Methanex Corp (MEOH) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Fourth Quarter 2009 Earnings Conference Call. As a reminder, this call is being recorded on January 28, 2010.

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

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 forecasts or projections which are included in the forward-looking information. Please refer to our latest MD&A 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.

Thank you, Jason and good morning, everyone. And welcome to the Methanex Fourth Quarter Investor Conference Call. I have a number of colleagues with me in the room and they will be available to help answer questions a little later.

Firstly, I'm pleased to report much improved results in the fourth quarter. We reported EBITDA of $73 million and net earnings of $26 million or $0.28 per share. The results reflected a further improvement in methanol industry conditions and the pricing environment in the fourth quarter.

We achieved an average realized price of $282 per tonne, which is $60 per tonne higher than the last quarter. We also achieved higher production levels in Q4. However, the positive impact from this was not reflected in our Q4 earnings as sales of produced methanol were lower than our production. This caused our Q4 results to be a bit lower than what they normally would have been. I'll comment more on the industry and pricing outlook a little later in the call.

But first I'd like to provide you with an update on our operations. As I mentioned a moment ago, I am pleased to report improved production in the fourth quarter with higher production across all of our sites. Firstly in New Zealand, the Motunui plant operated at full operating rates and we produced 223,000 tonnes of methanol. I'll comment more on the outlook for natural gas in that country in just a few moments.

Our plants in Trinidad continued to operate well and we produced 467,000 tonnes of methanol, which is just under designed capacity for those plants.

We also reported higher production in Chile during the fourth quarter and produced 265,000 tonnes of methanol. As I mentioned on the last conference call, gas deliveries from the Fell and Dorado Riquelme blocks have been increasing. And as a result, we restarted a second plant in Chile in mid-December which shifted production from one plant at full operating rates to two plants at reduced rates. This increased production at our site by about 20% to 25% to around 1.2 million tonnes on an annualized basis.

Having two plants operating in Chile improves our supply reliability from that site. I'll comment more on the outlook for natural gas at our plants in Chile also in just a few moments.

I'll switch topics now and address the industry and pricing outlook. Over the last quarter, methanol demand continued to grow and global demand has now recovered to pre-recession levels. To put this into perspective, at its low point in fourth quarter 2008 and first quarter 2009, methanol demand had dropped to around 36 million tonnes on an annualized basis. Currently, we estimate global demand has recovered to about 43 million tonnes on an annualized basis.

While there has been some recovery in demand in Europe and North America, most of the demand growth has been concentrated in Asia and particularly in China in both energy and chemical derivatives. Methanol demand in the DME in China has been stronger in recent months with higher crude prices and LPG demand stimulating more demand for DME in that country.

Supported by favorable economics, demand in methanol to methanol fuel blending in China also continues to grow and there is significantly more growth potential. China has recently become the world's largest order market for new vehicle sales and order sales were strong over the last quarter. As well, national standards for methanol blending in gasoline has been introduced in China and we expect these standards to act as a further catalyst for growth and M85 or 85% methanol standard took effect on December 1, 2009, and we expect an M15 or 15% methanol national standard to be released later this year.

Turning to methanol supply, with the recent strong recovery in demand, higher cost capacity in a number of regions has started up to meet this demand. In China, increasing coal costs have placed further upward cost pressure on producers, with coal prices increasing by about 35% in the last few months. As a result of these factors, methanol pricing continued to increase during the fourth quarter and pricing has improved further at the beginning of this quarter.

In January, our average non-discounted price across the various regions is about $350 per tonne and we have rolled the North American price into February.

I'll switch topics now and provide you with an update on the key initiatives we have focused on. Firstly, natural gas supplies to our plants in Chile; as I mentioned earlier, we have recently started up a second plant in Chile and increased the operating rate at our site by 20% to 25% to a current level of about 1.2 million tonnes on an annualized basis.

This has been due to the success achieved in the Fell and Dorado Riquelme blocks where we have contributed capital to accelerate natural gas development. Gas from these two blocks has increased over the last few quarters; and combined, these two blocks now account for about half of the gas supply to the Chile site.

In 2010, we are estimated production of about 1.2 million tonnes in Chile. This assumes that we may return to operating one plant at times during the year. For example, during the southern hemisphere winter, there is incremental seasonal demand for natural gas for residential purchases that may reduce gas deliveries to our plants below the minimum needed to operate two plants.

After this year, we expect production in Chile to ramp up more quickly as we see the results of gas development in the other exploration blocks near our plant. Exploration activity has commenced and we expect drilling activity in most of these blocks to increase considerably this year.

Based on the significant increase in gas exploration activity expected to occur in Southern Chile over the next couple of years and the success already achieved, we continue to be optimistic about returning our Chile sites to a full plant operation.

The next opportunity I wanted to provide you an update on is our new methanol plant in Egypt which is in the final stages of construction. Several of the utility systems are already operating to support commissioning activity. We are for the most part on budget and continue to expect first methanol production in the first half of this year. We are very excited by the addition of those first-class assets into our supply chain, which will increase methanol supply to our customers and significantly increase our cash generation.

Assuming today's pricing environment of around $300 per tonne realized price, our 60% interest in the project should generate an excess of $150 million in annualized EBITDA after it starts up later this year.

Turning to our operations in New Zealand; we currently have sufficient gas to operate our 900,000 tonne Motunui plant until near the end of this year. Our main priority in New Zealand is to secure more gas to extend the operation of this plant and we are in the process of finalizing contracts with a number of suppliers.

Based on the improved outlook for natural gas in New Zealand that has developed in recent years, we are optimistic that we can secure more gas supply in that country and potentially restart more capacity there in the future.

In this regard, one of the initiatives we are currently working on is to fund some natural gas exploration with a small company, Kea Exploration in the area in the Taranaki region near our plants. We are committing around $10 million for this initiative which will add an additional entrant and stimulate further oil and gas development in this region near our plants.

There is a possibility that this specific drilling activity could result in a significant gas discovery. However, it is probably more likely that this well will provide valuable data regarding the potential of this prospect and further exploration activity will be necessary.

Other than the initial commitment, we have no further commitment to provide funding. However, as part of the arrangement, we have rights to gas supply from this area at a price which is competitive to our other locations in Trinidad, Chile and Egypt.

While this expenditure is modest, this is a high-risk investment; but it is also potentially game changing. The opportunity here is to create a long-term life for our plants in New Zealand, with a globally-competitive cost structure.

I'll change topics now and make a few comments regarding our liquidity and capital allocation in the current environment. During the fourth quarter, we generated $74 million of cash from operations before changes in working capital. And we continue to be in a strong financial position. We have $170 million of cash on our balance sheet, conservative leverage, a $200 million undrawn operating facility and no refinancing requirements until 2012.

We have two key priorities for the use of our cash; firstly, our project in Egypt which requires a remaining equity contribution of about $20 million. And secondly, we expect to continue committing capital to accelerate gas development in Southern Chile. We are in a strong position to satisfy these commitments and our planned maintenance expenditures.

In the current environment, we continue to be focused on maintaining a strong financial position. With increased production in Chile and the Egypt plant starting up later this year, our ability to generate cash flows will significantly improve. And with capital spending on our Egypt project now almost complete, and our initiatives at other sites to increase production only requiring modest amount of capital, we expect to be in a strong position to build on our track record of returning excess cash to shareholders.

Before stopping for questions, I will briefly comment on our expectations for the first quarter. Firstly, pricing has continued to increase in the first quarter and we expect to realize about $20 per tonne higher than in the fourth quarter. In addition, with the higher operating rates in Chile, we expect higher sales of produced methanol in Q1. These two factors should lead to a further improvement in our earnings in the first quarter. The only unusual moderating factor; and I would say it's not too unusual and hopefully you will continue to get used to it; is that there will be an increase in stock-based compensation as a result of an increase in our stock price.

So at this point, I'm happy to stop and take any questions that you might have. Are you with us, Operator?

Yes, thank you. (Operator Instructions). The first question is from Jacob Bout from CIBC. Please go ahead.

Good morning.

Good morning, Jacob.

Maybe you can make some comments on the startup in Egypt. Are you still thinking second quarter 2010 and what the ramp up will be like there? And maybe also talk a little bit about the potential for the build of the DME plant there; what's the status of that?

Okay. I think as we've guided before, we expect to be making first methanol in the second quarter and that guidance is still good. And we've also guided that-- don't expect too much in terms of impact on our earnings, that really the continuous operation of that Egyptian plant will not really occur until the third quarter when you should see some impact on that production and earnings.

So I think the guidance that we provided in the past, Jacob, is still valid for our project. And the project continues to tick along quite nicely and it's always a struggle at this time, but I think we're very, very pleased with how it's proceeding.

The DME project has been quite slow, but I would say it's really beginning to gain momentum now. We are committing to a [FEED] study. I would say we're only a small shareholder. We're a 20% shareholder. So the progress on this project is driven by the majority shareholders. But we're expecting to make a final investment; this isn't before the end of this year and that project will be operational I guess I'm just looking at Michael Macdonald is here-- in late 2011. So it's ticking along, Jacob; a little later than perhaps we expected but we fully expect that will proceed.

And how much methanol would that plant actually use?

300,000 tonnes.

300,000 tonnes; any concern at all about the market absorbing the Egyptian supply?

The Egyptian methanol supply?

Yes.

No, no; not at all; no, we are very short. We think the world is short. It's a plant that's well-positioned on the global cost curve. So no, I don't think that's an issue at all.

Okay. That just moves to my next question here. Maybe you can provide us your thoughts on China imports going into 2010 and 2011; especially with the increase that we've seen in coal pricing; what is your expectation as far as a ramp up in imports from historical levels? And then maybe comment about-- because we do have a number of plants that are supposed to start up in the latter part of 2010- I think four; what the-- are we going to be net long methanol after the ramp up of these plants?

Okay, we've got John Floren here in the room, Jacob. So I'll ask John to answer that question.

Hi Jacob. It's a bit of what you use as assumptions; coal pricing today is almost $125 a tonne in China. You need two tonnes of coal to make methanol. So you're at $250 cash just before you get started on any other costs. So Egypt; to reiterate what Bruce said; we presold Egypt in the first half of this year. We're purchasing product to meet that demand. But when Egypt comes on, it will fit into our supply chain really nicely. So there will be no problems in absorbing that capacity.

With regards to China, it's importing at around 300,000 tonnes monthly at this point. So depending on what your assumptions are for coal price, demand oil price; the market will always be balanced. It's just a matter of where the demand line intersects the supply line on the cost curve. And as you know, a lot of the plants in China are high on the cost curve and really high today based on coal pricing.

How these other plants are going to start up and run is a little bit uncertain for us. Certainly two of them; one in Brunei and one in Oman are greenfield sites, like Egypt; so expectations are they'll come up some time in 2010, but exact dates it's a little hard to say.

And then you have a second plant coming up in Venezuela sometime in the second half of 2010, and that is really hard to get any good information on how that plant is progressing and whether there will be utilities, etc. with the issues going on in Venezuela.

Okay, thanks for that. Last couple of questions just as far as the Chile and how the environment has changed there with the election of the new President; and then maybe you can talk about thoughts on dividend increase and share repurchase.

Well, you're asking all the questions at once, Jacob; and quite a range as well. Chile has been, I think, a model of consistency over the last 15 to 20 years. And I don't expect any change of government is going to change the core policies of that country. So I'm sure every government will have different flavor on their policy, but I think the core of being friendly to foreign investment and encouraging foreign investment and being I think reasonably pro-business and being part of the global economy; that certainly will not change under this government.

And so we're generally positive and looking forward to developing a strong relationship with this government as we have in the past; so no real change there.

In terms of distributions; we're very pleased with the fact that we've been a strong dividend player. Since 2002, we've increased our dividend I think six times over that period. And we've always indicated that as we feel that dividend becomes more sustainable in the future, that we will increase it. And clearly the project in Egypt is the next opportunity I think we have to relook at our dividend. So the expectation you should have and clearly this is always subject to approvals of our Board of Directors; is that we will increase our dividend as we gain confidence around the project in Egypt.

In terms of share repurchases; we've established a long track record and I think that's the best answer to your question; that when we have excess cash, we haven't been shy about returning it to shareholders. In the past we've preferred to do that by share repurchases and I think for a company like ours, it's a very good mechanism; it provides lots of flexibility. And we continue to believe that the Company is a much more valuable asset then is recognized in the market. So we think it's a good buy for shareholders.

So philosophically, that's where we heading, Jacob.

Historically, what has been the trigger for either one of those events?

Well, historically the trigger for dividend increases has been some change in our asset mix, so that will be the trigger for the next change in dividend. And clearly, we don't repurchase shares unless we think we have excess cash. And today we have about $170 million cash on our balance sheet. We have some commitments. We have some things that we're working on. So we certainly don't, by my definition, have excess cash sitting on our balance sheet today.

Okay, great. Thank you.

Okay.

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

Hi, good morning. Bruce if I could just sort of touch on a question a bit more pointedly; on the Egypt project, the Q2 startup- we're still sticking to that; if you could just sort of lead me through that. The Q2 operating that you expect and then for the second half I assume it's smoothly ramping up from there, but what sort of operating do you expect in Q2 versus Q3 or Q4?

I don't want to get too specific. The closer you get to the end of these projects, Paul, the more challenging it is to know precisely. So I'd rather stick with a broad guidance, but don't expect too much of an impact on our earnings in the second quarter. Now but I think for modeling purposes, you can expect the plant to be operating at a reasonably high rate of utilization in the third and fourth quarter. And I'd rather not get any more specific than that at the moment.

Okay. Can we just sort of frame in saying Q2 is less than 50% comfortably?

Sure.

And on the idea of the increased supply coming, particularly outside of China; I know you talked about in round about ways; I'm just curious, in terms of expected price impact versus absorption by market demand; is this something where you think it will be an interplay on both or is there something where right now you're confident that that can be absorbed without a price-?

Well I think it will always be both. And that's the nature of a commodity. I think we are seeing demand growth and there will be some absorption of new capacity with demand growth. But as John explained, the pricing will be set by the intersection between total demand in this industry and the high cost producer on the cost curve. And today that's driven by coal prices in China.

So we would expect-- there are lots of moving parts there. So does that mean price declines or price increases? I've got no idea.

Okay. And in terms of the eventual adoption of M15 standard; are you able to quantify at all what you think that could represent in terms of demand?

Well, it's hard to say. But I think it's huge. The provinces in China have been implementing various methanol blends for a long period of time and quite successfully. So a national standard simply opens up the sort of practices that we've seen practiced in a number of-- particularly the coal provinces-- quite broadly over the last 15 to 20 years. So I think it certainly opens up a much larger potential market. John, do you have any add to that?

Well, if it's an M15 when the standard comes out, it's not a guide; it doesn't have to be used, but certainly has an impact of letting all the provinces know it's allowed. And M15 can be blended without any changes to the infrastructure or to their cars. So it's an economic impact right now. I think methanol prices in China, import parity are around 330 to 350 and the economic incentive just on an energy basis is $500 a tonne for methanol. So there's a $150 a tonne right there to incentivize people to blend methanol into the gasoline. So we believe that's quite an incentive.

Alright, that helps. And last question and I'll get back in queue; in terms of the mention of no near-term refinancing requirements and I'm just curious if you can give any color on this; the 2012 notes, is there any potential that you could look at refinancing that?

I'll ask Ian to answer that, Paul.

Hey Paul; it's Ian Cameron. In terms of the 2012 notes, we have a little bit of water to go under the bridge today. But my view today would be that it would be a smart thing to do would be to refinance those notes.

How much better would you be looking at; just out of curiosity?

When you say how much better-- it will be just depending on what those interest rates are at that point in time. (Inaudible)

I guess you would expect them to be cheaper is- that's probably what Paul is driving at.

Okay. Let's say-- is that something that we can expect in the very near term or is this something that's just going to be looked at on an ongoing basis?

No, we won't try to refinance now. The way our bonds are structured, we have a treasury make hold in our bonds, so it's quite expensive to refinance it, if refinancing (inaudible); you wouldn't get any benefit from the lower interest rates by refinancing today, in effect, prepay for that. So our thought would be that we would wait to-- not till the last minute, but closer to August 2012 before we refinance.

Okay. Alright, thanks, Ian; thanks, guys.

Thank you. Your next question is from Samuel Kanes of Scotia Capital. Please go ahead.

Thank you. I guess first question for Ian; S&P still has you ranked at BBB minus with a negative watch which has been on for years. What does it take to get that watch off?

Well, you can read their reports. I think that we're in a really good position, as Bruce mentioned, to really improve the quality of our business with Egypt coming on and we're seeing some improvement in Chile.

That's why I'm asking.

Yeah, and I think as we see those improvements take place, then we see the cash flow generation from that, I think that-- my guess is we'll see S&P move off that.

Do you have a timeframe when you're going to see them next?

Well, I don't think S&P-- it is unusual to have a negative outlook on a rating for a long period of time and we've talked to S&P about that and I think they're in this case comfortable and they're not in any rush to change it one way or the other and I think they'll wait for-- to see how we do with our new assets. And then I think the other they're interested in is just the general pricing environment.

Okay. Switching to John; just to clarify, there's not one mandate at all to use methanol within China; these are all guidelines/national standards; is that correct?

That's right, yes so it's end to end from production to distribution, and how it's used in cars, etc.

Okay. With respect to China, coal; this is again to you, John. I've been led to believe, maybe incorrectly, that it's anthracite coal that's preferred amongst Chinese methanol and ammonia guys with this gasification facilities. Obviously, thermal is up a ton. Met coal is up too. But my China analyst keeps printing out stuff that says anthracite is going sideways. Is it true you can use different coals from what your experience is within China in these various plants?

What it is Sam, is there-- as I mentioned before-- 250 to 300 plants; two thirds of the production is coal-based and there are a lot of small based coal plants that use anthracite and then some of the newer plants-- the 600,000 tonnes that have come on in the last 12 months and that are coming on this year, can use a lower quality coal. So it's a bit of mixed bag.

But when I look at the coal market in China, the pricing is different depending on the grade, but it seems to be moving kind of in locked steps; so we're not seeing a large difference in the movements in coal between the different grades. The other thing I think I'd point out is the current coal inventories are down to one week and I think a comfortable position for China is a two-week supply, so I think right now because of the weather and because of the demand, I would expect sideways or upward movement on coal and not a decrease.

I fully agree short term. Now the question is extended. Have you seen some of the natural-gas based methanol plants in China actually get cut off or cut back on gas supply to reroute it to heating homes? It's been I guess blizzard conditions there for weeks in Northern China at least.

Yeah, significant in the last three months in different parts of China; mainly in the North- restrictions on gas to make not only methanol, but other chemical products. The primary purpose for gas over the last few months has been for heating because of the conditions there and obviously we expect that to moderate as the weather improves in China, but I think the government has been pretty clear- no new methanol gas plants based on natural gas and the existing plants with few exceptions, we would think are in the next three to five years- not going to be able to secure gas at an reasonable price.

As you know, gas and coal are kind of regulated a little bit in China and we are expecting to see an increase in natural gas here in the next few months in China.

Last one for you John; diesel; is it DME to diesel? I remember reading a year ago there are a thousand buses coming in this year to Shanghai for the World Fair that are 100% pure DME buses. I'm not sure if that's happening or not. Do you see that or any other developments with respect to DME to diesel?

Well, DME to diesel was the big push in China a few years ago. We are still seeing some of that developed and that's mainly we believe are going to be for trucks and buses where you have a single point of refueling, so you don't have to invest in the infrastructure throughout the country. What's developed in the last six months, which is really interesting, is the direct blending of methanol into diesel.

I was in Shanxi province a few months ago, witnessing direct blending of methanol into diesel for buses and trucks, so that's pretty exciting for us. And I think the Chinese are really focused on that going forward for automobiles, trucks and buses.

At what percentage?

Different percentages; there was 50, there was 20, there was 30; so all over the board.

Okay. Thank you for all that, John. I guess back to the long track record of buying back stock; Bruce, final question from me. If I recall, most of your buybacks you would announce at your annual meeting in May. You're kind of implying here that it won't be this year. But it doesn't necessarily have to be that, does it?

No, no it doesn't have to be that. And it may be in May as well as it stands; so I'm not really implying anything other than it's not now.

Okay. I understand. Thank you, gentlemen.

Okay.

Thank you. The next question is from Jaret Anderson of Salman Partners. Please go ahead.

Great, thanks very much.

Hi, Jaret.

Hey, just a question for you, John; can you talk a little bit about inventories? It looks like inventories in your system were up about 75,000 tonnes in the quarter; a little bit surprising given the demand and pricing that we saw. Can you comment just on the situation globally with inventories as we head into this period with a number of plants starting up?

Yes. I think inventories are still snug, Jaret, around the globe. Our particular situation; we've increased our sales profile quite significantly for 2010 versus 2009 on a contract basis, wanting to pre-sell Egypt. So what you're seeing in our inventory we've built is really based on a higher sales level. You'll see in our Q1 results that our sales level will be quite significantly higher than Q4 or any quarter in 2009. So it's really our actual turnovers will stay the same but our sales volumes will go up.

Understood.

As far as around the globe, we're still seeing methanol pretty tight; some availability with the Iranian molecules; but besides that, things are still pretty snug.

And certainly John, at the end of Q3, we were at an unsustainable level of inventory so you should have expected to see some increase in Q4 over Q3 and we did that in a very planned way.

Understood; thank you.

Okay.

Thank you. The next question is from Steve Hansen of Raymond James. Please go ahead.

Yes, good morning everyone. Good to see you guys back in the black on the earning side. Just on the new supply; understanding that there's lots of assumptions in place, if you just had to handicap the amount of new product hitting the globe this year from those four new plants which includes your own of course, do you have a sense for that? Is it 1.5 million tonnes of the 4 million of capacity or is it 1 million? Do you have some sort of sense for that?

It's a little hard to call. Certainly we know our own situation better than we know our competitors' situation. I think if you look back at the last two years of new plants starting up, it hasn't been a very good track record-- if you look at the PETRONAS plant or the plant in Iran; they ran very intermittedly for a good 12 months. So again, I'll just point out that two of the sites are greenfield where you've had to build everything from infrastructure to port to methanol in places where there hasn't been that kind of infrastructure. So it's hard to guess when they're going to come up and how they're going to run.

But in planning purposes, 50% for the year once they start up is probably not a bad way to look at these plants.

Okay, great. And in Chile, when I look at your operating rate today which I believe is around 32% and then I also look at the rapid rate at which the gas is starting to come out of the Dorado block and the success that GeoPark's been having on the drill front; it just seems to me that the 1.2 million tonne guidance for 2010 could be a bit conservative. Is it possible that those rising gas supplies will prevent the need to go back to one plant during the year?

It could. There are several things going on here. One of the big ones are bottlenecks in the system and we're already facing bottlenecks from particular areas of the infrastructure. So today there is more gas that could be delivered if we had pipelines in place. So we're-- it's a constant battle of keeping the infrastructure up to speed with the discoveries that have been made. There's another pipeline being connected I think on February the 9th, which will give us a little bump in gas supply.

So without a doubt, there is outside this Steve, but on the other hand we don't quite know how bad the winter will be; if it's a particularly cold winter then there is a risk that we end up back at one plant.

Okay, great. Just a quick one; in the past you've spoken to your fixed-price contracts. As I recall, it was roughly 20% of your sales base and those are set to roll off, roughly half of those are set to roll off over the next sort of 12 or 16 months or there about. Is that process started or whereabouts are you in that sort of roll off?

Yes, it has started. But so by the end of this year, we'll be about half of what we were, so that will now be 10% of our total sales. And I'd say-- some of it happens in the middle of the year and some of it has already happened. So I probably can't give you any more accurate guidance than that, Steve.

Okay, that helps. And then just finally, if I may; lots of discussion around the rising coal prices in China which certainly seems to bode well for pricing. But as I understand, there are also some mechanisms coming into play here that are going to re-price some of the natural gas-based production in the country. Have you guys seen or heard much about that?

Yes, as I mentioned to Sam, that we're hearing that natural gas prices are set by the government, as you know. With the increase in demand for gas which is quite substantial; not only in the winter but through the summer months; and the bigger requirement on imports of LNG, etc., that the government is going to increase prices quite substantially here in the first half. The exact numbers are not known, but I think if you look at the market for LNG globally, that should give you some indication. So that will put cost pressure on the natural gas producers.

Having said that, there are some pockets in China like Hainan Island and some in Inner Mongolia where it is more or less stranded gas type of operation; so whether those operations get impacted to the full extent of the increase is a little bit unknown.

Sure. I guess the challenge is trying to understand for those producers that are going to face the increase, we can certainly get the LNG type pricing, but it's trying to understand what type of prices those producers are currently paying. Is it like the magnitude increases of a 25%, 50%, 75%, 100% increase?

Again, we haven't seen or heard it officially from the government, but the gas prices that those producers are paying are really subsidized based on what LNG imports would be so I think order of magnitude-- you're seeing double digit at least, and beyond that I'm not prepared to speculate.

Okay, great. Alright, thanks very much. I appreciate the time.

Good, thank you.

Thank you. The next question is from Fai Lee of RBC Capital Markets. Please go ahead.

Great, thanks.

Good morning.

Good morning, Bruce. You mentioned earlier about Egypt and you expect about I think it was $150 million of annual EBITDA?

That's right, assuming a $300 realized price.

Okay, and that's that $300. Okay, I just wanted to clarify the price-- so $300 realized, okay. And New Zealand; you talked about that being a game changer. In terms of its position I guess either relative to your other plants on the gas-cost side or your global guidance; would it sort of be in line with the global guidance of what you're thinking on a longer-term basis-?

Longer term; we're in the early stages of our relationship with Kea Exploration and we've committed to spend a little bit of money, as I mentioned and we acknowledged that this is a high-risk investment. But the gas contract that we have as part of this arrangement is very consistent with the guidance we provide for gas contracts in other parts of the world.

Okay, great. Okay, that's all I had. Thank you.

Thank you.

The next question is from Adam Comora of EnTrust Capital.

On the supply in the world; if I remember correctly, it takes about three years or so to build a methanol plant. What are we seeing after the 4 million tonnes that comes on line after the next 12 months or so? What happens in 2011, 2012, 2013; do you see any other supply brewing out there?

The short answer is not much, Adam. If I take as an example, our project in Egypt, we've been five years since the first idea of it to when we're going to be producing. So that's the sort of timeline it takes to develop and build and operate a world-class methanol plant. And now there is being talk of projects, but really there's nothing much around. John, is there any--?

No, outside of China-- I mean we are expecting to see in the next 12 to 18 months, some additional capacity in China, but beyond that the moratorium on 1 million tonnes plus has been in and we haven't seen anything announced there. Outside of China, you hear these things in Algeria, but still no final investment decision. We're hearing of a possible relocation to Azerbaijan from the Gulf Coast to the U.S. Again, it's hard to get specific information on that, but as far as steel in the ground; nothing.

So if you assume three years from first breaking ground to new methanol, there's nothing outside of China. And remember, the industry is growing at a rate of around 5% and if you've got a 40 million to 45 million tonne annual demand, 5% of that; you're needing one to two large-scale plants per year just to stay balanced.

That's the huge opportunity that we have to bring our capacity in Chile back into operation and these plants in New Zealand. But we haven't talked about [Meters and Hat] today that we're still working on the potential for Meters and Hat. So I think we're in a unique position here of being able to fill what looks like a significant supply void in this industry and the period you're talking about.

Right. Just a follow up on the investments to look for gas either in Chile for New Zealand; can you just remind us how much capital you guys are thinking about this year or on a go-forward basis? And also if I remember correctly, these things were also structured as almost prepaid natural gas contracts and now that we're getting more gas in Chile, are we getting a working capital benefit where we don't have to necessarily pay for some of the gas that's coming in?

So we have two arrangements in Chile; one with GeoPark that is a prepaid gas arrangement and yes, we do get that working capital advantage where we don't pay for the gas as it arrives. The second arrangement where we are 50% owner, we are contributing capital and we are a 50% owner of that reserve. So that doesn't have the same working capital advantages.

To date, we've invested I think about $60 million to $70 million in Dorado Riquelme. Our budget this year is $40 million in Dorado Riquelme and we've talked about $10 million New Zealand. So we have a total capital budget this year of about $50 million. I would say the return investment on this, when we go right through to the return on methanol molecules; it's fantastic. These are compelling investments to make and I'm sure all shareholders, if you saw the returns that we're making, you would appreciate that these are-- this is a very smart way to invest your capital.

So we're motivated to continue making those investments; so how long into the future and how much; those are unknown questions, but I think as long as we see strong returns for making them, we'll continue to be encouraged to do so.

Okay, so it sounds like $50 million is on the growth capital side and then what kind of a net back do we get because of the prepaid gas; is it material?

It's probably less than $10 million this year.

Okay. Alright, thanks a lot guys.

Yes, okay.

Thank you. The next question is from Hassan Ahmed from Alembic Global Advisors. Please go ahead.

Good morning, Bruce.

Good morning, Hassan.

Quick question around methanol economics in Chile. You're obviously all set to ramp up production over the next couple of years. I just wanted to sort of get a view on how we should be thinking about methanol economics in Chile, particularly sort of in light of the legacy economics over there-- when you guys are getting gas from Argentina.

Well, I think the natural gas pricing guidance that we offered is valid for all of the gas that we're getting in Chile and all the gas we expect to get in the next, at least, couple of years. A lot of the commitments from gas suppliers in Argentina have been transferred to Chile. So we have I think four of our gas suppliers from memory, have simply transferred their delivery obligation from Argentina into Chile on the assumption that they find gas and they're able to deliver it to us.

And I think the arrangements we've entered into are very sensible arrangements with our gas suppliers and ourselves with a sharing arrangement and when methanol prices are strong, which they are relatively strong today, then we're paying I think a good price for that natural gas and it provides a good return for those suppliers. And in an environment with weak ethanol prices, we have protection and I think it's still good business for those gas suppliers.

So nothing much has changed, Hassan. From what we're learning about natural gas development and deliveries and the economics of doing it in Southern Chile, we believe it's a continued good story to tell around the economic merit of searching for and delivering natural gas to our methanol plants.

Thank you. Now another one on the resale of the purchased methanol side of things; it just seems to me, just purely looking at the Q4 numbers, that the money you made on the resale was probably a bit lower relative to recent history. So just keeping in mind a rising methanol pricing environment, I just wanted some comment.

Well, you're correct about that. And it goes back to our response on inventories and we had extremely low inventories at the end of the third quarter and partly that was intentional and partly it happened because demand was stronger. We weren't wanting to build inventories but then we ended up with stronger sales to our customers.

So when you don't have that much inventory to start and prices start going up, then you don't have that same opportunity to profit from purchased methanol. John, I don't know if you have anything to add?

So as well we had a couple of unplanned outages in Q4. So we try to set up our purchasing program to purchase in the low-cost region, sell in the high-cost region and when we have some unplanned outages and very skinny inventories, we don't have that flexibility and are sometimes forced to purchase a little higher than we'd want to and that certainly happened in Q4.

I think that helps to explain why you haven't seen this bump in earnings that you've perhaps seen historically.

Fair enough; fair enough; thank you, guys.

Okay.

Thank you. The next question is from Brian MacArthur of UBS Securities. Please go ahead.

Good morning. I just wanted to go back and make sure I fully understand the accounting for the money coming back in from GeoPark. You said-- where would I find it on the cash flow statement? Is it actually buried in working capital changes or is it netted against outflows to GeoPark now that we're getting that $10 million back from what you initially invested?

It's netted in the finance activities.

On the cash flow statement?

Yes.

Did you catch that, Brian?

Okay, so it's always just going to be netted out there so we're never really-- we'll just be able to get a net number and gross into net you'll be continuously spending and continuously getting it in?

So to give you some guidance on GeoPark, we originally invested $40 million; we advanced $40 million. That's now down to $30 million. So they've repaid about $10 million of that. Then late last year we advanced another $15 million. So I guess our net advances today are about $45 million.

But when I see GeoPark financing in the fourth quarter of $13 million, that's presumably an outflow of some and an inflow back from the old stuff?

That's correct; yes.

Okay. And secondly, just back to New Zealand for a bit; you sort of talked about it being game changing and structured similar to other contracts. But I think-- I can take that to mean I assume that it will be the standard-- we have a base price that's similar to everything else and then share methanol prices-- we go up and down? It's that kind of correct?

That's right, yes. But it's also the opportunity to increase capacity there. We have 2.4 million tonnes of capacity in New Zealand and we're operating today at 900,000 tonnes. So I think that's the game change, in addition to the-- I think more favorable economics, it's the incremental capacity that comes at a very low capital cost.

Right. And I guess then that's what I was coming to. So the game changing- obviously you seem like you're thinking of being able to bring back not just the 530,000 tonne Waitara plant, but maybe both Motunui number two and that plant. Game changing; I should read that this could be-- we see a lot of gas potential there?

That's right, exactly. That's exactly right.

Okay, great. Thank you very much.

Thank you. The next question is from Bert Powell of BMO Capital Markets. Please go ahead.

Thanks. Bruce, in your outlook for Chile production in 2010; what are you thinking about the exit rate for 2101? And you mentioned the distribution system as being a bottleneck. What do you think, if the bottleneck was taken out, you can produce out of Chile?

I don't have that number out of the top of my head, Bert; so that second part of the question. But I think by the end of this year, we would expect to be at around 1.4 million to 1.5 million tonnes as an exit rate.

As an exit rate- okay. In general, the production profiles for the Fell block and Dorado Riquelme; have those been decreasing at rates about as expected or are they performing-- can you just give me a sense as to how-- the success rate has been very high, but how has the follow on been?

There are declines, as you always see in natural gas fields. I don't have a number on the top of my head of the exact decline rate. I would say it's not extraordinary. But to the extent that new gas is not being brought into the system, then we do begin declines. One of the small challenges we've had with GeoPark in the last 12 months has been the financial crisis. They were unable to fund their ongoing operation and they cut back severely on their exploration program. So when they came into-- or late 2008, they had a plan to drill 20 wells in 2009 and I think they ended up drilling six or seven, which was just a consequence of the crisis and their inability to raise sensible financing.

Now I think they've been much more successful lately and increasing their financing position and they've begun drilling a lot more aggressively than they were all through 2009, coming into early 2010. So I think we will see some increases coming out of GeoPark and we have a 20-plus well-drilling program in Dorado Riquelme this year that is fully funded.

And New Zealand; that contract I think if my memory serves me, officially ends at the end of Q2 and you've said you expect that to continue on at least for the balance of this year.

It will probably be more like Q3. We're constantly buying small parcels of natural gas in New Zealand which tends to extend the life of that larger contract. So I think it's somewhere around Q3. But we're very close to closing other gas contracts and I think it's a very low risk that we will not do that.

Are the economics about the same?

We're seeing gas prices come down in that country which is good. So we're certainly getting lower base prices and sharing at probably higher methanol prices. So I think we're seeing improved economics out of that site.

Okay. And just last question; any change on back haul?

Well the shipping market is still quite a challenge and I think our shipping business has done just an outstanding job in keeping all of our vessels fully occupied and we're covering our costs. Now I think if you'd asked me that question 12 months ago, we were making nice profits and some of those profits have disappeared, but we're covering our costs. John is there anything-?

Yes, the shipping market has improved a little bit in the last few months and the nice thing in our system we've got to redeliver two ships here in the last few weeks. So we'll be down to 18 ships with a decrease of some of our length in shipping. So that will be a positive thing for us.

Okay, thank you.

So Operator, we're closing in on an hour, if there is one more question, I'll take that. Otherwise, it's a good time to close off.

Thank you. We do have another question from Peter Butler of Glen Hill Investments. Please go ahead.

Hi.

Hi Peter.

You're looking at a lot of significant changes in your fundamentals and I think you referred to earlier the fantastic returns expected on your CapEx in Egypt. I'm wondering how you think these positive changes are reflected in your stock price; like in contrast, what does your valuation model say about your stock price?

I mentioned before in talking about share repurchases, that we think it's still a really good deal to be repurchasing shares. So you can imply from that that our view on valuation is that our Company is a lot more valuable than its current valuation.

So I think, Peter, that the market doesn't give us full value for Egypt and perhaps it's waiting to be sure that we can run and operate a plant in that country and we'll demonstrate that in the next few months. And I think there's a bit of suspended disbelief in our ability to get our site in Chile back operating at high rates and again, I think we are demonstrating success there and we'll continue to success.

So I think those two factors are probably not fully factored into the valuation today.

So a year ago, when things were looking so bleak, I think you were in the first quarter- your stock was under $10 and that could have been a great opportunity to borrow a lot of money, buy a lot of shares and a year later you're looking good. I'm wondering if you don't have the same similar opportunity now where there's quite a disconnect between what you guys think the fundamentals look like and say for instance what the Canadian analysts that follow you think you're worth.

Well-- and I think most of the Canadian analysts think we're worth more than we are today and most of them have a buy on us, so it's pleasing that they see some upside potential in that valuation. But I think to reflect that we could have borrowed money in March last year when the world was constipated with debt; that wouldn't have been a smart thing to do. And it's not something you would have ever seen this company doing.

I personally bought some shares in March last year and I'm very pleased with that investment. But unfortunately the Company wasn't in the same position.

Usually, the most important question to ask or get an answer to is what is the earnings outlook look like and that hasn't been asked today. Do you have an opinion on-?

Well, we purposely don't provide guidance because the methanol prices are a bit like the oil price; if you can tell me what the oil price is going to do in the next couple of years, then I can give you some better guidance on what the price of methanol might do. And so that's an impossible question to answer.

But I think in a broad sense, we have a lot more production coming up and it's all low cost. We have very little in the way of increase of fixed costs so all of our incremental production tends to come at variable cost which is gas and logistics. So every tonne that we produce over and above what we produced in 2009 does produce a great return for the Company.

So in most environments that I can think of, we're going to be producing strong earnings and we've just looked at our three-year projections for our cash flows that we're going to have a lot of cash coming out of this Company over the next couple of years.

It sounds like the CEO should get a management award-

That's the kiss of death, Peter. I don't think management will want it.

You guys have been doing a great job and thank you for your help on the Q&A.

Well thank you for that and thanks for all of the questions this morning. We are very positive. We're very excited about 2010 because I think it is a change for our Company that we're introducing a large low-cost unit in Egypt and we have more stuff coming in Chile and we're very excited about that.

I think it's interesting that the industry has recovered so nicely. For most commodities, it's quite unusual that we're back to the demand level that was at pre-recession levels and to a large extent that's driven by the extraordinary growth and the energy derivatives. And we're very positive about the future of those as well.

So I think that's all a great time and I just look forward to reporting more good news to you in the future and I would like to thank you all for your support and good morning to everyone.

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.