Methanex Corp (MEOH) 2010 Q3 法說會逐字稿

Welcome to the Waste third quarter conference call. This call is being recorded on Thursday October 28th. Your host for today will be 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 today may contain forward-looking information. This information buy its nature is subject to risks and uncertainties that may cause the stated outcome to diver materially from actual outcome. Certain material factors or assumption 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 more information. I would now like to turn the call over to Methanexs' President and CEO, Mr. Bruce Aitken for his comments.

Thank you, Jason, and good morning, everyone and welcome to Methanexs' third quarter investors conference call. I have a number of colleagues with me in the room and they'll be available to help out for questions later on. Firstly, some comments on our results. Methanol demand has continued to strengthen and we saw 1.8 million tons of methanol in Q3 which was up 6% from the last quarter. This is the highest volume of sales since mid 2006. Our team has done an excellent job of building sales volume in anticipation of increases in production from our facilities and positions as well from crude margins as production increases. We reported EBITDA of $57 million and net income of $33 million or $0.35 per share. Our earnings included an after tax gain of $22 million from the sale of the Kitimat terminal facility in the third quarter. This was the close out of an arrangement we entered into and disclosed back in 2005, and we will receive the cash proceeds from this transaction during the fourth quarter. As part of this arrangement we maintain the ability to continue shipping methanol through the Kitimat terminal. I will 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.

Firstly, our plants in Trinidad, they both ran very well during the third quarter, and we produce 501,000 tons of methanol. This represents the highest quarterly production from our Trinidad operations over the last couple of years. In Chile we operated one plant during the third quarter and produced 194,000 tons of methanol. As I have mentioned before, we received less gas supply from ENAP during the southern hemisphere winter when more gas is required for residential heating purposes. And this factor impacted our production levels in the third quarter. I will comment more on the outlook for our natural gas through our plants in Chile, again, just a few moments.

Finally, in New Zealand, the Motunui plant continued to operate well and produced 200,000 tons of methanol during the quarter. I will also comment more on the outlook for operations to natural gas supply in that country again just in a few moments. Before doing so I would like to make a few comments on the industry and pricing outlook. Global methanol demand has continued to be strong and we expect further growth in the fourth quarter. Traditional chemical demand is continuing to improve in all regions, and the strong crude oil price environment has continued to support demand into energy applications. There was some concern that DME inspections by Chinese government agencies over the last quarter might negatively impact DME demand. However, this issue does not have much of an impact on DME demand if China today is similar to levels during the first half of this year. We were also expecting higher DME demand in the fourth quarter with colder temperatures leading to more heating demand in China.

There are also continue to be positive developments for DME in other countries. Over the last quarter, Indonesia held a ground breaking ceremony for 400,000 ton DME project. Construction is expected to commence soon and the plan is scheduled start up in 2012. The DMEs in this project will be used in cooking and heating applications which is similar to it's use today if China. The Egypt DME project also continues to progress well, and final investment decision is expected soon. Fuel blending demand in China has also continued to be healthy supported by attractive economics and provincial blending programs. As mentioned on previous occasions, China has introduced national standards for M100 and M85 and we expect they will introduce an M15 national standard later this year or in early 2011. We expect a M15 national standard should act as a catalyst for growth, as it will encourage methanol fuel blending to be introduced on a wider scale in China.

In aggregate demand for methanol as a fuel and DME has grown from negligible amount a few years ago to about 8 million tons day -- excuse me -- or close to 20% of global methanol demand and the potential is much greater. It was interesting to read the recent reviews of one industry consultant who predicted that demand into these derivatives will grow to over 22 million tons by 2015. We have no special insight into how the future may unfold but we certainly remain very positive in the outlook for methanol and energy applications. We will also continue to support programs for methanol fuel blending in other regions of the world. For example over the last quarter we entered into an MOU the other major methanol producer in Trinidad, to begin a pilot program for methanol fuel blending. The goal of the program is to introduce a national fuel blending program in Trinidad.

Turning to methanol supply, there have been a number of planned and unplanned outages across the industry during the third quarter and some of these have continued into the fourth quarter. Supply outages combined with the strong methanol demand have caused markets to tighten and placed upward pressure on spot and contract methanol prices over the past couple of months. This week we have listed a price of $442 per ton in North America for November, which is an $83 per ton increase over October. We expect to see a similar increase in the Asian contract prices. The key reason for this is that the Chinese methanol industry has continued to operate at modest rates despite increasing prices. Feedstock availability and prices continue to impact production levels and a number of plants are being either directly or indirectly impacted by emissions controls as China is working to achieve green house gas targets. At the same time, methanol demand in China has continued to grow strongly and imports have stayed at healthy levels to satisfy this demand. The the supply demand outlook for the next few years suggests that higher cost capacity will be needed to satisfy industry demand. After the plant is set up in Venezuela last month and our plants in Egypt and Canada that are coming on line soon there is little new capacity outside of China expected over the the next few years. This suggests that low cost supply will be challenged to keep up with anticipated demand growth. And this should support a healthy methanol price environment This outlook also matches nicely to our plans for increasing production at our existing plants sites over the next few years.

One other piece of news that will be of interest to shareholders is that China has now made a preliminary determination of dumping duties. The decision is that dumping duties around 9% should be imposed on imports from New Zealand, Malaysia and Indonesia. The major suppliers into China being Iran, Saudi Arabia, Oman and Qatar, all continue to be duty free so we expect this decision will have no significant impact on the market. We expect some inconvenience in having to re-jig our supply chain, but this decision is also expected to have little impact on our results. The decision is disappointing in that we do not believe there's any basis for applying dumping duties on any country, and we will be working with the New Zealand Government to influence the final determination.

I will switch topics now and provide you with an update on the key initiatives that we have focused on to increase production. Firstly, in Chile, we have been disappointed by the level of gas supply to our plants. We are currently operating one plant and had been expecting to return to two plants in the fourth quarter. However, we now expect to continue operating only one plant during the remainer of the year and until about this time next year when we expect to again the be able to operate two plants. GeoPark's Fell Block and the Dorado Riquelme Block, where we have committed capital have continued to produce reasonable results and have increased production over the last couple of years. Combined, these two blocks are supplying us with about 70% of the total gas supply to our Chile site. However, lower gas deliveries from ENAP have offset these improvements, as gas deliveries from these fields are in decline. We have learned over the last couple years that the time lines for natural gas exploration and development are much longer than we anticipated. Exploration blocks were awarded by the Chilean government to a number of international oil and gas companies in 2008. And while a lot of activity is taking place, we have not yet perceived any incremental gas from any of these. Two of the company's have announced gas discoveries and we expect in 2011 that we will receive incremental gas deliveries from these companies. ENAP has also a drilling program that we have told is producing good results. And in the more frontier type of areas where we have involved with modest participation, there are interesting prospect that is have been identified in seismic surveys. Drilling activity in southern Chile is expected to increase significantly with but about 180 wells to be drilled over the next two years. Which is more than double the drilling activity that has occurred over the last two years. The Chilean government has so announced they plan to assign more areas in southern Chile to the private sector in the coming months which should provide further momentum for E&P activity.

I've gone into some detail on this topic to illustrate that a lot of activity is taking place and there's good cause to believe that additional gas resources will be discovered and developed. We have not changed our view that a long term potential of the area and we continue to be optimistic that we can increase our operating rates in Chile considerably. However, the time lines for re-starting idle capacity in Chile are being pushed out.

I would like to make a few comments now on the project in Egypt. While construction is complete and commissioning of the plant has been underway for the last few months, we have experienced delays primarily from repeated failures of power generation units which have resulted -- which have restricted commissioning activities. This issue has been resolved and the commissioning process is now proceeding as planned. We expect to produce a small quantity of methanal in the fourth quarter, and for the plant to ramp up to full operating rates in early 2011. While we have been frustrated with the construction delays, we are very excited about adding this first class asset into our supply chain.

Turning to our operations in New Zealand, we currently have gas contracts with a number of gas suppliers which will underpin our production of the existing 900,000 ton Motunui plant until the end of 2011 with some options for further gas in 2012. As I have mentioned on previous occasions, in recent years an improved supply and demand has developed in New Zealand and we are seeing more competitive gas pricing environment and better potential to contract increasing quantities of gas to supply our plants. We are continuing to assist the potential for securing more gas supply and are analyzing the possibility of restarting a second plant in New Zealand. With little new capacity expected to come online in the global industry the next few years, this opportunity looks very attractive.

The last project I want to provide an update on is the restart of our plant in Medicine Hat, Alberta. As we announced last month, we are planning to restart the 470,000 ton plant in April of next year. The plant is being idle since 2001 but it is in good condition and the capital required to restart the plant is approximately $40 million. The refurbishment of the plant is underway and we are well advanced with hiring staff and have secured key managers and supervisors. We have purchased gas supply on the AECO market which will underpin the production of the majority of the plants capacity until near the end of 2012 and we are continuing to pursue options to secure gas supply on a longer term basis. We are delighted to be bringing this plant on line as another competitive supply source for our customers. And, based on the current methanol price environment, the project offers an excellent return for shareholders with an attractive payback period.

I will change topics and make a few comments regarding our liquidity and capital allocations. During the third quarter we generated $53 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, $200 million undrawn operating facility, no refinancing requirements until 2012 and a cash balance of $192 million at the end of the quarter. Our immediate priority for the use of cash is to take advantage of the excellent opportunities to increase production at our existing sites. As I mentioned a few moments ago, we are spending $40 million to restart the Medicine Hat plant over the next couple of quarters and we may have a similar commitment for re-start of a plant in New Zealand. We also plan to continue committing capital to accelerate gas development in southern Chile. We are in a strong position to satisfy these initiatives and our planned maintenance expenditures. The outlook for cash flow generation looks excellent, and longer term, we expect to be in a position to build on our track record of returning excess cash to shareholders through share repurchases and dividends.

Before stopping for questions, I will briefly comment on the expectations for fourth quarter. As I mentioned earlier, methanol demand had been strong and pricing has improved significantly. As you know, there are lots of moving parts and it is difficult to provide useful guidance. However, we expect to sell a similar quantity of produced methanol in Q4 compared to Q3 and the price increases that we have seen in October and November, we expect our average realized price to be about $50 per ton higher than Q3. Clearly this will result in a strong improvement in net income before unusual items for the last quarter of the year. And as production from the Egypt project and our Medicine Hat plant enter our supply chain in the first half of next year, we have significantly more potential to increase our earnings in 2011. Further success in Chile and the potential to restart more capacity in New Zealand, offers more upside for the company. So it is indeed an exciting time. So at this point, operator I am happy you to stop and take any questions the listeners may have.

Thank you. Our first question is from Charles Neivert from Dahlman Rose. Please go ahead.

Good morning or afternoon as the case may be. A quick question on the pricing. We have been seeing discounts off of the list on the order of 13%, 14%, and we have been looking at that possibly shrinking down a bit toward the more normal discount in the marketplace, that is around 8% or 9% is that something we should expect going forward or a movement toward that number or stay in this area where it currently sits?

There's no such thing as a normal discount, Charles. Different -- different markets around the world have different pricing strategies. I wouldn't like to leave the impression that there's a normal discount. I think that most listeners will know that we have some element of ourselves on the fixed price contracts. A few years ago it that number was around 20% of sales and now it is around 7% of sales. So the volume of fixed price contracts that we have continues to decline. Next year the number is around 5%. And so as prices move around, clearly fixed price contracts have some impact on that level of discount. Clearly, at higher pricing levels, the discount appears to be higher. So that will continue to have some small influence but I think, for guidance purposes, at prices around $300 to $350 a ton. We expect discounts to stay in about the range we have reported for the last couple of months.

Okay. Then as a follow on, is -- with Egypt beginning to come on during the fourth quarter, and as it moves particularly into next year, are we going to see a decrease in the amount of purchased and then resold product and is it going to be more or less a one-to-one or what kind of ratio might we us on the sort of ramp up your own production in Canada as well versus a decrease possibly in the bought and resold product?

Well, we've got ourselves into a position where almost half of our sales today are from purchased product and we never did that intentionally, it was partly as a result of the consequences of what happened to us in Egypt -- in Chile. I'm sorry. That when we lost gas supply in Chile, we wanted to maintain our market position because we could see ourselves growing back to the same level of sales. So we have gone through a period where we had to support our sales position with a high volume of purchased product. It was never a long term intention that we should do that. So we are just now on the cusp of beginning to displace purchased product with produced product. So as Egypt and Medicine Hat come into our supply chain, we will be reducing the volume of purchased product. And I think in recent quarters we have been about 50/50. We would expect to get down to more like 80/20 in the coming 12 to 24 months.

Okay. Then obviously I guess when, if -- when Chile starts to get much stronger, which I know is still a ways off, but we -- is that an 80/20 -- is that something you would look to hold even as Chile ramps up or I guess it would depend on how fast Chile brings -- can bring product up. But is that a comfortable level for you guys?

(inaudible - multiple speakers) -- I don't know if it's a comfortable level but 90/10 is a comfortable level as well. We will always be in the market purchasing and trading because it is part of our business. But it shouldn't represent 50% of our sales and we don't expect it to longer term.

Okay. Thank you.

Thank you.

Our next question is from Jacob Bout form CIBC. Please go ahead.

Good afternoon. I had a question on M15. I know that you made the comments -- I think in the press release that you expected either at the end of this year or next year -- what is your sense from PetroChina and Sinopec, are they starting to warm M15 at all?

I have John Floren in the room and I'll ask John to make comments in a moment, but there -- there is some -- I'd say there are some elements of opposition to methanol fuels in China and if you look at the refinements they've made an investment in refining capacity to, to grow their position in gasoline sales in the country. So when ever you introduce a competing product, and it is -- I think there's a natural tendency to prefer not to be supportive of the increasing competition, so we certainly have seen a bit of that from the refining industry in China. But when you look at who's supporting methanol fuels, certainly the central government, municipal governments, a number of the car manufacturers, the provencial governments a particularly strong supporters, the coal company, chemical companies, so there's a long list of people who think it is a great idea and some of have something to lose as a result of this.

But isn't part of the problem here that the PetroChinas and the Sinopecs are the ones who are actually going distribute a lot of this product?

Well, every -- I think every Sinopec station in the Shanxi Province has a methanol -- has methanol capability. So while they say they may not support it. I think they recognize the inevitability and attractiveness of alcohol fuels. So lets go ask John to see if he has any other reflections, John, on the topic.

I think there was a delay in the M15 because some further tests were ordered by the government. Those tests have been completed. And we are expecting, based on our contacts in the alcohol fuels industry China, to have an announcement about an M15 standard this year or early next year. And that remains our position.

And if you remember when M85 was announced as a national standard, it took a long time and we were saying months and months in advance of it happening that it's coming soon, and "soon" took a little while. So I think it is a bit the same with M15 that is cautiousness about it occurring, but, as John said, everything we hear, it is happening.

Could there be a partial roll out of M15 in some of the coal producing provinces like Shanxi?

There is already. There are provincial standards in -- Shanxi Province in particular have been blending methanol with gasoline for 20 years, John? 20 years plus? So you know this is not something that someone worked up one day and thought it was a good idea. They have been working on this for a long period of time.

Jacob, this morning Hangzhou and the province of Zhejiang announced an M15 program. So we continue to see it being announced different provinces and cities, even with the M15 national standard that will come out, you shouldn't expect wided adoption overnight of M15. It will just have a standard to guide provinces that don't currently have programs to look at this possibility as part of there solution for there fuels programs.

Okay. And moving on to Chile, there Tierra de Fuego power and chemical is going to be building -- what has been some talk about building an ammonia urea plant in Argentina down in Tierra de Fuego. How does that change things within that area as far as natural gas supply?

Not much at all. So one, this is not the easiest part of the world to build any chemical facility, we looked quite seriously at building in southern Argentina in the 1990s and we were discouraged by things like the absence of a deep water port and the difficulty of shipping and it -- we decided and, perhaps unwisely with hindsight, to build our facilities in Chile. So we know that there are some practical challenges but the reality is there's a lot of natural gas in southern Argentina. One of the very large fields down there that was brought into operation purely to supply our plants has been idle since our plants have been -- since the gas exports were cut off. So we know there are large gas reserves and we know there's a lot of exploration potential in southern Argentina. So to the extent that people do build ammonia urea plants in their part of the world, I think there is still an abundant facility of gas.

But as far as the gas suppliers of the area, is there any chance that it could actually divert some attention away from Chile to Argentina.

No. Not at all. I think they're separate issues. If you have a company like PanAmerican that's an Argentinian company, if BP were a shareholder I think -- I know BP have sold but they -- I think it is one of the assets they've nominated for sale. But they have a program in Argentina. But they're very enthused about the program they're working on in southern Chile, and they're one of the company that are really ramping up their -- their operations in southern Chile in 2011.

Maybe just last question, your thoughts on Methanexs' CapEx spend for gas exploration in Chile, how are you thinking about that?

Well, in the numbers, Jacob, it is $50 to $60 million per year. But it is an opportunity driven. I think when I look back at the money we had spent, which I think $18 million or $19 million so far, and we always go back and look at the return on investment that we are making on capital projects. When I look at the returns we are making fantastic returns on those investments. To the extent we can continue to find gut good opportunities to invest in the upstream in southern Chile, I think we have a big incentive based on the returns we can make to continue to commit capital to that part of the world. So in the broad sense, $50 million to $60 million was a good number but if we had more opportunity I would probably invest more.

But still it is a lot more, I think, than we were originally thinking about a couple of years back.

Well, we have been -- we started with baby steps with this and we are not an oil and gas company, this is not our business and we don't want to turn ourselves into an oil and gas company. But I think what we have learned over the last few of years, we have learned a lot about oil and gas development. And as I mentioned in my comments, one of them is we've learned it takes a long time. But what we see today is that, there's a lot of momentum building and activity taking place. I continue to be optimistic that we will demonstrate some positive results out of this business in the next year or so.

Excellent. Thank you very much.

Okay.

Thank you. Our next question is from Bert Powell from BMO Capital Markets.

Thanks. Bruce, you talked about Fell and Dorado production going up at the same time that production from ENAP is dropping. Am I interpreting your comments to mean that at least for the next year that we should expect sort of flat production out of Chile? That it was just 2011 look like 2010?

We are suffering a bit. This is the short answer. We are suffering a bit from the consequences now of 2009. There was -- there were people had drilling programs in 2009 many of which suspended or stopped or certainly slowed down. So when we look back at how many wells were drilled in 2009, it wasn't nearly as many as were anticipated. And it was certainly a consequence of the financial crisis. When you stop drilling then production decline is a natural phenomena in the gas production industry. You stop drilling and you begin to suffer from decline. That's exactly what we are seeing. Now the good news is ENAP have committed I think 12 wells before the end of this year and they're in to that program. I was with them one day last week and they were very excited about one particular area and they have made a number of new discoveries. That's incremental gas that will be coming to us. But I guess we've been burned a few times on being a bit too optimistic or naive, whatever you'd like to call it, around natural gas. So we're being a bit more cautious now in providing some guidance and the guidance is that we think we will continue operating one plant for most of the next 12 months but by Spring -- southern hemisphere Spring next year, we should be in a position where we are operating two plants and it should be sustainable.

So if you look at what you are seeing in terms of the production profile that are there, and I hear you in terms of the lag effect of what happened in '09, but does that, do you think that translates into you know fairly linear growth? Or is there a compounding effect as this starts to come online in that you start to get double digit rates in 2012 and 2013 after kind of flat lining or is it just a more linear thing?

It is what we have expected. Really, the only incremental gas we've seen in southern Chile in the last few years are two areas that I mentioned with (inaudible) and GeoPark. So we know that those two fields are capable of supporting our one plant operation, and that's great. We are very happy that's the case. But they will not support multiple plant operations so we need to get gas from some of these other blocks. And when we scan around and look at what some of the other explorers are doing, I think there is a come pounding impact where instead of having three sources of gas supply that we have today we will have multiple sources. So I think there is a potential for much faster growth in 2012 and 2013.

Okay. And then you talked about deploying capital in a number of areas and one of those would be a restart of another New Zealand facility. Just to be clear that would be at the other Motunui or the [Watera].

The other Motunui site. So there's two plants on one side and there's a lot more efficiency than to having two plants operating the one side.

What would you give in terms of probability and timing to that, Bruce?

I think the probably is quite high. There was -- we have analyzed natural gas demand and supply balance in the country. We believe we're at the surface supply based on the current demand around 15 years. So it is like a very interesting prospect for us to secure competitively priced natural gas. The last of it, there's a key to our invement decision here, that until we secured a completed supply position, then we are not going to commit to capital to restart that plan. But I think it is high probability, and I think that the -- assuming it goes ahead we're planning to have that plant restarted probably before the end of next year.

Okay. What would be the capital costs to get that brought back up to operating speck?

Similar to (inaudible) maybe a little more 50 -- 50 odd million dollars to get that plant operating

Okay. And so for a mid-2011 start?

That's right -- well I said before the end of the year so that's probably -- "mid" might be a little too aggressive.

Okay and just in terms of your commentary around -- I forget the wording you used -- with the contract that's currently you existing in New Zealand, your committed gas to the end of '11 you said with some option on some for 2012. In a worst case scenario, if you don't go ahead and do this second facility, and you just exercise what ever options you would have under the current agreement you have, what would be the production out of New Zealand in 2012?

It would be around where it is today, 850,000 odd tons that's what we would expect. It's -- you know, we have been living in New Zealand now with short term gas supply and I think that the chances of getting a really long term gas position in that country are quite low unless it is gas that we own ourselves or have some position in.

Okay.

We have talked about previously about money we have committed to Kia, and part of our thinking there is that to the extent we can help Kia be successful then maybe there's an ability to secure a much longer term gas contract. But I think the gas market in New Zealand is a bit more like the gas market in North America today where you can't -- it is difficult to contract more than one or two years in advance.

Right.

So we spent a lot of time analyzing demand and supply and deciding where the market long or short and therefore where price is going to go. Our current prognosis is that the market is long and prices are coming down. Which I think makes -- puts us in a very good position.

So the thinking is very enough much like Medicine Hat; get a very quick pay back and everything else is optionality.

Exactly. Precisely.

Okay. Thank you.

Okay.

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

Thank you. Bruce, I understand that about 100,000 tons year-to-date has moved from New Zealand to China but you saw a lot more than that, I'm sure, because China is currently running at about 6 million tons of imports according to their latest data. And you have also said that in the last quarter New Zealand produced 200,000 tons or year-to-date, half a million. I am just wondering if you have already started the rerouting process from New Zealand elsewhere, outside of China given those statistics.

Well, you know the facts, Sam -- I actually don't have our Methanex numbers but I have looked at New Zealand, Malaysia and Indonesia. So the three countries that have been -- had dumping duties imposed upon them. And in the last couple of years, they're between 10% and 15% of total imports into China. So a relatively small amount of total imports. Well just look at New Zealand. New Zealand represents the sales (inaudible) in China represent 1% of total methanol demand in China. So the impact is tiny relative to the size of the Chinese market. So I hope those numbers illustrate the point I made earlier, that it is difficult to understand how dumping duties can be imposed. We sell a relatively small amount of New Zealand methanol into China and we do, as you have intimated, we do have some options to move the supply chain around and we certainly don't expect to see much impact on our results from the imposition of these duties.

Maybe I should rephrase that. What has New Zealand potentially -- or historically, I should say, shipped to China at peak?

I couldn't -- I don't really -- I should ask John -- do you have a number, John?

It happens to really depends on what we're buying half of what we sell, we're buying in the low cost region. So China has been up to, most recently, the low cost regions, so we have been making the majority of our purchases in China, therefore limiting the amount of imports from any of our sites including New Zealand. What I will say is that the determination is preliminary, it's effective, the duties start getting collected on the 28th of October. The final determinations on the 24th of December. We will be -- we won't be shipping any New Zealand product in that period and we will see what happens with the final determination and it will be a matter of where we can purchase in the lowest cost region and a factor of the duty, if there is any, versus other supply chain cost and we look at that on a buy monthly basis.

Okay. If I could switch -- there's been progress obviously some degree of methanol blending in Trinidad. What would the next decent size country be on the planet that you're seeing some form of development going back to methanol blending as was the case going back 25, 30 years ago which was the case in countries like Germany, Brazil -- for that matter the US, if any -- and the same is true with D&E now that Indonesia has broken ground. What other countries do you see on a preliminary basis lining up and your active involvement, I presume, with those?

Is Canada a decent size country in your definition, Sam?

I would say so.

We had some initiatives in Canada and some in the US as well. I think methanol suffers a little bit in contrast to ethanol in this world. For no particularly good reason, as would be my point of view. The two alcohols in gasoline behave in a very similar fashion and have very similar characteristics. They have the same long list of advantages and the short list of disadvantages and I think the wide consumption of ethanol in countries like Brazil and the United States and Western Europe illustrate you can blend significant quantities of alcohol fuels into gasoline. So we continue to preach that message in lots of countries around the world. We have modest programs going in a number of them. And you know, I -- how long will it take to get traction and to really get significant volumes like -- it is a hard question to answer. But I think the more alcohol we see blended in countries like China and in the United States and in Western Europe and in Brazil then I think the logic of blending methanol will come home. Australia is another country we have a program as well and Malaysia. So I an think of a number of countries where we have small programs where we are illustrating the benefits of methanol fuel blends. I guess the other country -- another decent size country is Iran, which is short of refined product and gasoline. And it is a country that we don't do business with for reasons that I'm sure you'll all understand. But we understand through the methanol institute that there is interest in Iranian produced methanol in the gasoline pool and that would be a significant step, and I know some of the Chinese provinces and some of the Chinese expertise in methanol blending have been collaborating with Iran on that particular program. So there's lots of things going, Sam, and I have to seen it's a bit hard to say.

Last question on the same vein, I read that as well that 22 million by '15, 45% into fuel markets. That's changing the definition of what Methanex is conceptually toward, I guess, being a methanol fuel refining company on a very long term basis. Do you agree with that? Or how else would you define yourself going forward?

We think of ourselves as the biggest gas to liquids company in the world. So we are a way of turning natural gas into a really useful versatile liquid. And weather you use that liquid in the chemical industry or as a source of energy, I think that is the way to think of this company.

Thanks, Bruce.

Thanks.

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

Thank you. First, I just wanted to get your sense without maybe getting into forecast, but just a sense on direction on methanol prices over the next few months, you have mentioned that you raised the prices in North America, and recently and somewhat maybe driven by production outages, even though they're temporary, but there's also some issues in China, and also I guess the impact of maybe replacing your purchased methanol with produced methanol and if that kind of changes the balances around a bit. Can you maybe comment on the direction of where you see pricing?

I will ask John to give you his reflections on that, Fai.

First of all we don't forecast methanol prices. But I think when we looked at the prices and supply and demand balances, we are in what we call a fly-up situation. We have been above cost curve now for two or three months, and we haven't seen the Chinese production react like we would have thought once prices got above cost curve. Now there's numbers different reasons for that that Bruce mentioned in his opening comments and we don't see those changing in the short term. But when all that's said, when we look to post prices around the world, we don't do it for a 30 day basis. We do it based on what we see as supply and demand fundamentals for a period up to a quarter. So that -- it is hard to say exactly what's going to happen to the 250 plants from China. But if the past is anything like the future, as we get into the winter in China, we see more restrictions on methanol production than we do in the summer months. You couple that with what we are seeing on the emissions control and some of the transportation issues around coal we are not expecting the Chinese production to change much over the coming months.

And we're used to seeing some seasonal demand growth this time of the year, John, so it feels like demand is going up and supply is staying about where it is. So it is -- it is a bit hard to imagine the change but this is a commodity and prices will move around based on the psychology of the market.

I know there's a lot of attention right now on the supply side but I think the demand side needs some attention. I think demand is much higher than anybody would have thought six months ago. I recently read one of the industry analysts saying that the consumption of methanol in China today is 20 million tons which is 2 million tons higher than forecast six months ago. So that's two world scale plants of a million tons each just off the demand side. That's just on China alone. If you look at markets outside of the US, whether it is western Europe or South America or the Middle East, methanol demand has been much stronger than most industry analysts would have expected.

Right. And in terms of -- do you believe you can potentially have an impact on pricing, given that when you start up your Egyptian plant and reduce your purchasing, as well as Medicine Hat?

Well, again we are in a fly up situation now so the cost curve is not playing a role. I think when Egypt starts up and we start to replace purchase molecules with our own production molecules, it will be a factor of what the market conditions are at that time, who needs to run, who can run based on a number of different factors whether that's raw material availability, gas admissions controls, gas availability, et cetera. So I think it is hard to predict the future and nobody was predicting that prices would be in the fourth quarter of 2010, where they are. So, it is a little bit hard to predict what things might look like in the first quarter of next year.

Okay.

(inaudible) we've seen probably the lowest levels of inventory since China. We have seen the last couple of years and we observe the same in other markets. So whether it is the customer level or supply level doesn't seem seem that anyone has got much in the way of inventory. So even with new supply it will take a while before the industry gets back onto some sort of balance. But as John has mentioned, this is -- there's lots of moving parts and we don't like forecasting prices, but the environment that we are in -- it doesn't look it will be dramatic change any time soon.

Okay. Now you have commented in the past about the cost curve, where do you put the cost curve at this point?

I think at $80 oil and current coal prices you are probably in that 310 to 320 range. There's quite a bit of marginal costs at that range. Again, I'll re-echo what Bruce said that most industry experts and analysts as well as customers thought prices was coming down in the second half of 2010. It hasn't happened so inventories are low. We think traders also had short positions that they need to fill so all of these factors are contributing to the fly-up that we see.

Okay. And just turning to a different topic, with respect to Argentina and the passing of the former president, Kirchner, do you see potentially -- does that a change the probability you might get gas from Argentina again in the future.

It is impossible to say, Fai. The situation with Argentina can't be worse than it is today which is we haven't seen any gas from Argentina since the middle of 2007. We continue to engage with our -- with different groups in Argentina around the logic the good sense that there is a win-win there that allows Argentina to be better off for our plants to operate so there's some really good reasons for gas to begin flowing again. But I don't want to get into the area of southern hemisphere politics.

Okay. Thank you.

Thank you. Our next question is from Bernard Horn from Polaris Capital. Please go ahead.

Hi. Good afternoon. Just a couple of questions. The comment that you made on, I think one of the gas fields in Chile, indicated that the production there was falling off. Is the decline rate on these wells happening at a faster rate than you expected or is it just that as you indicated '09 drilling was off and --

It is a function of drilling, that -- so the natural gas works well do decline and that's a factor in this part of the world as it is in many other parts of the world. So it is -- I think it is a function mostly of the decline in drilling activity, in the last or during 2009. The other thing that was really interesting, I saw a chat last week that ENAP showed us of the drilling activity of the last 20 years and there was a period in the 80s and early 90s where they were drilling a lot of wells in southern Chile looking for oil primarily. And then from the year 2000 they stopped drilling and folks of that stage were international expansion for the company. So they began to allocate resources outside of the country. So it was a period from 2003 to 2006, 2007 where almost no wells were drilled at all in southern Chile. And that's part of what we have been suffering from in the last few years as well, that the momentum to rebuild the portfolio of producing wells takes time, and that is continuing today and we continue to suffer a bit from the complete sesation of drilling for a five or six year period in the last decade.

Okay. Thanks. And then M15, is that straight ethanol or is it MTB blending as well.

M15 is 15% methanol. There's a cosolvent in it as well which some times is MTD and some times is TBA. There's a number of different products you use as a cosolvent. But it is methanol.

Okay.

Ethanol is -- it is good.

Yeah.

Got that right. Trust me.

The capacity that you are purchasing from, and the areas you are purchasing your methanol from -- it sounded like a lot of it was coming out of China from a response to a prior question. Could you just give US a sense for where you are buying it and where you are selling it as well as the people that you"re buying it from, are they producing methanol as a by-product or is it straight dedicated methanol production?

It's John Floren -- we're buying it where ever we can find it today. These are producer that are in the market on a regular basis. Some of them are higher cost like some of the Russians, so they the higher the price the more they produce and sale. Most of the product we are buying today, on the spot market anyway, is through traders, some direct from suppliers but mostly through traders. Of that 50% number that Bruce mentioned -- I'll have to remind everybody that some of that is commission products that we sell from our existing partners plants as well as we have a long term off takes. Not all of it is spot. But components that we have had to increase as a result of delays as well as the Chile situation is the spot component and today we are buying it where we can find it and not a lot of that is being found in China.

You say not a lot of it is being found in China?

Up to those recent 30 days we were buying most of our spot product in China and with China drying up we've had to turn to other markets. That's why you have seen us and others in the market buying where we can and that's why you seen prices increase.

Okay. That was my other question whether it was having the affect on price. It sounds like it is. Are there any particular places that you are selling it into?

We align our supply chain 12 to 18 months prior to the start of any year. So we are already know our contract position for 2011. So where we sell doesn't change overnight. We're not a big seller of spot product. In fact we don't sale any spot products.

Okay. Then could you break out your CapEx? I know that Medicine Hat you have talked about being $40 million to get that up and I'm assuming it is going to be spent mostly this year and next. Can you try to schedule out the money that you are spending on CapEx for -- in total and then that which is being spent on the new initiatives in both Egypt and Medicine Hat and then New Zealand, if New Zealand is --

Okay, so the things we have talked about are there's $40 odd million in Medicine Hat, $50 odd million in New Zealand subject to making a decision to go ahead. $50 million to $60 million in natural gas in southern Chile. And we've also spent a bit of money in gas in New Zealand. We don't have any further commitment to do so but, again, where there are good opportunities where we think can enhance our long term position there then we will be tempted to do that. So there could be some commitment of gas in New Zealand but it's $13 million to $20 million. Then typically we spend $30 million to $40 million per annum in maintaining our plants. That's probably a little bit higher than the numbers we have used historically but we have got a few more plants now so as our production increases we will -- we are spending a little more than we guided in the past. So that's about our commitment for capital over the next 12 to 24 months.

Okay. So I'll just assume that it's kind of equally spread between the two years? Thanks.

Okay.

Let's see. That's -- one other question was on the -- you talked about Egypt being a bit delayed because -- I couldn't quite understand that. Was it some power units that were failed or some --

Yes, there were two of those generators on that site, both of which failed twice which is quite unusual. There's nothing sexy or different or new technology about these units, so from our point of view, pretty disappointing performance on the part of the supplier. And of course when you go without power, then it's difficult to commission other bits of the plant so held up a lot of commissioning activity. Which has really pushed us back in quite a few months compared to where we thought we would be.

What sort of -- did you identify like what units they were and what kind of units that were.

It's a GE Gensets. So it's a reputable company.

Okay.

So that issue is completely resolved and we now have reliable power and it is working and we are presenting with commissioning. So it is a pretty disappointing performance by a reputable supplier, but these plants are a bit complicating creatures and it would be unusual not to have some problems but that's behind us.

Okay. That takes care of me. Thanks very much.

Maybe one last question, operator. Because we are closing the hour now.

Certainly. The last question is from Hassan Ahmed from Alembic Global Advisors. Please go ahead.

Praise the Lord. Hi there, Bruce.

Is that a reaction to our result?

A bit of everything really. I was dozing off at my desk over here. Just a quick -- What's that.

I thought it was such an exciting result it would be easy for you to say.

It's been a long day I will tell you. Listen, a quick question about Trinidad. I know you know the press every now and then sort of starts talking again about Trinidad and the gas situation there. And you know, the chatter as of late has been a bit more about you know, the sort evolving dirt of gas out there. So just wanted your thoughts about how we should be thinking about Methanexs' facilities out there. Knowing fully well that you can't give us specifics about what sort of facts you have in place, just general guidance around that.

We have been told by the Trinidad government that they have allocated gas to existing plants and they're committed to providing a longer life to existing facilities, provided they are efficient consumers of energy. Now, in the case of our plants they're modern, well maintained and world standard in terms of energy efficiency. So I think we certainly meet the standard that the Trinidad government has set. I think the second factor then is the chatter about low cost gas -- no more low cost gas. And you will know that our gas contracts the guidance that we provide around is world is that we have a low base price and then there's methanol price sharing. I don't think in our entire time in Trinidad, in the last seven or eight years that we've been investing there, I don't think we have ever planned the base price. We have always been paid for gas above the base price, and periods where methanol prices are strong as they are, we pay a much higher price. So I think the methanol industry has demonstrated over the last decade that this is an industry that can afford to pay a descent competitive price in natural gas. Today we pay a lot more for natural gas than I'm sure the (inaudible) industry is returning, but equally there have been periods in the last decade when the (inaudible) industry returned more value to their country. So I think the Trinidad approach is a portfolio of investments that includes some petro chemicals and includes some L&G and they're committed to maintain supply to existing facilities but I think it is much harder today to promote a new investment in that country, underpinned by low cost gas.

Super. Thanks so much.

All right. Well, thanks everybody for your participation. We are right on the hour, I really appreciate all of the questions and your interest. I do feel that we are in a really good position that we are on a trend of increasing earnings and we're getting perilously close to starting up the big plant in Egypt and Medicine Hat is not far away. So increasing production levels and we know that we make money in this industry by producing as much as we can and selling it for as much as we can. So those combination factors and the current market environment we have described fits on a very positive environment for the Company over the next few quarters. So thanks for your continued interest in support and look forward to talking to you again next quarter. Good day.

Thank you. The conference has now ended.