they would make on their equity investments and any excess returns, and tracked that back to the price of gas; and satisfied ourselves and them for that matter, that the sort of returns that our plant was capable of generating, exceeded the returns that the LNG provide in that country.

That makes sense.

So I do feel some degree of comfort. Now the other thing, and one of the reasons that we're really interested in DME is that here is a way taking Egyptian natural gas and turning it into a product that can be useful to Egypt and to the households in that country. So instead of importing LPG at whatever the equivalent price is today, but it's a very high number; they are taking advantage of their own domestic natural gas and substituting imported LPG. Again, that's a big positive benefit for their country. And I guess (inaudible) I think underpins security in that country.

Now slightly different; moving to China now, obviously there is a fair bit of noise around the DME side of things; but as we all know, acetic acid is a big sort of demand engine for you guys as well in the methanol industry. Now is it fair to assume that this coal-based methanol that's being produced out in China isn't high enough grade to sort of service the ever-growing acetic acid industry in China?

Well, I get some different stories on this, Hassan. Some producers have told me exactly that coal-based methanol has the potential to poison the catalyst in the acetic acid process. I've had other acetic acid producers tell me that no, they're quite happy to use coal-based methanol. I don't want to mention their name, but there is one large and prominent acetic acid producer in China -- who you can probably guess -- who says that they can use coal-based methanol but they've been very active buyers of natural gas based methanol from the Middle East ever since their plant started up. So I'm inclined towards the view that there's a strong preference for natural gas based methanol into acetic acid.

That's very helpful, Bruce. Thank you.

(Operator Instructions). Our next question is from Brian MacArthur from UBS Securities, Canada. Go ahead, please.

Good morning, Bruce. I just want to clarify the comment that you're talking, the 1.25 MMBtu at $150 a tonne and then sharing it [with] one third. I assume that's before the Egypt plant comes in; that's sort of based on today at 1.8 in Trinidad.

It is. What we're wanting to help with is incremental gas in Chile and the gas contracts in (inaudible). We don't want to get into individual geographies and talk about the gas prices in every geography. And it's much easier I think for us to give you global guidance. And that guidance covers all of those territories until Egypt come on.

Okay. But does it assume over time that Chile ramps up to 3.8 million tonnes or is that kind of based on a 1.2 or 1.3 million tonne level in Chile?

Well today, it's based on the 1.2, 1.3; but I'd say; I haven't calculated it, but I think it will be applicable to Chile going up to 2, 2.5 million tons probably. So when it gets at a higher rate, we may have to look at that number again. And I'd expect that the number would go down at that point and not up. So it feels to me that that guidance should be good for the next couple of years.

Right. So you kind of employ as you get new gas from other suppliers in Chile, you're going to get a similar type of contract, basically.

That's correct.

Okay, great; that's all I wanted to check. Thanks very much, Bruce.

Okay.

Thank you. Currently there are no further questions.

Good, well it's a good time to break up; we're just about on an hour so that's really great. Thank you very much for everyone participating on the call.

One little reflection I have is there is a real preoccupation with quarterly earnings and I find it a real frustration for a Company like ours. We have lots of volatility in our quarterly earnings over the last couple of years and you can see that if you look back quarter by quarter. But we have consistently generated substantial earnings and cash flows out of our asset base and I think we have that capability in the future as well.

So there's no doubt that 2008 is a challenging year. We really are feeling the effects of losing all of the production capacity in Chile and that's evident in our results. But as we get -- I think we're making tangible progress to restoring our assets in Chile. We've talked about Egypt -- less than two years away from operation. We've got New Zealand coming on stream in the next few months. So I think lots of growth that provides some incremental earnings and incremental cash flows in the short term.

And I think then if I think medium to long term there is substantial incremental cash flows that I don't think are reflected in our valuation today. So thank you very much, everyone, for your support and good morning to everyone.

This concludes the Methanex Corporation First-Quarter 2008 Earnings Conference Call. Thank you from Telus.