Methanex Corp (MEOH) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation First Quarter 2010 Earnings Conference Call. As a reminder, this conference call is being recorded on Thursday, April 29, 2010.

I would now like to turn the conference call 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 2009 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 First 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 an improvement in our results in the first quarter. We sold 1.7 million tonnes of methanol. This represents a 12% increase over the last quarter and our highest volume of quarterly sales since the second quarter of 2007.

We've increased our sales volumes in anticipation of increased production volumes in Egypt and Chile. In the first half of 2010, we are managing our supply balances by increasing purchases of methanol, but expect over the next few years to become less dependent on purchases and supply more sales with produced product.

During the first quarter, we achieved and average realized price of $305 per tonne, which was $23 per tonne higher than last quarter. This led to higher EBITDA of $81.5 million and net income of $29 million or $0.31 per share.

There were a couple of factors that caused our earnings to be lower than normal and lower than the consensus forecast of $0.42 per share. Firstly, our stock-based compensation was about $0.08 per share higher than it would have been in a quarter in which our share price did not increase. We also have higher vesting of stock compensation in the first quarter of each year, due to accounting rules.

Secondly, one of the factors that is difficult for analysts to estimate, is the level of sales from produced methanol. We make a significant margin on produced methanol, but a much more modest margin on purchased methanol, so small changes in sales of produced methanol can have a substantial impact on our results. So despite achieving higher production in the first quarter, the benefit of this has not yet been reflected in our earnings as our sales of produced methanol were lower than our production in Q1. If sales were the same as production in Q1, this would have improved our earnings by a further $0.05 per share.

I'll comment more on industry and pricing outlook a little later in the call, but first I'd like to provide you with an update on our operations. Our plant in New Zealand, the Motunui plant, continued to operate well and produced 208,000 tonnes of methanol. I'll comment more on the outlook for these operations and natural gas in that country in just a few moments.

In Trinidad, we produced 455,000 tonnes of methanol which is a little below capacity for those plants as some technical issues led to a short period of unplanned downtime at our Trinidad sites during the first quarter. These issues were resolved in late March and the site has been operating well since that time. However, we are planning a short outage at the Atlas plant next week to conduct another minor repair.

In Chile, we operated our site at about one third capacity and produced 304,000 tonnes of methanol. This represented our best quarter of production in Chile in two years, as we benefited from an increased gas supply from the successful new gas development initiatives that are taking place in Southern Chile. And again, I'll comment more on the outlook for natural gas at our plants in Chile in just a few moments.

I'll switch topics now and address the industry and pricing outlook. As I mentioned in our last conference call, methanol demand has recovered significantly over the past year and current annualized demand has now surpassed pre-recession levels. We are continuing to see improved demand in both chemical and energy derivatives in all regions and current indications are that the demand will improve further over the coming quarters.

The strong energy price environment continues to underpin healthy demand for methanol in both fuel-blending and DME in China. Demand growth into these derivatives has been very strong in recent years. And the outlook for further growth is excellent. China has recently introduced an M85 or 85% methanol national standard for blending methanol with gasoline which took effect on the first of December, 2009. And we expect an M15 or 15% methanol national standard to be introduced later this year.

Provincial programs in China also continue to support more methanol fuel blending. For example, we understand that Shanxi province, which has been blending methanol into gasoline for more than 20 years, is planning to introduce an M30 or 30% blending standard later this year.

Also the oil majors such as Sinopec have begun retailing M15 fuels in Shanxi. And we understand that by the end this year, all retail stations in this province will be offering methanol blends.

On a personal note, I was in China over the last quarter and visited an auto manufacturer who has M100, 100% methanol vehicles, that subject to the release of a national methanol vehicle standard are ready for mass commercialization. I had the opportunity to test drive one of these vehicles. I found the performance to be excellent, with better acceleration than a similar gasoline-powered car.

The DME industry also continued to operate at a higher rate during Q1. In the last two quarters, there has been a step change increase in DME operating rates in China and we believe that if high oil and LPG prices persist, there is further upside potential.

Turning to methanol supply, over the last quarter operating rates in the industry have improved. In China, production increased and natural gas-based plants operated at higher rates after the lifting of winter gas restrictions and some new plants have begun operations. This has led to some replenishment of global inventories and we've seen some downward pressure on pricing.

In April, our average non-discounted price across the various regions is about $350 per tonne and we have just posted our May non-discounted price for North America at $333 per tonne. However, as prices have come down, we are seeing some higher-cost capacity shut down. And in the last week, spot methanol prices in both China and Europe have increased. It does seem that at current pricing levels, higher cost producers are moderating rates of production.

There are four new methanol plants, representing 4 million tonnes of capacity scheduled to start up outside of China by the end of this year, including our project in Egypt. If all these plants come online promptly and operate well, then there may be some downward pressure on methanol prices. However, history teaches us that it may take some time for this capacity to operate at high rates of utilization and have a meaningful impact on industry supply.

Given the substantial amount of high-cost capacity that is operating in the methanol industry today and if strong energy prices and demand growth continue, this new capacity may not be particularly disruptive to industry pricing.

Longer term, we believe the industry supply-demand outlook is very positive. Apart from plants expected to start up this year, there is little new capacity expected to come online outside of China over the next few years. This suggests that even with conservative demand growth assumptions for the methanol industry, supply will be challenged to keep up with demand and this should support a healthy methanol price environment in the next few years. This environment also lines up nicely with our plans to increase production in Chile and possibly some of our other locations in 2011 and 2012.

I'll switch topics now and provide you an update on the key initiatives that we are focused on. Firstly, natural gas to our plants in Chile; as I mentioned earlier, we achieved higher operating rates at our Chile site in the first quarter as we operated two plants, underpinned by increased gas supply from new gas developments in Southern Chile.

As I mentioned in the last conference call, we expect an improvement of about 20% to 25% to our production in Chile in 2010 compared to last year. And this assumes that we operate one plant during the Southern Hemisphere winter, when the demand for natural gas is higher for residential purposes. In this regard, earlier this month we reverted to operating one plant, so we expect lower production from Chile in the second quarter.

We also expect to be back running two plants again and operating our Chile sites at higher operating rates during the third quarter. We continue to see positive news coming out of Southern Chile on the development of new gas supply. The Fell and Dorado Riquelme blocks where we have contributed capital to accelerate natural gas development, continued to increase gas deliveries to our plants over the last quarter and these two blocks now account for more than half of the gas supply to our site in Chile today.

We are also beginning to see the results from nine other blocks near our plants in which several international oil and gas companies have been ramping up exploration activity. For example, over the last quarter PetroMagallanes who have four exploration blocks in Chile, announced a gas discovery and this could result in incremental gas supply to our site later this year.

With momentum building in Southern Chile and drilling activity forecast to increase significantly, we expect production at our Chile site to increase more quickly in 2011 and 2012 and we continue to be optimistic about returning our Chile site back to a four-plant operation.

The next project I want to provide you an update on is the new methanol plant in Egypt which is almost complete. Prior to startup, there are some remaining construction activities and then pre-commissioning to be completed in the process area. Much of the utilities have been in operation for several months and the operating organization has been working shifts for some time to support the utilities operations and pre-commissioning activities.

We continue to target first methanol production in mid 2010. We are very excited by the addition of this first-class asset into our supply chain, which we expect to increase methanol supply to our customers and increase our cash generation in the second half of 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 and are close to finalizing contracts with a number of gas suppliers to extend the operation of this plant. 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, on the last conference call I mentioned a new initiative we're involved in with a small company KEA Exploration. We committed around $10 million to fund some natural gas exploration in the Taranaki region near our plants and we expect drilling to commence on this prospect in the second quarter.

I'll change topics now and make a few comments regarding our liquidity and capital allocation. During the first quarter, we generated $78 million of cash flow from operations before changes in working capital. And we continue to be in a strong financial position. We have conservative leverage, a $200 million undrawn facility, no refinancing requirements until 2012, and a cash balance of $196 million at the end of the quarter.

We have two immediate priorities for the use of our cash. Firstly, we have a number of excellent opportunities to grow our Company. We expect to continue committing capital to accelerate gas development in Southern Chile and improving the utilization of that site. And we also have further potential to increase and restart production in New Zealand and Canada and we may commit some capital at these sites in the coming months. We are in a strong position to satisfy these initiatives and our planned capital maintenance expenditures.

And secondly, we are committed to returning excess cash to shareholders. With the Egypt project starting up soon, our business will have improved potential to generate cash flow, so we would expect to be in a position to build on our strong track record of distributing excess cash to shareholders through both regular dividends and share buybacks.

Before stopping for questions, I'll briefly comment on our expectations for the second quarter. Firstly, pricing has moderated a little in the second quarter. So at this point, we would expect to have a lower average price realization. And this should lead to modestly lower earnings. However, with the Egypt project targeted to commence operations later this year and with Chile expected to be back operating at higher rates in Q3, we believe that the improving trend of cash flow and earnings is again likely in the second half of the year.

So at this point, Operator, I'm happy to stop and take any questions that any of our listeners might have.

(Operator Instructions). And the first question will be from Jacob Bout from CIBC. Please go ahead.

Good morning. I had a few questions on the M15. I think this was the first time that we've seen the suggestion here on a timeline when we could see the M15 standard being established in China. You're suggesting by the end of the year. What gives you this level of confidence?

I have John Floren on the line, Jacob, so I'll ask John to make some comments on that.

Hi Jacob. We were expecting actually the M15 last year and as a result of some of the input from automobile manufacturers in China, similar to the E15 story in the U.S. that we're all following today, the worry was that the older cars using an M15 standard would have some challenges with some of the seals and gaskets, etc. So the Chinese government decided to do quite a bit more extensive testing and that delayed the M15 rollout by about one year. So we are expecting, based on our contacts, to have that standard sometime mid to the end of this year.

And is this just for the gasoline market or is there any direct blend into diesel as well?

This-- the M15 is direct blending for gasoline; having said that, there is more and more methanol being blended directly with diesel.

Okay. And then should we look at this as a kind of-- the M15 or the 15%-- is this on a volume base or on an energy equivalent? And really what I'm trying to get at is if you're assuming that the Chinese gasoline demand is around 65 million tonnes. Does that move the needle from say-- 4 million tonnes of direct blend to 10 million tonnes? Or do you go from 4 to 23?

Well, the 15% is volumetric. Just because there's a standard, doesn't mean it's going to get widely used day one. But the trend would be there. I think it's an economic opportunity for gas blenders and we're seeing some of the bigger guys come into the space now with actual fueling stations using methanol. And I think also that over time, because of China wanting to be more self-sufficient on energy, as part of their strategy to use their coal to make liquid fuel. So I think those two things combined, over time, will lead to a more adoption of M15.

The other thing about China that's a little different than the U.S. is because it's such a new market; they don't have an older fleet of cars as let's say the U.S. has. So they don't have the same overhang of 20 and 15-year -old cars that the U.S. would have.

And there's quite a focus also on M100 John, that 100% methanol vehicles-- so there's a bit of work to be done before the standard authority approves the release of 100% methanol vehicles. But certainly the car manufacturers are gearing up for that, Jacob, and I think that will be-- if we can roll the clock forward ten years-- we're going to see a large fleet of vehicles that run on 100% methanol.

Okay, maybe just last question to flush out; what is your sense on what the current demand in China is right now for methanol for fuel blend? And then what is the upper end as far as how much can they actually blend into gasoline using the current engine technology in China?

Well, if the current demand for 2010 is around 4.5 million tonnes of methanol into fuels; the upper end would be just a guess. I mean the market is the fastest-growing market in the world. So you have to tell me what timeframe you're talking about and assuming that most of the cars end up using M15, we're talking four, five, six times where we are today; assuming any normal growth rate. But as we get into these higher blends, as Bruce mentioned, it's really difficult to forecast. But what I would say, Jacob, is since we've been following this over the last five to ten years, we've always underestimated the amount of methanol going into energy applications in China, i.e. DME and fuel blending.

Maybe if I could just rephrase that question; the current engines right now-- can they handle a 15% blend because there's been some suggest that that number could actually be higher, closer to 20% or 30%?

I think what we're going to see is 15 for awhile and then see what happens to the fleet. That's what I would suggest and it's blending so you don't have the same issues as if you're running 100% methanol as far as the energy and the BTU value, so we would expect 15 to be the standard for most of the gasoline specs in China for a few years anyway.

Okay. Thank you for that.

Thank you. The next question will be from Bert Powell from BMO Capital Markets. Please go ahead.

First, I was just wondering if you could share with us your thoughts in terms of the capacity that's coming on in the second half of this year that's inside China.

Well there-- I think it was 5 million tonnes came on last year and then another 5-odd million tonnes this year. So there are plants being built in China and they are coming on and they are producing. For the most part, they're in the inland provinces and they're based on coal resources in those regions. The Chinese industry typically operates around 50% capacity utilization and I think that's a function of both economics and the fact that coal-based methanol is more challenging to operate than natural gas-based methanol. So I think that operating rate is explainable.

Our long-term view is that most of that methanol will operate and it will find its way into fuel and just as John has explained, that we see lots of growth occurring in gasoline and DME and in diesel. So that's-- I think John also mentioned that the Chinese government is on a path to having a significant part of its liquid fuels or transportation fuels supplied by methanol manufactured in their own country.

Longer term, we also see-- well even midterm-- we see that the coastal provinces where all the people live, well not all the people but a lot of the people live and I think where the chemical industry resides-- that will be supplied by, in our view, imported methanol, mostly made from natural gas. So, we've been saying that for a few years now and it's kind of the way that the world's worked out and it's what we still believe in the future.

Okay. And just to Chile-- if you look at what you're finding today, is it reasonable the exit rate for-- at the end of 2010 would be consistent with 1.5 million tonnes of methanol in 2011?

Roughly-- I think that's a reasonable estimate. And we've had a few frustrations in Chile and I feel that we never quite delivered on what we hoped in any period. And I can go back and explain the reasons -- that 2009 was a pretty tough year and I know all of the companies operating down there cut back their budgets and slowed things down. Then while the latest earthquake hasn't had a direct impact on the plants, there's no doubt the government is a bit more focused on the earthquake area and are quite appropriately so. So we've struggled to get the attention of some of the government departments who are important to us.

So there are some things that have been a bit of a frustration. But the reality is that as money is spent, as wells are drilled, the success rate has been quite high and we see continued increased deliveries of gas to our plants. So I think our view is unchanged; albeit things are happening a bit slower than we hoped they would.

Okay. And just last question; on the discounts, my recollection is that those start to roll off in the second half of 2010. In other words, I think you're currently disclosing about 10% is subject to preexisting fixed-price contracts.

You're right, Bert. That number was 20%; so some of those fixed-price contracts have already rolled off. We've probably seen the-- the biggest part of that impact has already occurred.

Is that likely-- is that going to continue in the second half of this year or is that really more of a 2011?

I'm going to ask John to comment on that.

Yes, Bert; it's John Floren. So we've seen some impact in the first quarter, but there is another pretty significant one that's coming to the end at the end of April-- will be the impact on that. The next ones after that are more 2011.

Okay, perfect. Thank you.

Thank you. The next question will be from Peter Butler from Glen Hill Investment. Please go ahead.

Good morning, good morning. I always thought that you guys had a rather lean organization. But I note that you must have more than one person writing the scripts for the press release and for the charming CEO's conference call.

I assure you we do have a lean organization and what's your point, Peter?

Well, in your press release, on the subject of cash, you talk about investing in growth and you don't mention shareholders. And in your conference call, you quite rightly include shareholders there. I'm wondering-- when I read the press release I was wondering whether does this hint about another Egypt project coming around the corner or is there anything that doesn't meet the eye here?

No, there's nothing that doesn't meet the eye. I think we've been really consistent over a long period, Peter, and I think you can continue to see that consistency. The one thing that's a bit different today is we've got lots of opportunities sitting in front of us that have outstanding returns and whether it's our plant here in Canada or added capacity in Chile or New Zealand, every one of those initiatives that we're working on have substantial double-digit returns and certainly I'm an enthusiast for distributing excess cash to shareholders, but while we have great projects to invest in to grow the Company and provide great returns to shareholders, I'm an enthusiast for that as well.

So if there's any little subtle change at all, it's simply that we do want to pursue great projects that we have sitting in front of us.

But the things that you mention-- maybe doing some more exploration which sounds damn good and-- they don't seem to be extraordinary uses of cash.

Well, if they provide extraordinary returns, they're certainly extraordinary uses-- aren't they?

Well, the point is that the things that you suggest as investments in growth, don't seem to be large and I guess I'm lobbying for maybe a large program to return cash to the owners.

Yes, you are right. All of these projects themselves are a few tens of millions of dollars; so they are light capital. It's not a huge amount of money, so it's not a second Egypt or a greenfield plant. That's certainly not in our current planning horizon, although ultimately of course it is because we need to continue to grow our business.

But the reality today, Peter, is by my definition we don't have much in the way of excess cash. We've been operating between $150 million and $200 million worth of cash and in the environment that we've been in with the challenges that we've been confronted with, that doesn't meet my definition of excess cash. So we're certainly not at a point now where we're ready to start increasing distributions.

Well, Bruce you've done such a super job as CEO. I just like the opportunity once in awhile to pull on those tail feathers.

I can feel the tightening right now, Peter.

Okay, thanks for the help.

Thank you. The next question will be from Steve Hansen from Raymond James. Please go ahead.

Good morning, everyone. Bruce, you mentioned of directing a little bit of strategic capital toward Canada is certainly quite interesting. I understand the unique strategic nature of that plant in Alberta in the context of not much being left in North America anymore. But am I to understand that you might have made some progress toward securing long-term gas contracts with a domestic producer?

No, that would be overstating the progress we've made. We've certainly talked to a lot of producers about the potential for long-term contracts, but I would say we don't find much appetite for those. I think the North American gas market is a bit more focused on the immediate market. But there are quite a few avenues we are chasing down. What we observe, if our plant at Medicine Hat was operating today, we'd have plant (inaudible) cash costs of around $200 a tonne, based on today's natural gas price.

So there's a great margin opportunity there. But we need to commit $45 million or $50 million of capital to get that plant restarted. And none of us have a crystal ball in terms of what the future gas price is. In talking to lots of people, I know that there are bulls and bears out there and it depends which group you choose to believe as to whether you think this is a great opportunity or not.

Okay. Yes, that's an interesting debate. Just shifting to China if I may, the DME production certainly has shown some growth with recovery in energy prices of late, but there has also been some hiccups related to blending labeling with regards to cylinders. Do you guys have a view on that and how that's shaping up? I've been hearing things about it spreading but--

Well there's much ado about nothing there. It was an issue of labeling that there was a retailer/wholesaler who was selling DME blends as pure LPG. So it was really an issue of being less than straightforward about what product they were selling. And also we understand perhaps blending at above the recommended rate of blending. So the authorities did crack down on that particular distributor and have been a bit more rigorous on checking the rest of the market. But we've seen little or no impact on demand as a result of that.

And as I mentioned in my comments, the last six months we've seen a real step change in the amount of methanol flowing into DME. So I think that while that issue has created a bit of noise in China, it certainly hasn't impacted the market at all.

Okay, great. That's encouraging. And then just one last one if I may also related to China; do you have any comments or perspective on the anti-dumping investigation by China right now and how do you think that's going to play out? I understand we could be due for a ruling for some sort of finding here in the short term.

Yes, it's John Floren. We are expecting to hear something in the next weeks. We were expecting to hear something by April 1, so I think that we haven't heard something indicates that China is going through a pretty difficult decision-making process on this issue. I'll remind you that number-two and number-three importers into the country; Iran and Oman; are excluded from this investigation.

So it's hard to say what's going to happen. But we think that an impact of any duties will be minimal, as people would just readjust their supply chain. I think our concern is-- what could be next if there's not an impact on imports that the Chinese are looking for. So it's a bit of a story to be played out in the next 12 months.

Sure. Okay, that's it for me, thanks.

Thank you. The next question will be from Sam Kanes from Scotia Capital. Please go ahead.

Good morning. (Inaudible) on math, Bruce; the $0.32 basic Q1 number; you referred to of course if you had matched production with your sales produced volumes, you would have picked up $0.05. And there was $0.08 of stock comp-- one shot in Q1. When you refer to Q2 being down in earnings per share, which number are you referring to?

Well, I'm not going to forecast stock comp, because that's like forecasting the methanol price, so I was really referring to the core earnings which would be the $0.32 plus the $0.05 if you like.

Okay. So it's $0.32 plus the $0.05; that's what I was looking for. Okay. I imagine there are other people looking at mothballed methanol plants around the planet, including yourself in Canada.

Well, you know there's not too many, Sam. When we've scanned around the world, a lot of the plants- you think about the plants that operating in the U.S. and in Canada for that matter-- most of them have been dismantled or moved or sold or done something with them. So there are very few that are actually mothballed and sitting in a location where there are competitive feedstock supplies. So I think this is a really unique opportunity that we have.

When you say very few-- would you elaborate on one or two areas--

There's only one I can think of; that's on in Malaysia. Are there any others, John that you can think of? There's one small plant in Malaysia that has talked about restarting as well.

Okay. With respect to DME recovering in China; in your initiatives, how you profiled on your priorities; obviously some were below-- the ones you've announced are DME expansions at your site in China with your partners as well as Egypt. Is there anything noteworthy of mentioning in there?

Well, we've actually just started the front-end engineering and design for our project in Egypt. We're a 20% shareholder on it. It's a few million dollars; that's why it doesn't rate much of a mention. We never set out wanting to be a DME producer. We were always interested in the industry and wanting to understand it. And we were wanting to support our partner in China.

So that's the reason that we're invested. But it's a pretty small contribution and we still don't have any ambition to become a major player in that industry.

Switching then to the opposite side; feedstock costs; in integrating yourself which you're doing tentatively I guess or moderately in Chile; does it make strategic sense from your perspective of being more aggressive on the feedstock side with respect to your usage of feedstock?

Well, I think it does for me. Our business model has been to build these big plants that last for 30 or 40 years and to underpin those with long-term contracts. Now in some places that's worked really well; in other places it hasn't worked well at all. So Chile is a great example of-- where we've had long-term contracts that people have for various reasons, haven't honored. So a different model is to become more integrated into the upstream and I think that's what we've-- I think you might have used the word tentatively moved into that.

I'm a bit wary. We don't want to turn ourselves into an E&P company. I don't think that we have the skills and we don't have the ability to manage risk in the way that oil and gas companies do. But I think the model that we're developing in Chile, we kind of like. And if we can develop a similar model in other markets, then we're really quite enthusiastic about that as well.

So it does perhaps imply a bit more capital input into the upstream.

Yes. Last thing; there's been a variety of MTBE/ETBE switching going on; sometimes one way, sometimes the other. I'm not sure if there's any trend whatsoever there at all. This is to you John; are you seeing any kind of trend there?

Well, we're seeing growth in MTBE. That's the trend we're seeing. I think you're aware of the Enterprise plant in North America has started up. That consumes about 200,000 tonnes of methanol. That's all for export. We continue to see growth in MTBE in China in a fairly significant way and Africa as they replace lead. So it's not growing at the rate of fuel blending or DME but MTBE is far from a dead product and I think if you look at Huntsman's results, they probably consider it a specialty based on the amount of money they're making from MTBE. So I think the world outside the U.S. is still using a lot of MTBE and will continue to do so.

And it's been an extraordinarily profitable product in the last couple of years probably.

Yes, the interesting dynamic, Sam, is that as octane becomes short because the U.S. is importing so much octane because of not using MTBE, there's more demand for MTBE in those other markets where they're short on octane the U.S. is importing; so pretty interesting things happening.

Also it shows up in Lyondell's some form of IPO or prospectus here along the same lines.

Absolutely.

Thank you, gentlemen.

Thank you. The next question will be from Charles Neivert from Dahlman Rose. Please go ahead.

Good morning, guys. A quick question on China and not so much the cars that are on the road, but the cars that are being built; what's being built now in terms of compatibility with the M standards? Are they mostly in effect what we would call like a flex-fuel where they can take M85 or are they being built more in line with an M15 or M20 kind of situation? I mean what can you say about what's going on there?

I think you get a blend, Charles. I think most of the cars that are being built today can consume M15 no problem. I think our quote was it's about $100 per car difference to be compatible with alcohol fuels, similar numbers to what we're seeing in the U.S.

As far as M85, I don't have the exact split, but there are quite a few vehicles being built in China that can take M85 as well.

Okay. And then just briefly-- you talked about the other plant in Trinidad going down for some-- for a quick fix and some maintenance. Can you comment about how long it might be and what kind of loss relative to what we saw in the first quarter on the other plant in Trinidad in terms of tonnages?

The current outage is about eight days and it produces about 5,000 tonnes a day so it's about 40,000 tonnes of lost production. I would say I've been a bit disappointed in the production rates in our Atlas facility in particular. It's a big plant. And they're all small things that are very hard to predict and very hard to anticipate.

The one that occurred in March was a design fault in a large compressor and when we finally found what the issue was and went back to the vendor, the vendor acknowledged that they knew there was a fault and never told us. So that was kind of really, really disappointing that that's something we could have resolved had we had better communications with that vendor.

So it tends to be small, annoying little things like that and this current one is of a similar nature; another design or fabrication issue.

Okay. That's it from my end. Thank you.

Thank you. The next question will be from Fai Lee from RBC. Please go ahead.

Great. Thank you. My first question relates to I guess your estimate of the marginal cost of production in China. We've seen some production switch on at higher prices and we've seen some switch off when prices have come down. Do you think that with the North American price coming down at $330 I guess-- net price maybe $300-- is that sort of where you see the marginal cost-- maybe that's lowering enough to keep China's production offline or do you think that you'll see some more production switch on and kind of go back and forth here?

Fai, it's John Floren. We're at the point here in China-- I think the import parity price today is around $270 or $275. And we got there-- what we have seen is about 1.5 million tonnes in China, mainly coal-based, turn off for reasons of maintenance. This is the official reason. We probably think-- there's probably some maintenance and mostly cost-curve impact. I'll remind you that if you're buying coal at $110 a tonne, you double that to make a tonne of methanol; so just cash cost for coal alone is $220. So if you're in inland, getting it to the coast at $50, you can see the economics pretty quickly.

So I think we're at the inflection point right now, and that's why Bruce mentioned earlier, we've seen some bounce back in the spot market in China. The other thing that's happening-- we talked about dumping a little earlier. We are seeing quite a few of the middle traders in China moving off their imported material from Saudi, Indonesia and Malaysia in front of what they expect the dumping ruling here in the next week or so. So that has also contributed some of the pressure on the downside.

Okay. And when you say your inflection point like about maybe-- are you referring to $275 or do you think that your new level around $300 is sort of reasonable?

Again, in China we look at the cost curve. If we get to that $270 number as an example, there's probably 100 plants on that place in the curve. They all act independently, they all look at cash, they all have different drivers; so it's hard to say that they're all going to act in concert. So it's really difficult-- there's a range is what I would say.

Okay. And earlier Bruce you commented-- I'm just going to switch topics-- you talked about the new capacity that's coming online is going to take some time to hit the market-- if that seems to be historically what's happened. I just wanted to confirm that's-- you're not trying to say something about your Egypt plant and maybe you can comment on how you expect to see that ramp up over the next year.

Sure. Now I've got Michael MacDonald in the room who is running that project in Egypt so I'm going to ask Michael to make a comment on how we've got on over the last quarter and what our forecast is.

Okay. Thanks, Bruce. Good morning, Fai. Just to remind people on the status of the project right now; utilities are now operational and we're now focused on the pre-commissioning the oxygen plant and the rest of the process. So in terms of schedule, since the last conference call, we have incurred some delays from our expected schedule and that was due to some construction execution issues relating to the contractor and his subcontractor. So these are construction issues and nothing related to the underlying plant.

Our target there continues to be startup in mid year and that focus is to achieve a safe and reliable startup and we continue to expect to produce some methanol in Q3. But if we don't recover the current delays, the Egypt volumes will have a lesser impact on Q3 earnings than if we were to recover those delays. And I should add-- say that in one of the morning notes I did note that there was a note about the impact on Q2. I think we can say with certainty now that Egypt will have no impact on our Q2 earnings.

Yes, and I think we guided to that last time. And I think my kind of take on this Fai is this is a 30-year project we're building and we've built it over the last five years and we're doing it at quite a difficult time in the global economy and in a challenging country that we've always acknowledged. And we're getting very close to the end. And I know that everyone wants to fine-tune their models to determine exactly when the thing is going to startup, but we want to do it cautiously, carefully, and make a good job of it.

So we're much more focused on doing that than we are on rushing the start, just in order to say that we've started it up. So we'll continue that steady process, as Michael said and I think as I said last time; don't expect anything in Q2 and I think we're confirming that now and the volume in Q3 will be a bit dependent on whether we can catch up some of the delays that Michael has talked about.

Okay. And just in terms of-- when you do start up, it's not going to be 100% based on your current targets-- are we talking maybe like 60%?

These plants do come up to 100% remarkably quickly. But typically there will be a few gremlins and you end up turning them off for a week and then turning it back on again. So our experience in starting up plants in Trinidad in Chile has been that when we're ready to start them up, they operate at high rates of utilization right from the beginning.

Michael, do you have anything-?

No, that's absolutely right.

Okay. Alright; no I just wanted to make sure because earlier you were talking about some of these plants not operating-- not particular to yours-- but they may not be operating at high rates right away.

That's probably talking about some of the other plants-- (inaudible)

Just a last thing; just on the share compensation-- Sam's question; maybe it might be a question for Ian, but if your share price doesn't change from the end of the last quarter, should your expense not come down? And also I think there were some-- I thought there was (inaudible) in the first quarter that may have impacted your expense.

Fai, if the stock price doesn't come down, we would still have stock compensation expense because part of the stock compensation expense gets amortized over the vesting period, so that would include stock options and PSU's.

Right. I was aware of that. But I'm saying if your share price doesn't change relative to Q1, should your expense not come down?

Absolutely. Substantially-- so $5 million of that stock compensation in the first quarter relates to the increase in the stock price and then there's a weighting every year to stock compensation based-- as Bruce said earlier-- on the accounting rules that provides sort of an extra charge in Q1 which reduces significantly in the other quarters.

Okay. That's what I was trying to get at. So your base might not really be $0.37-- it might be a little higher than that depending on where your share price goes?

I'm not quite sure I follow your point, there. Maybe we can just take this offline--

(Inaudible) that's fine. Thanks.

(Operator Instructions). The next question will be from Paul D'Amico from TD Newcrest. Please go ahead.

Hi guys. Bruce, just really quick; I know I've asked you this in the past but in terms of the August 2012 Bonds; is there any updated thoughts you can give on potential refinancing in interest or whatnot?

We would intend to refinance it but it's a little far off in the future. We think the structure of our balance sheet is the way we like it. So at this stage, we would have every intention of refinancing that bond.

Is this something that-- as you get closer you're going to be opportunistic? Or are you already sort of pigeon-holing very close to the end date?

Well, I don't think we'll do anything in the next 12 months for sure. But I guess we've always got a little watch on the market and we'll make decisions as the time gets closer.

And something in terms of a bit of a history lesson here; you mentioned in terms of potential restart in Canada as an example and looking for long-term gas contract supplies and whatnot. What sort of long-term arrangement would you be talking about? Are we talking 10 years, 15 years plus?

No, I think in my mind there's a dislocation between North American gas prices and oil prices today that presents a great opportunity for methanol. And we wouldn't-- it's very hard for me to envision a circumstance where we would either think about building a greenfield plant in North America. But our good fortune is that we have this plant in Medicine Hat. It's about 470,000 tonnes. It's in pretty decent condition, but albeit we have to spend some money to get it in operational order again.

But for a relatively small amount of capital, we can bring another 500,000 tonnes into our supply chain with a decent cash cost if we could find gas prices that are similar to the prices that prevail today. One of the challenges is, if you look at the forward curve for gas, it's a lot stronger than today's prices. So we've been trying to find ways of getting some certainty around feedstock cost before we go and commit and spend $50 million.

No I understand that. What I was trying to get a gauge on is how much certainty in terms of how far out and my second part of the same question is-- in the past, for instance is that a shorter term than it was in the past such that you're more confident now?

In my mind, it's a short-term opportunity. Eventually, oil and gas prices in North America will end up at some sort of parity as they have been for most of the last 20 years. So I think we're in a period now where the shale gas or LNG or conventional gas or demand-- there are all sorts of reasons why gas prices are low today. And it looks to us as though that's something that might prevail through the next-- and whether it's three year or five years; I don't know. I doubt that it's ten years.

So once you've spent the capital, then I think we've bought ourselves an option to operate that plant when we choose to or not. And that's probably our ideal circumstance, that we build ourselves a flexible asset that's able to take advantage of discount gas pricing in Western Canada.

That clarifies it. Just last question on eMethanex; I know it's been beaten to death-- but just to get an idea on Q3 as a range. At this point are you still confident you're going to be north of 50%?

I really don't want to throw out numbers, Paul, because it's just-- it's too hard to say. I think the project is going on really well. We're quite pleased with where it is. It's slipped a little. We're a little disappointed with that. But in the context of the scale and size of this project, I think it's going along really nicely. There are no red flags that we can see that will cause significant delay. So as I say, for us it's safety, reliability, quality; all of those are important features to us in starting this plant up.

So we don't intend to rush it. But we want to do a good job when we do start it up.

Okay. I appreciate it. Thanks.

Thank you. The next question will be from Chris McDougall from Treaty Oak Capital. Please go ahead.

Hey guys, thank a lot. A couple questions; first one just I might have missed something you talked about with the Canadian facility. If you decided to start it up today, about how long would it take for it to be operational?

Well, it's about a six-month schedule to return it to operating status and a good part of that is we have to go and recruit 100 people and train them. So that's not something you can do overnight.

Okay. Great; and how long do you think until you make the decision to go forward with that? You discussed some of the factors, but what's your--?

I think during the summer we will make that decision. And it's probably not a smart thing for us to even contemplate starting it up in the middle of winter. So what's in my mind on this is a spring start in 2011.

Okay. Great; and then touching back on the stock comp and any other kind of special items that occurred either positive or negative to earnings in first quarter; so you said that there was a -- I think it was a $5 million hit to stock comp of additional stock comp because of the run up in Methanex shares. I'm just trying to make sure that-- that increase in stock comp was due to an increase in Methanex shares where it will go away if Methanex shares stay flat versus the average during last quarter?

Well, it's a bit complicated. I think the answer is yes. It is bit complicated. There are three elements here. One-- there's a regular amortization of stock comp over a vesting period. So that's something that occurs every quarter, regardless. And then there's an adjustment to stock comp based on the share price. This quarter the shares were up 20% so you would expect that there would be a hit to income as a result of that.

And I hope that our stock goes up 20% every quarter and we have to explain this away because we'll all be very happy investors at that stage.

And then the third element and Ian mentioned it before; in Q1 every year accounting rules forces into an additional expense that is not repeated during the other three quarters of the year.

Alright and what was the amount of that expense?

$2 million to $3 million.

Okay, thanks. And so the additional stock comp, aside from that first quarter expense, is due to the amount of change in Methanex shares or due to the level?

Most of it is the run up from the stock price.

So it will go down if the stock price doesn't change?

Yes, if the stock price goes down, we'll end up with a negative adjustment.

Okay, okay great; thanks a lot. Sorry for the detail.

Thank you. And the last question will be from Bernard Horn from Polaris Capital. Please go ahead.

Yes, good morning and I just wanted to follow up a little bit on this price discrepancy between gas and oil in North America. I mean we know that there-- you suggested that the reason is because of the shale gas coming on and of course the LNG glut if there is one, around the world.

So my question is-- as a potential buyer and when you're trying to procure long-term supplies, how much credibility do you give to the gas producers who have indicated that it seems like the shale gas has quite a long life to it-- because every once in awhile you hear about long-term viable sources of gas and then it hangs in there for a little while and the next thing you know, we've got a shortage. I mean I don't know how you make a decision based on that, but maybe you could give us a little bit more of an insight into how you're thinking about it and whether or not it's shale gas you'd be relying on or imports of LNG and how Medicine Hat would secure those or how you'd get into Medicine Hat.

Most of the gas that we would try and source in Medicine Hat is conventional gas that has been produced in Alberta over the last 20 or 30 years. And there has been a lot of it and there still is. I think there are lots of different opinions on shale gas.

I look at the Barnett shale; they've produced over 5 tcf of gas out of that shale over the last few years. So you know that the gas exists and you know you can produce it. How sustainable is it? What are the long-term decline rates? How much gas is ultimately recoverable? I'm certainly not expert enough to answer any of those questions.

I see some people who are very positive about it; and others who are quite negative about it. So I think the jury is out in terms of the long-term recoverability of shale gas. But there's no doubt that short term, or medium term even, it's having an impact on the market because it's adding supply in a market that's already well-supplied. And I think LNG is just the icing on the cake. There is a lot of LNG coming to market and I think North America is the market of last resort and there still is LNG turning up in the U.S. today, despite the fact that gas prices are low.

So my own feeling is that supply is overwhelming demand and that will probably continue for the next-- and whether it's three years or five years-- I don't know. But that's the opportunity that we have to source gas from Western gas and turn it into methanol which trades like oil; so we're taking advantage of that disconnect between natural gas and oil.

So even though you have to have an opinion on the viability of shale gas; as long as it exists for the next two or three years, the capital investment you make in Medicine Hat is sufficiently low enough that you can make that as long as the discrepancy lasts like three to five years and then you could be out of it if it returns to parity?

We've run all sorts of models around it and it's all gas pricing and methanol price; those are the two big variables. And on many of those models, you get your money back in 12 months; so this is not a long-term investment. This is all about building ourselves an option to operate that plant if the economics make sense. If it doesn't make sense, then we'll turn it off again. And if my three to five years is right, then if you've paid your capital back in 12 months, you know that the return on that capital is going to be fabulous over a three to five year period.

Right. And would LNG have any viability for you at all there?

No, not really. Medicine Hat is in the middle of the prairie so this is all about, as I say, conventional gas that's available in that location.

Okay. So it's just a-- there's no pipelines that come into there from elsewhere like from the coast or anything like that?

There are-- most of the pipelines export gas. There are lots of pipelines in the area, but LNG will find its way into the U.S. Gulf and maybe the East Coast and will have some influence on the market, but would never find its way to Medicine Hat.

Alright, okay; that's very helpful. Thanks a lot.

Alright well, thanks everyone for your comments. We have got our annual general meeting, in fact, in another hour and I know it will be webcast so any of you who are interested in continuing to learn more about Methanex, you're welcome to join us in another hour.

I feel very positive and optimistic about the situation that we're confronted with. We're in an environment where demand for methanol continues to grow robustly, energy prices are high and we talked about the outlook for energy applications. And we're sitting here with lots of opportunities to grow our low-cost production base to take advantage of the positive environment we're in.

So I look forward to the next few quarters, the next few years, because I think we're in for just a great run here. So in the meantime, thanks for your support and we'll talk to you next quarter.

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time and we thank you for your participation.