Methanex Corp (MEOH) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation First Quarter 2009 Earnings Conference Call. (Operator instructions.) 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 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 2008 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.

Yes, thank you, Jason, and good morning, everyone, and welcome to the Methanex First Quarter Conference Call. I have a number of colleagues with me in the room and they will be available to help with questions a little later on.

Firstly, some comments on our results in Q1. In the first quarter, we generated EBITDA of $13 million, cash flow from operating activities of $68 million, and a net loss of $18 million or $0.20 per share. We achieved an average realized price of $199 per ton on sales volumes of 1.4 million tons, which is the same level of sales in the last quarter, Q4 of 2008.

The results of the first quarter is not a good reflection of the strength and earning capability of the company in the current pricing environment. While our cost structure is quickly adjusting to the lower methanol price environment, we still had some inventory timing issues and gas contract pricing lags that negatively impacted our earnings in the first quarter. In addition, we've recently undertaken a global cost reduction program. We have reduced some labor and other operating costs and these are not fully reflected in the first quarter results. Adjusting for these factors, we would have expected to earn about $40 million of EBITDA during the first quarter, which is a more representative figure of our cash flow generation capability in the current price environment.

Furthermore, looking forward to next year, assuming a successful startup of our project in Egypt and some modest production improvements in Chile, we would expect to generate about $300 million of EBITDA in the price environment of $200 per ton realized methanol prices. So I hope that this gives you an idea of the near term potential to improve our earnings even without assuming any recovery of methanol prices.

I'll comment on the industry and pricing outlook a little later in the quarter, but first I wanted to provide you with an update of our operations. Our plants in Trinidad continue to run well and we produced 427,000 tons during the first quarter. The Atlas plant was offline in January for planned maintenance and this reduced production by about 75,000 tons. In May, we are also planning to undertake a routine maintenance program at our Titan plant and this should result in about 75,000 tons less production from Trinidad in the second quarter.

We are expecting some efficiency improvements to result from the maintenance work completed at the Titan and Atlas plants, which should result in 5 to 10% higher production in Trinidad going forward. We continued to operate one plant at our site in Chile during the first quarter with gas supply from that country. The production of 228,000 tons in Chile was disappointing as we lost about 35,000 tons of production from an unplanned outage due to some technical issues, which have since been resolved. I'll comment more on the outlook for natural gas through our plants in Chile in just a few minutes.

The Motunui plant in New Zealand operated near capacity in most of the quarter and we produced 194,000 tons of methanol. As I mentioned on the last conference call, during the beginning of the quarter we operated the plant at moderately low operating rates to manage inventories. However, since late January we have been operating the plant at near capacity and generating positive cash flow.

In the current market environment we have no immediate plans to restart our smaller Waitara Valley plant. However, in the medium to long term, based on the improved outlook for natural gas supply in New Zealand, we continue to be optimistic that we can operate both plants and have 1.4 million tons of production capacity operating in that country once market conditions improve.

So I'll switch topics now and address the industry and pricing outlook. On the last quarterly conference call, I explained the effects of the global financial crisis and weak economic environment had on methanol demand and supply in the fourth quarter of last year. Global methanol demand reduced by about 15% in the fourth quarter, and as a result a significant amount of high cost capacity, particularly in China, was forced to shutdown or operate at lower rates. During the first quarter, industry conditions stabilized. Overall industry demand in the first quarter was similar to Q4 2008 levels. On a regional basis, demand in China showed some improvement while demand remained relatively stable in most other regions.

Demand for traditional chemical derivatives, which is generally correlated to industrial activity, remained depressed, while demand in energy derivatives remained stable. High cost capacity remained shutdown or operated at low rates in the first quarter in China and other high cost jurisdictions. This helped bring some balance to the industry. Methanol prices have remained reasonably stable since the beginning of this year. During the first quarter, our average non-discounted price across all major regions was $216 per ton.

As we enter the second quarter we have seen some signs of recovering demand primarily in China and other areas in the Asia Pacific region, while demand in Europe and North America remains weak, but stable. Imports into China have continued to escalate, reaching an annualized rate of about 6.5 million tons for the quarter, compared to a level of about 1 million tons, which has been typical over the last few years. With more methanol shifting into Asia from other regions, global inventories have been drawn down and stock pricing has been increasing in all regions in recent weeks, and particularly in Asia where spot pricing is currently the highest in the world.

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. We are operating our site in Chile at about 30% of capacity, based on gas supplied exclusively from Chile. While we continue to operate only one plant today, we are optimistic about the future and encouraged by the level of gas exploration and development activity occurring in southern Chile.

During the first quarter, GeoPark again increased gas deliveries to our site from the Fell block. This one block alone is now delivering over 1 million cubic meters of gas per day, which equates to about one-third of our current gas supply in Chile, or 10% of our total gas supply needs. We are also receiving quantities of gas from our major initiative with ENAP in the Dorado Riquelme block. Drilling activity will increase significantly in this block this year and we expect to have further increases of gas deliveries to our plants later this year.

Based on the significant activity occurring, we expect to be in a position to restart a second plant towards the end of the year after the southern hemisphere winter ends and surface gas is available to supplement the new gas discoveries coming online. In addition, exploration and development activities are in the early stages in nine other exploration blocks that the government of Chile awarded to several international oil and gas companies earlier this year under an international bidding round. A significant amount of capital is planned to be spent in these blocks this year with 3D seismic work already underway in some of the blocks. And the government of Chile reiterated its intention early this month to intensify hydrocarbon exploration and development in southern Chile, which includes other blocks near to our plants.

When we add up all the initiatives in southern Chile, we estimate more than $500 million is expected to be spent by a variety of oil and gas companies on gas exploration and development between 2009 and 2011. And based on the significant activity and the success we have seen to date, we continue to be optimistic we can gradually recover our site in Chile back to a four-plant operation over the next few years.

The next opportunity I wanted to provide you an update on is our new methanol plant in Egypt. The project is now over 80% complete and it continues to be on budget and scheduled for startup in early 2010. This is the biggest and most complex project we have undertaken to date and we are now in the most challenging part of the construction schedule where schedule delays can often arise. We are dedicating significant resources to the project and managing risk closely to minimize any delays. We are very excited about adding this first class project to our supply chain to increase methanol supply to our customers, and as well as the lowest cost plant in the world that will generate strong cash flows for our shareholders after it starts up.

I'll change topics now and make a few comments about our liquidity and capital allocation in the current environment. During the first quarter, we generated 68 million of cash flow from operations and we continue to be in a strong financial position. We have 313 million of cash on our balance sheet and 250 million under our credit facility, no leverage, and no refinancing requirements until 2012. We have two key priorities for the use of cash. Firstly, to complete our project in Egypt, which requires a remaining equity contribution of about $60 million, and secondly, investing to accelerate gas development in southern Chile. We expect to spend around $50 million on these initiatives during the remainder of this year.

We are in a strong position to satisfy these commitments and our planned maintenance expenditures. The margin earned from being on incremental, low cost capacity in Egypt and Chile is very attractive and will significantly improve cash generation capability. Maintaining our strong financial position is also a key priority for our company, especially in today's environment. With credit markets effectively closed and no visibility on when we will recover from the global recession, we believe it is vital to maintain a strong balance sheet. I mentioned in our last conference call that we had stopped repurchasing shares under the normal course issuer bid at the end of last year. We cancelled almost all discretionary capital spending and embarked upon a global cost cutting program.

These actions are designed to allow us to continue to invest, the grow, and improve the quality of the company's assets, and manage through the current financial crisis. And we continue to review with our board other actions that may be necessary to further strengthen the company.

Before stopping for questions, I'll make a few comments regarding the future and our expectations for the second quarter. Contract methanol prices for the quarter are expected to be a little lower than Q1, as prices in both Europe and the U.S. have declined. These declines are partly offset by an increase in contract prices in Asia. Based on the current supply and demand balances, we think that prices should remain reasonably stable during the balance of the second quarter and have today announced the roll of April prices into May.

I mentioned earlier in the call that our first quarter earnings were not representative of our earning capability under the current price environment as our cost structure had not fully adjusted to the lower methanol price environment and that we had implemented some cost saving initiatives that were not reflected in our first quarter results. In the second quarter our cost structure should continue to adjust downwards as these factors take effect and this should lead to improved earnings for the quarter.

So at this point, I'm happy to stop and I'm happy to take any questions that there might be.

Great, thank you. (Operator instructions.) The first question is from Jacob Bout from CIBC World Markets. Please go ahead.

Good morning.

Good morning, Jacob.

Maybe you can just give us your thoughts on the Chinese methanol markets right now and some of the large net imports that we're seeing. In your view, is this just a function of where methanol prices are and the marginal cost production considering where coal prices are in China right now?

Yes. I've got John Floren in the room here with me, so I'll ask John to handle that question.

Good morning, Jacob. Yes, right now, as you know, there's quite a bit of imports into China. Prices have gone up there to the 250, 240 range, which is, like Bruce said, the highest in the world. As a result, we expected and saw lots of product from the U.S. Gulf from Trinidad, from Europe, and other non-traditional sources find its way to China. Coal prices there have recently gone up a little bit. I think they're around $85, $90 a ton for the grade that you can use to make methanol. As a result, it has put some pressure on some of the producers there to decrease capacity for coal. On the other hand, with the winter season ending, natural gas production is increasing and we are hearing in China of some of the government subsidiaries made on gas prices for some of these gas-based plants.

The net result is, based on the cost curve, we still expect imports into China in the second quarter, quite substantial imports, although we are also seeing the production rates in China increase as well. So where it's going to all balance out is a little bit of a guess, but we still believe that import to current prices will be quite substantial into China.

So we've seen methanol prices actually move from like sub 200 to the 240, 250 mark?

Right. And we've seen over the last two weeks maybe a flattening at that level, maybe a slight downwards, couple of bucks of ton. But it's pretty dynamic. There's still a lot of product from the U.S. Gulf and from Trinidad on its way to China. So depending on--I think what we should be watching is the operating rates of the Chinese plants and the coal prices for indications of what might happen in the next quarter or the quarter after.

So, John, then at 240, 250 methanol, how much of this Chinese based coal, methanol coal-based capacity is economic do you think?

I don't have the number right in front of me. It's around 6 million tons and then there's the gas-based methanol as well. A lot of the gas--some of the gas-based producers were not operating in Q1 because of restrictions on gas in the winter time. We are understanding recently that the government has maybe made some special arrangements on gas prices for certain producers, but we're still trying to get a handle. We are expecting Chinese production on a month-by-month basis to go up by about 10%.

I think [it's safe to say] most of the coal-based producers in coastal China are really struggling at this current level. They're either shutdown or they're either marginally positive or marginally negative. So if there's any price we can [support on] China, it's hard to imagine too much coal-based methanol in the coastal provinces operating. So I think most of that 6 million tons, John, is some of the inland provinces and that methanol ends up in gasoline or DME or some other application.

Yes. They'd have to have a special coal arrangement other than market-based coal.

And then, just flipping over to DME, maybe you can talk about the demand in profitability in China currently. And then, outside of China, there has been some talk about DME in Iran and Japan. What's the thought about growth of DME demand outside of China?

Well, DME in China today is operating around 20%. The economics make sense for some producers and not for others. In China, it's still 100% for substituting LPG. We wouldn't expect at current prices for methanol in China and the affordability of LPG that those operating rates would change all that much in the next quarter or so. Outside of China, we are seeing, as you know, there's a new plant in Japan in Niigata. It's a small plant. It's 80,000 tons. It's operating. That application is for diesel substitution, so for trucks running between Niigata and Tokyo. Other than that, there are no other plants outside of China or Japan.

We are hearing, as you heard, possibilities in Iran, but there's nothing being constructed to our knowledge at this point. We are aware as well India is now interested in DME, mainly for LPG substitution. So I think we are still optimistic DME is going to grow over time. Having said that in the current energy environment of around $50 a barrel the economics are not as attractive as they were six to 12 months ago.

Yes. I was in Egypt last week, Jacob, meeting with the Minister of Petroleum and he's still very enthusiastic about our DME project in that country. It's been going probably a little bit slower than we would have liked, but that said, we're already focused on getting our methanol plant up and running so we haven't been too concerned about some small delays in that. But from the point of view of the government of Egypt, they are very enthusiastic. They've been doing some interesting trials on cooking trials, just understanding the properties of DME, and the minister asked that we really push ahead with the DME project as a second priority after getting the methanol plant up and running. So we certainly expect that to happen probably towards the end of next year.

Bruce mentioned that we're seeing demand for methanol down by about 15% globally. Interesting point in those numbers is the energy applications for methanol, whether it be biodiesel, gas blending, DME, MTBE, are flat or slightly up versus last year. So if you take out the energy demand for methanol, the traditional chemical demand is much less than the 15% Bruce talked about.

Okay, and then just a last question here on Egypt. So, the methanol plant will be ready to go in the beginning of 2010. When do you think the DME project will be ready to go?

Well, probably towards the end of that year, Jacob. We haven't yet initiated engineering, but the idea is to basically lift the plant from China and put the engineering into Egypt. We have selected a site. I think a lot of the legal documentation around joint venture agreements and sales contracts, that's all been either done or substantially done. So a lot of the detail work has been going on in the background, but nothing physical has taken place. So, the good news is that the Egyptians really want to do it and they're 60% owners of the DME plant. We're a 20% owner. So we're interested in promoting it; we're not particularly interested in being a long-term investor in DME.

Thank you very much.

OK.

Thank you. And the next question is from Peter Butler from Glen Hill Investment Management. Go ahead, please.

Good morning.

Good morning, Peter.

Peter Butler. What does your intelligence discern in new capacity plans. It feels like there's quite a hiatus in new expansion plans beyond the two plants that are coming on this year. Has this bad economy been enough to cause quite a hiatus?

Not really, Peter, that's not really fair because (inaudible) plant in Egypt comes up in 2015 and there's a couple of other plants in Brunei and Amman which are due up sometime around that time as well. And we know there is a plant being built in Venezuela. We never hear much about it, but we assume that it's making good progress as well. So there are a number of other plants actually under construction. I think if there's a hiatus, it's probably after this period, and that feels like the 2011, 2012, 2013 period. There's not many plants or projects out there that have legs at the moment. So we certainly could be heading into a period with a very modest amount of new builds for a period of multiple years.

You should have a fair amount of free capacity coming on in that 2011-12 period.

Exactly. By the time we ramp up Chile, exactly around that period of time, and we have some really interesting options at our New Zealand site as well, you're exactly right that we will be coming into a period where there's no competitor activity occurring.

It's admirable for you to be cautious and maintain a strong balance sheet, et cetera, et cetera, et cetera, but if you were to increase your dividend by 10%, that money is a very small fraction of the cash you have on the balance sheet. How would you size up the odds on a dividend increase this year?

I'd tend to say quite low, Peter. This is a pretty difficult environment we're in, and you look at our balance sheet and you could say that we could afford that. And maybe that's the case. The challenge, I think, for management these days, and boards of directors, is the lack of visibility. None of us know how long is the world methanol market going to stay at this current level, and what's the future price of oil going to do, how are the economies going to evolve in the next couple of years? The (inaudible) is almost the complete inability to borrow money for companies like ourselves.

Here we are, we have a strong balance sheet, we're a split-grade rating, yet it would be very difficult for us to raise a bond today, or to borrow from the banks. So we've got to, I think, be very careful with the resources we have, and manage them cautiously. And that's exactly what we're doing. And you know, I think, we've been a bit criticized in the past as being too conservative. But I don't apologize for that. I feel when I look around our industry and the world today, and we're sitting here with a good balance sheet and we're thinking about growth and envisioning for the future, whereas lots of other companies are thinking about survival. So maybe we are a little bit cautious, but I think we are going to survive and we're going to be a lot stronger in the future than we have been in the past.

Okay. Thanks for the help.

Thank you. And the next question is from Sam Kanes from Scotia Capital. Please go ahead.

Good morning, Bruce. Just to talk about that growth out in the future, a little further, I guess, or strategically, if and when markets open up some, you've got your Egypt plant running, just wondering where you would strategically go next. I know Vietnam was thrown up by some reporter from Reuters. But I'm more interested, I guess, if you have something of intelligence to say generally about where this 56.5% MHTL block fits within the Trinidad government, or doesn't, or has been priced or hasn't, and where you may fit within whatever might happen there if it doesn't go back to CLH.

Yeah, there's not a lot I can say about that, Sam. What I know is that it's extraordinarily complicated, that the businesses of the MHTL and the insurance company and the bank and the various other businesses that were managed by (inaudible) are all rather heavily intertwined and unraveling that ball is going to take, I think, quite a bit of time. We know that there are minority interests. We know that they've expressed their desire to exercise rights of first refusal. So I guess one thing I would say, it's going to take quite a time to unravel and none of us quite know what the outcome will be. If there was an opportunity for Methanex to help with some consolidation of industry in that country, I think that's a good thing and we'd be willing to participate in that. But it feels to me that it's a long time in the future and it's a low probability of occurring.

So you started your question, Sam, with a--?

--Well, just broadly in terms of strategic going forward.

Oh, okay.

There was a time your predecessor thought about focusing Methanex on Simgas, the generic building block, of course, of not just methanol, but other products.

Yes.

Including DME. Can I throw that at you conceptually and also kind of the context--or concept of a variety of new renewable methanol projects or renewable DME projects coming from [Biomaster] that Simgas route--.

--Yes--.

--And where you may fit within that and your level of interest in that area?

Well, we've looked at lots of things you could say would be diversification or broadening our product range over the last 15 years and never really found anything that grabs us and excites us. And particularly given when we look back at our own industry and what we're doing and how we're positioned and how we can grow our own position. What really excites me today, Sam, is that we're--this year we're going to produce about 4 million tons of methanol. Next year, we're about a little over 5 million tons of methanol.

By the time we get Chile back operating at capacity and I know there's lot's of water to flow under that bridge and there's money to be spent, but I think we're being very realistic in expecting that that plant won't come back to capacity. We can produce almost 8 million tons of capacity. I think I'm not--I'm not even counting in that incremental capacity in New Zealand. So when I look at our sites, and every site that we're in in New Zealand and Chile and Trinidad and in Egypt, we have opportunities to increase our own production base with an outstanding cost structure that's very difficult for others to compete with. So if you ask me what's our real focus today it's on exactly that, on the sites that we're on and doing the best job we can to enhance our position in the areas where we have the best advantage.

So that said, as you mentioned, we're always on the lookout for potentially the next investment and one of our corporate development guys visited Vietnam and that gave rise to a press release. It certainly didn't come from us and at a very early stage in discussing with people whether there's any potential at all for methanol. It's simply not something that we would talk about publicly. And we're always on the lookout for that next opportunity. So I do think--thinking about when would we build another plant, I think a second plant in Egypt is probably our first and best option for us today. So it feels like a greenfield site is a long way in the future.

Thank you, Bruce.

Okay.

Thank you. The next question is from Paul D'Amico from TD Newcrest. Please go ahead.

Hi. Good morning, guys. Bruce, with respect to Egypt, if I can just sort of get educated a bit on the process here, you said you're 80% complete now in terms of the project. The remaining 20%, again getting to the process, is there anything in particular that you can give us some clarity on what that 20% entails, i.e., is there any potential execution risk on that 20% that's not linear versus the first 80 would be the first part of the question. And second, are we within--is 80% sort of ahead or online with what the schedule's been so far?

The 80% is slightly behind, but it's a little bit misleading. I think a good analogy here is when you're building a house the structure goes up incredibly quickly and it looks complete before you can actually live in the place and you end up in the small finishing parts, which take a lot longer than you perhaps anticipate. So we're into the sort of piping and instrumentation, electrical wiring, all those things where you don't see a lot of progress occurring, but there's a lot of work to be done.

I think--so the plant is actually looking like a real methanol plant. There's a lot of progress being made. It looks fantastic. But it's a big and complex project and if this--as I mentioned in my remarks, if there's ever going to be a problem in the schedule this is the time when it normally occurs in the project. So we're putting a lot of attention to that. I think we have a first class team in Egypt that's really dedicated to maintaining the schedule and we're still expecting to start the plant up in the first half of next year and our track record when we start plants up is that they run at the high rates of utilization right from the beginning. So that's certainly our planning and we're working hard to achieve that, Paul.

So Bruce, when you're saying first half are we sort of 50/50 with respect to numbers in Q2 or is the bias towards Q2 at this point?

Well, I think the original schedule is the end of Q1. So perhaps in saying first half I'm giving myself a little bit of latitude here. But I think it's impossible to say exactly when this plant will be complete. It may be a little bit late, but I wouldn't want to spook anyone here. I think we're talking about days and weeks not months and years.

I appreciate it.

Okay.

And in terms of--another thing you talked about in terms of how the cost is lagging the cost improvements, are you able to give us any quantification with respect to how to think of that in terms of Q2 versus Q1, either per ton or on a fixed cost absorption basis, anything along those lines?

Yes, we think--I do have the numbers here if you'll just give me a second to refer to some notes that I have here. In Q1 we thought that the cost lags were around $15 million. I think in Q2 that number is more like--I'm looking at Jason--about $5 million?

Yes, in that range.

$5 to $6 million is kind of the cost lag that is in our Q3 results.

Okay. And last question, if I could just understand the answer you gave earlier with respect to the China coal based production. With respect to the current pricing being 240 to 250 a ton in China, you referenced the 6 million tons. Let me ask it a different way. In terms of production that you would expect to be restarted if pricing was sustained at that level. That--what would the answer be?

Well, we've seen production slowing eroding. The worst month of the year was in January with I think the 475,000 tons of production in China and I think in the month of April we're at 575,000 tons. So there has been a small increase. I would say that our numbers are a bit different from the numbers that you read in some of the publications, which they extract numbers from Chinese government statistics that we think don't very accurately capture actual production numbers in China. So I think the level of high prices has encouraged some of that incremental capacity. But--so I think there's two things here. One, I think the idle Chinese capacity put something of a cap on prices until demand recovers more robustly. So it's hard to imagine prices going much above that current--that level. But also it puts a floor on prices. I think we saw when prices went down to the $200 level, the Chinese production reacted quite smartly to that and went down under 500,000 tons a month.

So I think that we're in the kind of range of 200 to 250 where sometimes we'll see a bit more production or a bit less depending on where it is in that range of prices.

Okay. So using that math, about 1 million tons have been restarted since January.

That's correct, yes.

You would say there would be incrementally nothing material above that, or are you saying maybe another 200,000 tons or--?

--Well, I'm sorry, I've probably--I lost your point just a wee bit there, Paul.

In terms of the idle capacity that was in place with respect to China at the lower prices versus what's coming, what's being restarted?

Yes.

The delta it sounded like you said in terms of the start of the year adds up to about 1 million tons.

Yes.

Paul, it's John Floren. There are producers that aren't operating today that at current prices would be cash positive.

Right.

They're examining the situation. I think they're a little reluctant to start up because of coal--the uncertainty around coal prices and the amount of imports that are coming in. So there could be downward pressure on prices because of imports and there could be upward pressure on costs because of coal prices rising. So whether they make the decision or not is hard for us to predict what they're going to do. But there's certainly idle capacity today that would be cash positive in the current environment. We're just not sure how much or when they may make the decision to start up.

Okay. No, I appreciate that, guys. Thanks.

Thank you.

Thank you. And the next question is from Bob Hastings from Canaccord Capital. Go ahead, please.

Hi. Thank you. In the quarter I noticed there's about an 8% discount from between realized price and average contracted price. That's down very smartly from what we saw in the last quarter of about 17% I think it was. Now, I know that as prices come down your fixed costs--fixed price contracts become less of a significant--can you just remind us where we are on that? I think some have fallen off or fallen by the wayside in those fixed price contracts.

Not quite yet, Bob. As this year and next year rolls off, I think by the end of next year we're down to about half that level of fixed price contracts. Jason?

That's right.

So today, they still represent about 20% of our sales volume. By the end of next year they'll represent about 10% of our sales. So none of those contracts have fallen off. But--so the decline in discount is purely a result of the fact that we've closed the gap between the market price and those fixed price cost contracts. So it's much more reflective of the price that we sell at in the market.

Right. Now, I've talked to other producers--I've heard from other producers that their discounts from contract--or post the contract prices can be--are still fairly high, maybe can be as high as 14%.

I certainly wouldn't invest in those producers, Bob.

No, neither would I. So--but what I wonder is if I look back at historical without these fixed price contracts, I think Methanex's historic discounts at low pricing was more like in the 8 to 10% range. So I'm just wondering has there been--it seems to me that discounts off the non fixed price contracts are really must be only a few percent or something. It can't be very significant.

Yes, it varies around the world, but you're right. We're in a range now where we would expect if the price of methanol stays around this $200 a ton, we're going to be at a similar level of discount. So--and there's a whole range of discounts in this industry. It depends a little bit about where you sell in the world. But we're in the range now that we would expect to remain at in this pricing level.

Would this have some reflection on the business that you're doing into Asia?

Well, we're very global. We do business in every continent don't we? So some of it's priced a little higher than others, but like in any commodity industry we have to be competitive as well. So we don't always sell the highest price molecule, but we're glad to do so.

Yes, good. And this--in the disclosure this time I didn't see the amount made on merchant sales.

Yes, it is there. It's right at the beginning of the MD&A. I think (inaudible) it's a million tons of produced sales and 400,000 sales of merchant sales.

No, no, I--no, the amount of money made from that. Usually you give your EBITDA margin.

Yes. Well, we have changed our disclosure a little bit, Bob, and we've been very frustrated with the way that disclosure has worked historically. And there's a little arbitrariness about how you allocate costs and revenues. And I don't think it's ever really worked particularly well, so we have changed our disclosure there. And I think with the numbers we've given you, you can roughly work out the number you exactly were asking for. But I think the guidance we provide is--you should expect over time that we'll more or less breakeven on merchant sales.

We aim to make a few percent on all of them on commission. But from a modeling point of view, if you assume we breakeven that's a good assumption. And we will experience the leads and lags that we have in the past. So purchased material stays in inventory for six to eight weeks and if the price is going up, we will tend to make more money. If the price is going down, we'll tend to lose a little bit of money.

So I think with that sort of general guidance, when we look back over the last 10 years, that is good guidance to reflect the actual results that have occurred.

Yes, and I would agree with that. If that's the turning point, sometimes there's, as you say, gains or losses. Anyway, one last question. On your covenants, while you're not addressing your bank lines or haven't needed to go into them, you made the comment on--it would be difficult to access money from banks and I just want to confirm whether you were talking about your existing arrangement or--and sort of where the covenant--.

--No, I fully--our existing arrangements are fully available and we would be able to draw them today. I was really talking about new bond issues, new bond--new bank borrowings, just an ability to grow your company with leverage is I think a challenge that companies face today.

Yes, I would agree. And just out of curiosity, your inventory write-offs, would that be in your covenant calculation?

Yes.

Yes, they are.

Okay, thank you very much.

Right.

Thank you. And the next question is from Steve Hanson from Raymond James. Please go ahead.

Yes, good morning, everyone.

Good morning, Steve.

The success in gas exploration that you're seeing in Chile here certainly seems to be very encouraging. And you noted a second plant started up later this year, if I heard correctly.

Yes.

Would it be reasonable to assume, given all the spending that you've described going into the rest of '09, that we cloud see a third plant startup in the back half of 2010 or how do you sort of think about sort of base case scenario?

Yes. One thing that's obvious and I've been questioned on this a lot in the last year or so, is that it takes time. This whole process of exploring for natural gas is not something that happens instantaneously and one of the advantages in southern Chile is that there is some existing infrastructure there. There's a big gas pipeline that comes from Argentina. There's some gas treatment facilities. So this is not like a virgin territory where infrastructure needs to be added. That said, by the time you commence an exploration program, you do 3D seismic surveys, you do some drilling for--some exploratory drilling and then developmental drilling, and then you link up those wells into a distribution system, all of that takes time. And the gas that we're seeing today coming out of Fell block and Dorado Riquelme as well, is gas that was really drilled and discovered over the last one or two years.

So there is this timeline of one or two years it takes to go from beginning an exploration in a particular area of a block until the gas turns up at our plants. So I've been trying to be quite cautious about the expectations we have for instantaneous results, because I know that they're not going to recur. I was in Chile about three weeks ago. I visited both the Fell block and Dorado Riquelme and it's hard not to be extremely optimistic and very excited about what you see there. There's a lot of drilling activity, particularly in Dorado Riquelme. Both of those sites have made recent discoveries that open up new areas of potential within the blocks that they're working on and both of the operators of those blocks are very excited about what they've got, the potential they've got. And we're constrained really only I think today by money is the only thing that constrains the more rapid development of the potential.

Okay, great, that's good news. What are you seeing--just moving to China. What are you seeing on the inventory levels in China? It would seem to me that given a small up tick in domestic production and the flood of imports that you've described, the inventory levels must be building here. The raw industrial demand certainly hasn't improved overnight . And so, I just want to get a sense for how that demand balance is sitting in there.

Well, the industrial demand has improved quite a bit in China over the last few months. The imports are averaging between 500,000 and 600,000 tons a month. One of the challenges in China is the physical ability to handle that much import. So we're seeing in south and east China inventories of around 300,000 to 350,000 tons, so as you can work out that's about two to three weeks turnover. So that's really posing quite a logistic challenge for the Chinese importers.

True.

So we don't think there's capacity to go much beyond that level for storage at this time. So we think one of the constrains will be the logistics feature in China. And if you talk to some end users in China, they'll tell you that getting methanol on a timely basis is quite a challenge in today's environment.

Interesting. Okay, that's great. And then, just lastly, if I may, Bruce, I just wanted to go back to a comment you made at the beginning of the call on the earnings power that you think is reasonable in 2010. Could you just clarify the comment? I think you said 300 million of EBITDA at the $200 level.

Sure. That's right exactly. And then, I think I mentioned the number 5.1 million tons of production.

That's right.

During 2010. So that assumes Egypt and some more Chile and operating New Zealand and a little more, but that's in Trinidad, I did refer to that we've done a small [de-bottleneck] in Trinidad and we expect to get a more juice out of that as well.

Okay, fantastic. That's it for me, guys. Thanks very much.

Okay, thank you.

Great, thank you. And the next question is from Gary Lenhoff from Ironworks Capital Management. Go ahead, please.

Thank you, Bruce. I think you just answered my question. Thanks.

Good. I anticipated it, Gary.

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

Bruce, just assuming that methanol prices remain at stable levels and given your cash balances seem to be more than enough for your future CapEx, near term CapEx needs, what in your opinion would have to change for the board to even consider a dividend cut?

Well, I can only refer back to the comment I made a bit earlier, Fai. It's just the absence of visibility. And we need to continue to think about our desire to continue investing in southern Chile, because one comment I made just a moment ago, I think that one of the biggest constraints to gas development in that part of the world in this environment is cash. So we've been making relatively modest investments based on the scale of our commitment to that country. And we want to continue to be in a position where we can carry on making those sort of investments. And we have this big complicated project in Egypt that's making great progress and I have very little concern about budget on that project. (Inaudible) and I've talked about some of the risk around schedules. So there are--there's some [reaps and shoals] out there, Fai, that I think the Board of Directors pay a lot of attention to today. And our board is no different than others, and we will consider all of those risks whenever we meet. And that's part of the contemplation of how we manage excess cash flows.

Right. No, I guess the difficulty I'm having is that it sounds like as you mentioned Egypt it doesn't sound like there's a lot of risk there. And I guess perhaps maybe I guess it sounds like if the board decides that you want to invest more maybe in Chile to ramp up gas production maybe as a redirection of any money you might put towards the dividend towards increased investment in Chile. Is that the way to think about it in terms of the risk?

Well, I want to emphasize we haven't made any decisions yet. So we had a dividend, we set it at a level that we always thought was sustainable. I guess I've very publicly over the last six months about how we think about that dividend, so we're very committed to our philosophy of distributing excess cash flow. And the balance between distribution to shareholders and investing for our growth. What we find ourselves sitting here today in an environment where we do have to live within our means, but we have lots of opportunities to invest for future growth.

So our inclination is tilting towards dedicating more of our resources to investment and less towards return of cash to shareholders and that's evidenced by stopping the (inaudible) last year. Now, that said, I think our stock is unbelievable value and I kind of wish we could go and borrow 100 million and buyback shares, but that's not an option that's available to us today.

Right. But--okay. I think I've got it. Because what--I just wanted to make sure it wasn't your--it doesn't sound like there's a risk per se that could drive a potential dividend cut, but more perhaps you can make some strategic decision in the future, the board may make some strategic decision, which would be your choice.

Yes, that's right.

Rather than a specific risk out there that would cause you to have to cut the dividend.

That's right. Now, some companies cut dividends because they're in trouble. If we were to do that, we would not do it because we're in trouble. We'd do it because we think we have better ways to use the cash. But I don't want to suggest that that's the outcome.

Okay, no. But I think it's more the--yes, if there's nothing--as you say, there's nothing that would cause you to have to cut it because you got into trouble.

That's right.

That's your view.

Yes, exactly.

All right. Just moving on, in terms of the (inaudible) unit restarting, right now for Chile you're offering about 30% of capacity. How should we think about when that second unit--that restart. Should be thinking of it going up to 60 or something a little lower than that?

No, no, it shouldn't be 60, because the two units would not operate at capacity. So we need to get--today we can run at about 3,000 tons a day at the one plant that we're operating. We can--the minimum rates of two plants is about 3,400 tons a day. But we--I don't expect--I expect we'd be running at a higher rate than that when we first start up because we need some buffer against gas disruptions. So I would think you should think about 3,500 to 3,600 tons a day as being the sort of rate that we could be running at in the fourth quarter of this year.

Okay. And with respect to Egypt, can you provide a little bit of color in terms of do you expect to be--once it starts up, when it does startup, there'll be a high operating rate--in terms of between that time, like how should we be thinking--like should you start at about 50% and by the end of the year you'll be up to 90%? Is that the way to think about it?

I think you should expect some production in the second quarter next year and then at a reasonably higher rate for the Q3 and Q4 is what I think would be a reasonable assumption.

Okay. But by the end of Q4 should we--would you be at full operating rate?

Oh, absolutely, absolutely, yes.

Okay. All right. And just finally, there was a recent report I guess from [vendors] regarding--Lago Mercedes [fund] talking about the fund not being commercially viable to the large amount of infrastructure part. Do you--in you opinion do you see the infrastructure required being problematic for the development? Are there blocks that may be closer to Lago Mercedes?

Well, Lago Mercedes is quite a bit to the south on the island of Tierra del Fuego so it is a bit--it's a bit remote from the existing infrastructure. So I think there's about a 100-something kilometer pipe then that would need to be built. There's no gas treatment facilities. But the issue in Lago Mercedes is more the complexity of the reason (inaudible). So there is--and I think the (inaudible) report acknowledges it as well, there's the presence of a considerable accumulation of natural gas. But it is sub-commercial at current gas prices in that part of the world and that's what we've understood for the last year or so, so there's nothing kind of new in this. A bit disappointing perhaps, but certainly not new. And it is--that sort of accumulation is different from the sort of accumulations we find in the northern area of Magallanes, which--and those areas they're exploiting the sands and layers that are more typically found in Argentina, where there's been large accumulations of oil and gas found on the--over the border in Argentina.

So we're talking--I don't want to get into the geology, because I don't understand it myself very well. But I do understand that we're in a different zone in Lago Mercedes and it's a different sort of reservoir.

Okay, great. Thanks.

All right.

Great, thank you. And the next question is from Bert Powell from BMO Capital Markets. Go ahead, please.

Thanks. Bruce, can you give us a sense of what the savings from your cost reductions are absolutely on an annual basis?

Well, we had a budget of $195 million for all the fixed plus--costs to run our plants, all of the SG&A, and we've reduced that by about $45 million. So it is--there's a few variables in there that are a challenge to track. One would be FX, so if the Canadian dollar revalued that would take some of the gloss off some of our savings, the same with the Chilean peso and the New Zealand dollar. So those would be the three areas where we would incur a lot of our overheads and fixed costs.

Secondarily, you might have noticed in our disclosures that we've now having to expense some of the pre startup costs in Egypt.

Yes.

Which I'll speak as a frustrated business person rather than as an accountant. I think it makes no sense whatsoever, but that's what the accounting rules require us to do. So that's what we're doing. So the disclosures we've made there will be ongoing over the next few quarters and we'll continue to expense some costs that we had been capitalizing. And I think good sense should allow you to capitalize it but accounting rules don't.

There was one third element that I had in my mind and--oh, stock-based compensation. Yes (inaudible). Yes. To the extent that the stock goes up, of course, we have more stock-based compensation and that's been a little bit evident in our Q1 results and it's looking to have a bit of an impact on Q2 results as well. But we shouldn't ever feel too bad about the fact that we're expensing more stock-based comp, because it means that shareholders are winning as well.

Okay. And so, when you talk about the 300 million in EBITDA in 2010 at current levels, are you contemplating that 45 sticking or is obviously I guess if you turn on another facility in Chile then that starts to eat back into that starting in your--?

--Yes, it eats back into it a little. And I'd say some of those savings are not--we don't feel a bit sustainable. We've really been a stricter organization to operate on a--in this more constrained environment. And I think when the earnings rate of our company improves that we will ease up some of these cost savings that we've squeezed out of the organization.

Okay. And just back to Chile, there were some announcements early on in March this year with--relating to some flow rates out of some--a couple wells that were drilled at sort of 13 million cubic feet per day. Can you just give us a sense in terms of what you think that adds per ton on a run rate basis for the Chilean operations on an annual basis? And I'm just trying to triangulate that against what looks like if I kind of back into your numbers factoring in Egypt and the continuation in New Zealand for 2010, that you'd be looking for production in Chile to kind of be 1.5 million tons in 2010, if I'm interpreting your comments correct.

Yes, right. Well, to give you some really rough guidance, so I think 30 million cubic feet--I think in cubic meters is helpful to me because it translates easier--.

--Sure, okay--.

--The methanol production. So I think the 30 million cubic feet sounds like about 40 or 50,000 cubic meters a day. That's a bit on--that's probably on the low side of some of the wells that we've seen and the average that we've tended to see in Fell block and Dorado Riquelme is around--is more like 100,000 cubic meters a day. Those would be the starting rates. Now, these are wells that decline reasonably rapidly as well, so those are not sustainable levels.

Okay.

And you--the reason that cubic meters are so nice is they translate almost exactly into tons of methanol. So--we're capable of producing 10,000 tons of methanol per day on our site in Chile and we need just over 10 million cubic meters a day of natural gas. So if you say we need 10 million cubic meters a day and the well provides 100,000 of those, you need 100 wells to be supplying your plant. And this year I think in Allegro Mercedes--sorry, in Dorado Riquelme and in Fell block, there's a plan for over 30 wells to be drilled. So you can see that we're beginning to get to a level of drilling that should begin to produce the sort of results that have become evident in our production numbers.

But--so that's kind of really broad high level guidance there, but I hope that's helpful.

Yes, okay. Now, and just last question. I have it somewhere and I might have this wrong, but that there's--the pricing mechanism changes somewhat in the second half of this year with respect to gas pricing in Chile.

Well, there is--there's one gas contract that expires in the middle of this year, but that gas contract has been--.

--Not working.

Well, and it's been short delivered on--.

--Yes--.

--And there is commitment to make up all those short deliveries.

Okay.

So that contract (inaudible).

So it's enough.

Well into 2010.

Okay, so it's enough?

Yes, exactly.

Okay, thanks.

Okay.

Thank you. And the next question is from Basili Alukos from Morningstar. Go ahead, please.

Hi, guys. Good morning.

Good morning.

I have a couple of cash flow questions. I guess the first one deals with the Egypt project. If you look on your annual report in your commitments section, it says there's 319 million that will need to be funded this year. Earlier in the call you mentioned something that there is only a $68 million equity.

Yes, the 68 million is our equity contribution only. So the 319 million would include debt and equity and I think that's a 100% number, right?

I'm pretty sure that's what it is.

So our share--it includes our partner's share. And we--if you look at the numbers, we consolidate 100% of the assets and liabilities in the Egypt project and then we back out our partner's share of that. So the 319 represents 100% of all of the dollars that need to be spent. Our 60 million is just our share of equity.

Oh. And so, then, I believe the ownership is something like 64%?

60/40, that's correct, yes.

Okay. And so, then the difference--so I guess the difference between them which I think is like 200 million versus the 60 million, so do you already have that financed?

That's right. Absolutely. Yes, we have a project financing that's 55% of the total project cost and the balance will be equity contributions from our partners.

Okay, great. And then, kind of just for the current quarter, I mean, the company was able to produce operating--positive operating cash flows, but it looks like a lot of that dealt with the reduction in inventory.

That's correct, yes.

I mean, how sustainable do you think it is? At what point do you anticipate having an increase in inventory I guess?

Well--.

--Or do you think that earning positive operating cash flow is a possibility for the whole year given how drastically sales--.

--Oh, yes, no, no, absolutely. Because I think the leg in our costs that are included in our costs in Q1 are around $15 million. So if you take those away, and I think I mentioned--.

--I'm sorry. What was the number?

15. 1-5.

Okay.

And in Q2 that number dropped to more like $5 million. So there is instantly another $10 million of cash flow that is not included in the Q1 results. So there's no doubt that we're in an environment at $200 a ton where we generate good positive cash flows.

Okay. Because I know--I mean, obviously, with the problems in--with the plants in South America there's been a reduction in inventories at least over the past year, if not two years.

Some of that is because it costs us less to accumulate those inventories. So we are at a low level of inventories ourselves, but because of the decline in the price of natural gas that goes into those inventories, the cost of those inventories has gone down dramatically as well. The same with receivables, of course, Receivables have gone down dramatically because the selling price of our product has gone down.

Right. And I would also imagine as the sales go down, that number would probably go down, too.

That's correct yes.

Okay, great. That's all my questions. Thank you very much.

Okay. Well, listen, we're just a little over an hour, so I would like to call a halt to this I think. Thank you very much for the questions and the interest in the company. I think we are in a pretty interesting time for the organization. We are investing for growth, as I say, and I look forward to next year when we're producing more methanol and this is all low cost methanol that comes into our system. And then, as I mentioned a little earlier, we have been looking to double our production capacity in low cost methanol over the next few years. I just think that regardless of the market environment for methanol, we are in a very strong position to increase our earnings and cash flow. So again, thank you very much for your support and I look forward to talking with you again in the future.

Thank you. And this concludes the Methanex Corporation First Quarter 2009 Earnings Conference Call. Thank you from Telus.