Methanex Corp (MEOH) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation fourth quarter conference call. As a reminder this conference is being recorded on Thursday, January 27, 2011. I would now like to turn the conference over to Mr. Jason Chesko, director of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen. I would like to remind you are 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. Certainly material factors or assumptions where 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. Good morning, everyone and welcome to our conference call. I as usual have a number of colleagues with me in the room and I will be available to help out with questions a little bit later.

First comments on our results in the fourth quarter. We reported EBITDA of $71 million and net income of $28 million or $0.30 per share. We saw 1.8 million-tons of methanol with an averaged realized price of $348 per ton, about $60 higher than the previous quarter and this explains our higher earnings quarter over quarter. Fourth quarter results were a bit lower than consensus and lower than they normally would have been. So let me help you a little with understanding the two principle factors that explains the delta.

Firstly, the results were negatively affected by sales mix. Our sales of produced methanol were less than production. Had we solved all of the methanol in the quarter that we produced, we would have earned about another 17 per quarter. I would emphasize this is simply a timing issue that over a longer period we will of course always sell everything that we produce. It just happens from quarter to quarter so there are periods when sometimes we sell a little more and sometimes we sell a little less. This quarter we sold a little less.

The second big factor that impacted our results was the impact of unusually high stock price compensation -- stock-based compensation. To put this into perspective, and in a quarter where stock price is flat, the typical quarterly stock-based compensation expense would be a few million dollars. In the fourth quarter, stock-based compensation expense was $17 million. To explain the difference, our share price increased by $6 in the fourth quarter and this accounted for about $7 million of additional expense. In addition, the stock price crossed over certain price thresholds and this caused the expense and stock appreciation rights that were previously out of the money. And also to increase expenses under our performance share unit plan as a result of applying higher vesting factor. These factors caused stock compensation expense to increase by another $6 million in the fourth quarter. So while these numbers might seem high, I would remind you that our stock was up 24% this quarter. And while I am very optimistic about the future value of our Company, I would be exaggerating to suggest that this is a normal quarterly fluctuation.

I will comment more on the industry and pricing outlook a little later in the call. But first I want to provide you with an update on our operations. Our plans in Trinidad ran very well during the quarter and produced almost 500,000-tons of methanol which is about the capacity. In Chile, we continued to operate only one plant during the fourth quarter and produced 207,000-tons of methanol and I will comment more on the outlook for natural gas through our plants in Chile in just a few moments. In New Zealand the Motunui plant operated well and produced 206,000-tonnes of methanol and I will also comment more on those operations and natural gas supply in that country again in just a few moments.

Before doing so, I will make a few comments on the industry and pricing outlook. Entering the fourth quarter, methanol markets were tight and posted contract prices increased significantly in November by about $90 a tonne to $450 a tonne. The market tightness was a result of continuing strong methanol demand and a number of planned and unplanned outages in various regions including in China where operating rates remained low despite an increasing price environment. Plants in China have been impacted by a mission controls, as China has been working to achieve greenhouse gas targets and in addition feed stock availability issues have continued to affect operating regs in that country. The impact of this is greater in the winter when colder temperatures result in more feed stock being redirected for heating purposes. Later in the fourth quarter, industry supply began to improve, including in China, where some plants started up, encouraged by the high pricing environment. However, the operating rate in China is still low as plants in that country continue to be impacted by the same factors that I mentioned a few moments ago. As a result of the recent higher industry supply, spot methanol prices had moderated but remain at strong levels. This week, we announced a $25 per tonne decrease in our North American posted price to $426 per tonne for February, and we expect to announce a decrease in our price in Asia later this week.

As we enter 2011, it is interesting to reflect back on demand, which has been very strong. We estimate the global methanol demand increased by about 14% in 2010, and we have seen further growth entering 2011. Strong demand growth has been a key factor supporting the strong methanol price environment, with prices escalating in 2010 despite the fact that three new [world scale] plants entered the market during the year. Methanol demand into energy applications continues to be a key factor contributing to demand growth. Supported by coal temperatures in China, demand for methanol into DME in that country has been growing.

Fuel blending demand also continues to grow with the support of Provincially sponsored programs. For example, over the last quarter Zhejiang province in eastern China instituted a program utilizing M30 and M50 gasoline, and in addition Shaanxi province kicked off an M15 methanol blending program in mid-December in a number of cities and plans to extend the program to the whole province during the first half of this year. Methanol demand entered into traditional chemical derivatives has also been healthy, particularly again in China where industrial production rates have been high. And more recently we have seen strengthening demand in other regions including North America, Europe and Latin America.

One area we didn't talk about too much is biodiesel. Methanol demand into biodiesel production has grown to about 1.5 million tonnes per annum globally, and recent change in regulations in the United States is expected to result in much higher methanol biodiesel demand in that country this year.

Looking out over the next few years, the industry supply and demand outlook continues to look positive, as there are limited capacity additions expected to come online over the next few years. This suggests that higher cost capacity is needed to satisfy industry demand, which in turn implies a strong pricing environment to support high cost capacity. This outlook also matches well with our plans to increase production over the next few years at our existing plant sites, where we have a very competitive cost structure.

I also want to provide you an update on the investigation into methanol dumping in China. In late December, the Ministry of Commerce in China issued its final determination, and the results were similar to those of the preliminary determination, recommending dumping duties of around 9% being imposed on imports from existing producers in New Zealand, Malaysia and Indonesia. However, the customs tariff commission of the state council in China decided to suspend enforcement of the tariff, which will allow methanol from all three countries to enter into China without the imposition of additional duties. We are pleased with this result, which will support the efficient movement of methanol into China and benefit both importers and methanol consumers.

I will change topics there and provide you an update on the key initiatives they we have focused on to increase production. Firstly, we continued to make good progress on the commissioning of the Egypt project and have produced first methanol in January. It is quite normal to expect some ups and downs over the next month or so as we line out the plant. However, our expectation is that the first shipment of methanol will be loaded in February, and we are very excited about adding this first-class asset into our supply chain. It will be an important new supply source for our customers and have a significant impact on our production and cash flows this year.

The next project I wanted to provide an update on is the restart of our plant in Medicine Hat, Alberta. We remain on track to restart the 470,000-tonne per annum plant in April of this year. The majority of the staff have been hired and training is in progress. The plant is in good condition and the refurbishment is progressing smoothly, with no major surprises. As I mentioned on previous occasions, we have purchased natural gas to underpin the production of the majority of the plant's capacity until near the end of 2012. And we are continuing to pursue options to secure gas supply on a longer term basis. We're delighted to be bringing this plant back online as another competitive supply source for our customers, and based on the current methanol price environment, this project offers an excellent return for shareholders.

I will continue to operate one plant in Chile, and we have been disappointed at the pace of natural gas development in that country. But we continue to be encouraged by both the success rate from existing activities and the significant increase in exploration activity planned over the next couple of years. We expect to start receiving gas later this year into a new box, where exploration activities have been underway since 2008. We have not changed our views on the long-term potential of the area and continue to be optimistic that we can considerably increase the operating rate of our plants in Chile. Drilling activity in southern Chile is expected to increase with about 175 wells due to be drilled over the next two years. This is more than double the drilling activity in the last two years. In addition, the Chilean government 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 in the long-term.

However, as I have mentioned on previous occasions, we have learned that it takes longer to develop gas reserves in the region than we originally anticipated, and the timeframe for increasing our operating rate in Chile is being pushed out. In recent weeks, you probably read the media reports regarding our gas supplier, ENAP, the state-owned oil and gas company Chile. ENAP recently made an announcement that it was increasing natural gas prices to residential and other commercial users in the province where our plant is located. This led to some protests and disruptions to the infrastructure in the region. However, the protests ended last week with the government reaching an agreement to reduce the amount of natural gas price increase in the region. Production at our Chile site was not impacted by the events that occurred, and our gas price was not impacted by the announcement. We hold separate long-term gas contracts with ENAP, extending out as far as 2025, and our gas prices are linked to methanol prices. In recent years, as crude oil and methanol prices have escalated, we have been paying higher gas prices for the natural gas supply from ENAP and do not expect any changes to existing contractual terms.

Finally turning to our operations in New Zealand, we have secured further gas supply over the last quarter and currently have gas contracts with a number of gas suppliers, which will underpin production at our existing 900,000-tonne Motunui plant through 2012. We're also working to secure sufficient gas supply to enable the restart of a second plant in New Zealand. At this stage, we think it is unlikely there will be any incremental production from the second plant in 2011 but are optimistic that we can secure sufficient gas to underpin a restart in 2012.

I will change topic from there and make a few comments regarding liquidity and capital allocation. During the fourth quarter, we generated $77 million of cash flow from operations before changes in noncash working capital. We continue to be in a strong financial position. We have conservative leverage, a $200 million undrawn operating facility and a cash balance of $194 million at the end of the quarter. Our first priority for the use of cash is to continue to invest in value-adding initiatives to increase production at our existing sites. We have about $30 million more to spend to complete the restart of the Medicine Hat plant, and if we are successful in securing enough gas to restart the second plant in New Zealand, we expect to commit capital there later this year. We also plan to continue committing capital to gas development in both southern Chile and New Zealand. We're in a strong position to satisfy all of these initiatives and our planned maintenance expenditures. And with incremental production and cash flow from Egypt and Medicine Hat this year, our outlook for cash flow generation is improving. As we build up excess cash, we expect to be in a position to build on our track record of returning cash to shareholders through dividends and share repurchases.

Before stopping for questions, I'll briefly comment on expectations for the first quarter as there are a lot of moving parts, and it is difficult to provide really useful guidance. After methanol price, the single biggest driver of our earnings is the level of production and the sales of produced methanol. And we find that in some quarters, as we have in this current quarter, that we sell less than we produce. For a number of reasons, we expect this to also be the case in Q1. While the Egypt project has recently produced first methanol, we do not expect any significant impact from Egypt production in Q1 earnings. Accounting rules require that all costs and any related revenues from products sold be capitalized until the plant is capable of being operated in its intended manner. Accordingly, the transition to include sales of Egypt production in our operating results is dependent on the profile of the ramp up, as well as the timing of inventory flows. In addition, we are near the end of an estimated three-week outage at our Titan facility, which we expect will negatively impact levels of production and sales of produced methanol in Q1.

Finally, one effect that always impacts our earnings is the timing of inventory flows. When prices rise rapidly as they did in the fourth quarter, we tend to have higher cost ending inventory. We expect this state that will result in higher costs of $5 million to $10 million in Q1 than we would normally expect at Q1 pricing levels. Putting all of these factors together, at this point we expect our first quarter earnings to be lower than Q4 earnings. I would say the slightly disappointing result -- it feels to me that we're working hard to increase levels of production capacity, and we're not quite there yet. We're going to have one more quarter where production is going to be a little disappointing and sales of produced methanol are disappointing. And as I mentioned a moment or two ago, those are two big drivers of our earnings. We do have significant upside potential and momentum that I think later in 2011, with both the production coming on stream in Egypt and Medicine Hat as it ramps up. So at this point I am happy to stop and take any questions you might have. Are you with us, operator?

Yes. We'll now take questions from the telephone lines. (Operator Instructions)

Our first question is from Jacob Bout from CIBC. Please go ahead.

Hi. I had a question on the Chilean gas supply -- and thanks for the commentary you gave there. But I think they also mentioned that they're -- they talk about the possibility of curtailment to Methanex in May. Is there any update on that, or what's your interpretation of those --?

Well, Annette made comments during the period of the protest, and I think the comments were taken a little out of context. They were trying to explain why it was necessary to increase the price of natural gas in southern Chile, and part of that explanation was that unless prices increased, there was no incentive for explorers to look for natural gas, and there was a risk to supply. And there was a comment at that point that including a risk to supply to Methanex, because clearly we're part of a big part of the demand profile for natural gas in that part of the world.

So it was in the context of trying to explain why they needed to increase prices. Certainly, we continue to run one plant, and where it is -- and we're not running a capacity. You would have seen that from our results. So that continues to be a disappointing result.

And frankly in Q1 we don't expect to be running capacity either. We'll expect to be running at lower rates during Q1. We know the seasonality in southern Chile. We know that the methanol natural gas demand is driven by weather conditions. If there happen to be a very cold winter, or if there happen to be some other disruptions to gas supply, yes -- there is a risk in the winter. We don't think it is high, but it is a risk. I think we need to continue working hard on these alternative sources of natural gas supply because that's what will allow us to increase rates and ramp up our production in that country. But I think we're not out of the woods yet. It is -- short term is going to continue to be a struggle for us.

So currently what is the split right now between what ENAP is providing for natural gas and what GeoPark is? And then --

Off the top of my head, I think it is about 1 to 1 to 1 to between ENAP, GeoPark and Dorado Riquelme. It's roughly like that.

Okay. And it's ENAP that's responsible for the Dorado Riquelme?

Well, they're the operator, and we're a 50% shareholder in that business.

Okay. And then right now, what is your best guess as far as the restart of a second, third and fourth plant in Chile?

Well, as I mentioned, we have been over-promising and under-delivering on this, Jacob, for the last couple of years, and I think -- I will take the blame. I am a bit -- I was a bit naive about how long it takes to develop natural gas in a province where there had been no activity. And I looked at it and said, well there's natural gas pipelines and there's gas treatment facilities and maybe this can happen quite quickly. Well, I was completely wrong. It is a lot more complex process. There are a lot more steps to it.

And even in recent discussion that we've had with one of the gas suppliers, where we have been talking about -- can we get early deliveries of gas discoveries that they've made, part of the discussion is -- well, that's not the way we run our business. We want to complete the exploration phase, which could take another couple of years, and then we'll get around to developing and deciding on development plans.

So we are just learning that this is taking time, and what's encouraging, as I mentioned -- that there is a lot more activity taking place, a lot more wells being drilled, a lot more money being spent, a lot more companies are out there. So, when we look back at success rates and our own success in Dorado Riquelme -- we've had a lot of success in finding natural gas and finding bits of oil as well -- mainly gas but there is some oil -- and I look at GeoPark as well. GeoPark had been active in that part of the world for, I don't know - two or three years, maybe three or four years. They've been extremely successful in a short period of time.

So we know the resource exists. We also know that you need to spend money to get at it, and we know that it takes time to go after that.

Last question here. You made the comment in the release about one of the reasons why the operating costs is a little higher is because of the backhaul. Can you just explain a little what's happening there in the backhaul?

Well, it's a complicated question, and it's probably a complicated answer, too, Jacob, that -- we have a shipping fleet of 18 vessels -- 18 or 19 vessels I think today. And we have -- we plan around certain levels of production at all of our sites, and as we have either disruptions or opportunities in the market, we move vessels around. The tanker market itself has been - I'd say awful would be the way to describe it, John? I am looking at John, who runs our shipping company. So some of the opportunities we've had in the past to utilize our vessels to carry other products are less attractive in the fourth quarter than they were in the earlier quarters.

We have made some changes to our fleets, so I think in Q1 we're actually expecting quite an improvement in our overall logistics costs. But I think we had been hurt by -- one, levels of production to the tanker market and the open capacity that we've had. So that impacted results in Q4 for sure.

Okay. Thank you.

First, if I could just ask a question -- that there may be one question and one follow-up. I don't - we don't want to dominate anything -- dominate the questions.

Our next question is from Steve Hansen from Raymond James. Please go ahead.

Yes. Good morning, everyone. Bruce, has there been any structural changes in your cost structure over the past year or so that should perhaps lead us to believe that cost will be structurally high on a go-forward basis? The only reason I ask is that it seems, at least over the past four quarters anyhow, when you back out the gas costs formula that you typically provide -- the SG&A and freight costs have been considerably higher for different reasons in each of the quarters, I suppose, but have been considerably higher than your previous historical operating costs.

It may be logistical costs, John. I don't know. I am affecting a little bit -- without doubt, bunker has been more expensive, and that has pushed out the cost of shipping. And is there anything else in shipping, John, that you can think of?

It's related to bunker costs. It's also related to lower production, so where do we move our ships when we have lower production? Where we can buy product -- where the product is available makes us less optimized on our shipping routes than we normally would be with a normal production profile.

But there's nothing else fundamental in SG&A. One of the big impacts, Steve, is foreign exchange that -- but it's very second order in the big picture. Certainly we pay a lot of costs in Canadian dollars in this country, and the Canadian dollar is a lot stronger today than it was a couple years ago. You could say the same thing about the New Zealand dollar and the Chilean peso.

So a weakening US dollar has pushed up some of our costs, but I can't think of anything else. I think we run the Company with the same number of people and maybe a few less, and I think we're always looking for efficiencies and pretty good at finding them. So, there is certainly no underlying theme other than perhaps some currency and the impact of a higher bunker price.

Okay. Just as one follow up, then. There has been a considerable amount of unrest in Egypt, well and much of the Middle East, I suppose, over the past week or so. How comfortable or uncomfortable are you with the situation that's developing there?

Well, it is hard to make a sensible comment. The issues are 48 hours old. We -- probably our biggest concern is for our staff. So we're in constant contact with our people there. And, I can say that there is -- there has been no disruption for people getting to and from our plant sites and from continuing to work in a fairly normal manner. Now that said, I am sure people are nervous about what's happening in their country and they're seeing that in that whole region.

So there is really nothing much more we can add. We keep a close watch on the government of Canada website, and there is nothing other than advising people to keep away from areas where there are demonstrations going on. And it seems to me that the demonstrations are anti-government; they're not anti-foreign investors, they're not anti-foreign -- so, I am not sure there's much more I can say at this stage, Steve.

Okay. That's great. I will jump back in the queue. Thanks.

Good.

Thank you. Next question is from Hassan Ahmed from Alembic Global.

Hi there, Bruce.

Hi, Hassan.

So, again on equip, less on the political side -- just wanted your view of how we should be thinking about the ramp up there? I know as are you starting up a new facility, there can be ups and downs. But correlate as the first quarter is behind us, what should we be thinking in terms of operating rates in Q2 and Q3?

I think a fairly high operating rate. I think to the -- if you said 70% or 80% in Q2 and then up to 90% in Q3 and Q4, that would certainly be our expectation. I think we produce some methanol in January. We'll produce more in February, and we expect to be at a relatively high rate in March. But as I mentioned in my comments, whatever we produce will either flow back into capital or will not hit the income statement because it will be in inventory.

And then as far as Medicine Hat goes -- and same question, I guess.

I think Medicine Hat is a bit quicker. It is a smaller plant, it's operated before, and so I think there is a bit less risk around that in terms of -- I wouldn't say risk, maybe -- fewer issues in terms of startup. So, I would expect in Q2 that the things should be running at -- I would guess 80% is probably a good number, and then 90% to 100% from there forward.

So changing gears from that, and also particularly in Asia and China -- there has been a fair bit of chatter about methanol-to-olefin facilities. How are you thinking about that? Agreed early days and the like, but -- as far as the pie in the sky goes, so to say -- best case/worst case scenario, in terms of what it could mean from methanol demand.

That's an interesting question. I'll ask John. He is closer to the issue than I am. I will ask John to offer some comments.

So, currently, right now, there are three integrated plants. Two of them are running, one is not running. There are 1.7 million-tonnes of methanol for about 500,000-tonnes of combined olefins. They're in inner Mongolia. They're integrated, as I mentioned, and sometimes the methanol plants run, and sometimes they don't. So they can be merchant buyers of methanol, which happened in the fourth quarter, which led to some of the tightness we saw in supply in China.

And going forward, there's a lot of activity with merchant methanol to olefin plants on the coasts in areas like Nanjing.These plants are much quicker to bring up than an integrated plant, so we're hearing in the next 12 to 24 months, there could be as many as four to six of these, consuming millions of tons of methanol. Whether they come true or not is under watch.

What I would say is this is a similar play on the energy story, so economics here are to replace NAFTA, which is based on oil, so $90 to $80 oil converts into a NAFTA price, which 50% of the global market for ole fins is still based on NAFTA. So people are looking to take advantage of low methanol -- relatively methanol energy content prices versus $90 oil and convert that into olefins. So, the economics make sense at $80 oil. Olefins producers can afford to pay around $310 for methanol, which is similar to what we use when we're looking at other energy applications. So, we think the economics make sense, and we would expect this application in China to continue to grow -- and outside of China as well.

Sort of neutral to our industry because most of the methanol was integrated into a big chain of investments, and I think our view now is that it is actually probably strongly positive for methanol demand growth.

Absolutely. So, now, just one last one on that one. Typical -- these four to six facilities that one's hearing about in China -- how large are they in terms of collect olefins capacity, and how should we be thinking about conversion of methanols to olefins in terms of unit-to-unit comparison?

It is different depending on which olefins they decide to -- the rule of thumb is between two and two and half tonnes of methanol per tonne of olefin, depending on the plant.The sizes from 200,000-tonnes of olefins to a half a million tons of olefins.

Okay. So below (indiscernible), so to say? Okay. Thanks so much, guys.

Thank you.

Thank you. Next question is from Jaret Anderson from Saul man partners. Please go ahead.

Great, thanks.

Bruce or John, can you give us a little bit more detail on what exactly caused the build up in the inventory in the quarter, and why you expect to be continuing in the fourth? Was it a matter of the timing of when vessels left, or is it something else that we should be aware of?

It is simply timing, Jaret, and there is nothing underneath that that causes it. It is just the way it works sometimes. You -- we end up with inventory at one of our plants, and the vessel turns up on the first of January rather than the 31st of December, and so you end up with more produced methanol and less produced sales. So there is nothing other than timing, so we will have a quarter coming up soon, I hope, where sales will produce methanol will exceed production. And the earnings that we're missing out on this quarter and next will -- they'll turn up sooner or later.

And other than Egypt, what would be the other reasons that you expect another quarter of inventory build here?

Well again, it's timing. And again, it's just looking out at where our inventories are and the shipping movements we expect. That's our current forecast. We're trying to be helpful to the analysts to help them get somewhere and near to where we think the quarterly number will be, so there is no real certainty on it. It is our current forecast that we will again this quarter be selling a bit less than we produce.

Okay, and last question -- I just noticed the last couple or three years, you've actually had a build in the December quarter. Is there a seasonal effect here, or is this just purely luck of the draw, and we got unlucky a couple three years in a row?

Jaret, it's John. I'll remind you that we've been growing our sales profile over the last three years as well, so we have planned for about a 10% increase in our sales in 2011 versus 2010. De facto, that means we have to keep larger inventories to service that new business.

As well, our inventories as we entered the third quarter of last year were extremely low and unsustainable levels, so we are going to see some fluctuations. But, as we go through the first quarter of 2011, we don't expect to be building inventory per se. I think the mix of purchased and produced may change, but we don't expect the absolute inventory level to be building.

Okay. Thanks very much.

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

Thanks. Maybe -- this question either John or Bruce. I am just wondering -- could you maybe comment on where you think the cash costs curve is at this point on a realized basis?

Well, we think it's in the low to mid-300s, Fai, and it depends on the price of coal, which has been going up. It depends on the R&B currency rate, which has been strengthening. It depends on the freight and logistics costs in China, which tend to move around as well. So we think it's in the mid-300 range -- as there's quite a band of capacity in that debt level.

Okay. Thanks. Just a follow-up question.

In terms of the share price comp, Mark, it seems you're trying to take care of that problem right now. I am just wondering if the threshold -- if it crosses over, will we see a reversal like of what we saw in Q4, and where would this possibly take place?

I'm looking at the accounting brains around the table here, and --

Yes, Fai, it is Ian speaking. I think the answer is it could cross over, but it may not cross over exactly proportionate to what was incurred in the fourth quarter, due to some statistical models that would be in place in terms of measuring the compensation. But, I think there is a possibility that when you cross over the threshold you have a reversal.

Would it be -- what level would that be?

Around the $25 level.

Around the $25 level. Okay, that's where the threshold is.Okay, thanks.

Thank you.

Your next question is from Charles Neivert from Dahlman Rose. Please go ahead.

Hi, guys. Just a quick question on Egypt. Is -- they have a gas contract that isn't the same as all your others, that varies with methanol at least for some period of time after start up. How long does that go? It is a fixed number for a period. Is it until the end of '12 or the beginning of '12?

End of '12.

End of '12. Is it a fixed amount of time from the start up, or it just ends at '12, no matter when the start up occurs?

It's the end of '12, regardless of when the start up occurs.

Okay. So, obviously getting that into production, assuming that current methanol prices, that would be lower priced gas than anything you've currently got -- you obviously want to get that into production as quickly as possible and to the greatest degree?

Yes, and we've been trying as hard as we can. And I think we're there, Charles.

Okay. Great. That's it from my end. Thanks.

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

It is an accounting question, I guess. Cash taxes, deferred taxes. Ian, I guess to you. A lot of moving parts here -- Egypt coming on, the tax shield how that works. Medicine Hat coming on, how that may work -- got an idea on Canadian taxes. Obviously, there is some kind of tax limitation, if I recall, on one or both of your Trinidad plants as well, on a go-forward basis. Can you guide us some there, Ian?

Okay, Sam, just to refresh everybody's memory -- the guidance we provided over the last few years is that we have a structural tax rate of around 30%, and it's heavily weighted to cash taxes. One of the benefits of Medicine Hat, of course, is that we have lots of shelter in Canada, so incrementally -- there will be no incremental tax. And, Egypt there's a lower tax rate than the structural tax rate of 30% -- it's 20%. And, from a cash tax perspective, we have lots of shelter, so for the first few years, we don't anticipate paying cash taxes.

So, the guidance we've been providing is that once Medicine Hat and Egypt are on stream and operating at full rates, we would expect our structural tax rate to fall, and our current estimate is around 25%.

Okay. And, with respect to Trinidad there is some kind of duration maturity curve of some kind? kind.

In Canada, I think we have lots of shelters, so we wouldn't anticipate, as long as Medicine Hat is running -- we don't anticipate to have to ever pay taxes.

Oh no, I'm talking to Trinidad.

Oh, in Trinidad -- there's -- we accrue at the full 35% statutory rate in Trinidad today. There's a mix in terms of cash -- current and deferred taxes related to the structuring of a tax holiday, and the tax holiday -- today, the cash tax rate in Trinidad is about 20%, and it increases to 35% over the next three years.

I see. And it caps out there and that's that for that?

That's right.

Okay. Just one follow-up. Bruce, have you bought any gas beyond two years in Canada yet, or is that even available?

No. It is available. We've bought out to the end of 2012. This doesn't seem quite the right time of year to be out buying gas, Sam, because we're going to be patient, and all the indications look that gas prices are going to be weak in the next twelve to eighteen months. So, we think there will be opportunities to extend our gas profile at -- with reasonable prices.

Thank you.

Okay.

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

Thanks. Just a few quick ones, just going backwards. Bruce, just to be clear on the Medicine Hat, the gas has been purchased you said until the end of 2012, or is that October 2012.

October 2012, yes.

Got it. And on EMethanex, in terms of capitalized versus having a ramp or -- producing at its intended rate before you can recognize income contribution. So, at the Q2 is operating at 70%, is that a threshold that actually recognizes contribution then as income?

You would expect so. I understand it is a bit complicated, but we would expect that probably in Q1, we pretty well get there in the month of March. But, I know there is lots of moving parts, so I think from the point of view of analyzing our results, you should assume that what we produce in Q1 goes into capital and Q2 hits the income statement.

Got it. And, in terms of something you mentioned on the Chile operating rate in Q1 -- expected to be lower. Did you mean lower versus Q4, or were you referring to something else?

Lower versus Q4.

And lastly -- and I don't know if you have the time for it or not, but in terms of expecting the Q1 earnings to be lower than Q4, I know you walked through it a bit. Could you walk through it a bit more specifically?

Well, it's very - it's hard to do so, Paul, because --

Well, earning point in terms of reference -- what specific earnings are you saying -- are you using as your benchmark that you'd be lower then?

The -- when I mentioned lower than the $0.30 EPS, so that would be our expectation today. And, I think when you work through the factors that I've mentioned around production and sales of produced methanol, that it shouldn't be hard for you to get to a number that is lower than where it is today. So, I am trying to just provide -- as helpful guidance as we can. You know, we've never given absolute numbers because I think in our industry, we're only going to be wrong the day after we give you the number. So, we try to just to provide some helpful guidance on the trends that we see, and I'm not sure I can do much better than that.

Okay. No, sorry. I must have missed that clarity then.

So, on an operating basis, aside from the timing flows or whatnot -- not calling those unusuals --you expect to be reporting less than $0.30?

Yes. And, I expect that a number of the analysts have got some Egypt revenues in the models, and that would be fair enough. We don't know ourselves exactly when those Egypt revenues begin to hit the income statement, so I talked about that a little this morning. So, part of the guidance is -- take anything out of Egypt, because that -- we don't expect it to positively impact income statement in Q1.

Got it. Alright, thanks, Bruce.

Okay.

Thank you. Our next question is from Peter Butler from Methanex. Please go ahead.

That's Glen Hill investments, not Methanex.

I thought you changed sides, Peter. I'm very pleased.

Maybe make a little bit more money working for you high cost guys. Looking at your history and analysts would say that, at annual meeting time, Methanex is going to announce a mixture of dividend increase and share repurchases to return cash to the owners.

I'm wondering two things. How worried are you about the cash flow outlook with some of the uncertainties that you mentioned about? And then secondly, is it possible that you'd consider unusual ways to return cash, such as a Dutch auction or something else?

To your first question, I am not worried about the cash outlook. I think we've got some short-term problems that we expanded on this morning, and it's kind of disappointing. We feel like we're stuck in a little bit of a time warp here. We've been stuck in this zone of low levels of production, and for the last few years thanks mostly to our friends in Argentina. And we have been busily digging ourselves out of that hole. Frustrating that we're not yet demonstrating success with that ,but we're getting very close to it.

So, when we look at our models, and we see additional production coming out of Egypt and out of Medicine Hat, and then incremental out of New Zealand and Chile, we pretty quickly get the very interesting cash flows that will flow out of this company. The reality is, they're not there today. And they won't be there at the AGM either for that matter, Peter, but I am very positive and optimistic about where we're heading as a company. It is frustrating that we can't do it more quickly.

Okay. What would your valuation model say the Methanex stock is worth? Is it substantially -- would the model say it is worth substantially more than where it is now?

One of the slides we have in our investor presentations demonstrates a billion dollars plus of EBITDA when we get Chile back running at higher rates, and we get New Zealand running a second plant. Assuming that the price of oil is $80 a barrel and assuming that methanol continues to track with oil, which it always has in the past. So I think, how do you value a billion dollars of EBITDA? You certainly put a higher value on it than $30 per share, or whatever we're at this morning.

At what point would you guys -- your board look at this and say, we should go private and enjoy this cash flow ourselves?

It's something we always look at, and we always contemplate our capital structure and our strategies going forward. And the reason you're a public company is access to capital on the public markets. And, we haven't made much use of that over a long period, and certainly when we're sitting around sometimes discussing accounting policies and disclosures, we quietly wish that we were a private company. That is not always -- that is not always feasible option for us.

You know what Machiavelli would do would be to --

Is this your follow-up question, Peter?

I'm sorry?

Is this your follow-up question?

Yes. This is the last thing, I promise. Machiavelli would take the Company private and then announce some phantom methanol projects, like two or three world scale plants that you had no intention of ever putting up, but --

We'll take that to our next strategy session.

Okay. Well, thanks for the help, Bruce.

Okay, thank you.

Thank you. Our next question is from Dax Vlassis from Gates Capital. Please go ahead.

Hi. Yes, I am just wondering, if I look at Chile production throughout 2010, you were more like 300ish million in the first quarter, going down to basically a little over 200 million this quarter. You know, on an annual basis it was a modest decline in production. Do you feel like we're stuck at this? Is there something seasonal or something else that we're stuck at this 200 millionish sort of production run, or 200,000-tonnes of production run rate, on a quarterly basis, such that it is going to be low 800s this year for production for Chile?

I think that is a possibility. We are producing less than we anticipated, and there is a couple of factors here.

One, I think the state-owned company, ENAP, that I talked about a little, they've been busy doing other things, and I think not quite as focused on the issues in southern Chile as we would have liked them to be. I mentioned a few quarters ago, the earthquake in Chile caused a lot of disruption in that country, and it caused a lot of disruption to the two refineries that ENAP owned in northern Chile, and that diverted some capital that may have otherwise been spent in the upstream.

The second thing then, we had a bit of hiatus in drilling in the middle of last winter. That doesn't always happen, but there is a number of reasons why during Q2 and Q3, there were not as many wells drilled, and we've had quite a rejuvenation of drilling in the fourth quarter. Now, again, what I've learned from that industry is that drilling of wells is a useful start to providing gas supply. That after -- even with a successful well, it takes quite a few months before you've built the pipelines and helped the environmental approvals and being able to deliver that gas into the system.

So, we are expecting some more gas to come into the system, probably late this quarter or early next quarter, but in the meantime, we're a little stuck where we are. So, it's all just slower than we would like it to be.

When do you think you would see some sort of reasonable ramp up in production in Chile over what timeframe are you looking? Because I think, obviously at the beginning of last year, you said that up 10% in 2010 and up 10% in 2011.

That's right.

But we're nowhere near that, so can you give some sort of -- I mean, I understand what you said. You admitted that you thought it was going to go faster. But having said that, what do you see now? Do you have any better sense of when will you start to get traction?

Well, we continue to think that we can achieve this year about what we achieved last year, which doesn't feel like a lot of forward progress. But, when you look at where the gas is coming from, it is coming from new areas that have been developed in the last couple of years. So, I think that is a sign that there is gas there, and that what it needs is the money to be spent in the development to occur. So, this year is similar to last year, and I think next year is back to the modest improvement. And, then I am a lot more optimistic about 2013.

Now, that might feel like a hockey stick, and it certainly looks like a hockey stick when you put it on the chart. But, I think when you look at the level of activity that's occurring and the companies that are spending money, if you don't have to be very aggressive in their assumptions to reach a conclusion that there will be incremental gas flowing out of these investments. And, the expectation that a good quantity of that will come to us in 2013, I think is still a very reasonable expectation.

Okay. Thank you.

Okay.

Thank you. Next question is from Steve Hansen from Raymond James. Please go ahead.

Yes. Bruce, just as a follow-up, can you comment perhaps on the Beaumont, Texas, plant that surfaced of late? I know it's purchased by a new group and just wondering whether or not that plant -- I think you said in your remarks -- commentary -- that it's got 2012 production as a reasonable start up timeframe. But, maybe just a quick background on the history of that plant, whether you think it's a quality plant, if you're aware, and what kind of production levels you would expect from that plant next year?

Steve, it's John.

We don't know any more than what's been made public in the press, which is very little. So, the plant has been down quite for some time, since 2004 if I recall, maybe 2003. It is in an environment that is on the coast, so a lot of corrosion should have or would have occurred over that period. We do understand there was some equipment taken off that site, including loading racks, et cetera, and Methanex is still under contract for the terminalling operation on that site, through the balance of this year. So, that's what we know.

Okay. That's very helpful. Thanks.

Thank you. Next question is from Chris McDougall from Treaty Oak Capital. Please go ahead.

Thanks a lot guys. Could you give us a little bit of color on New Zealand timing? I know it's still a fluid process, but have the potential increases in gas supply been going there that might allow to you open up a second plant?

Yes, I think I am very optimistic about New Zealand. As we look forward at the demand/supply balances for natural gas in that country, there is clearly a surplus, and we certainly foresee a reasonable period where we could operate two plants, and the country still has an abundant supply of natural gas for all other consumers. The challenge, of course, is always around commercial terms. We've done very well. We've pretty much filled out the one plant now to the end of 2012 from a whole variety of gas suppliers, and now we're working on gas supply for the second plant. And, we need enough to justify the capital that we need to spend, which we think is around $60 million.

So, it's a bit like the Medicine Hat decision. We want to be sure that we have enough gas to justify the capital. Once we've got that, then we'll make the decision to go ahead. There is about probably a six-month start process project to restart the plant, so I indicated earlier I don't expect too much production in 2011, and I think that's reflecting the fact that we think there's a few more months before we can secure the incremental gas we need to make the decision. We then need a six month period to restart the plant, so at best, it will be towards the end of this year. At worst we think it's sometime early in 2012.

Okay. So it sounds like about 80% likelihood that you're able to restart that plant, if you decide to give it a probability, or even better than that?

That's right. I think it is a high probability.

Okay. Great. And then follow-up, there's been a big disconnect between Brent and crude pricing -- $10 a barrel, which is somewhat historic. And, it occurs to me that methanol being a much more global, and not as US-centric at least on the fueling application, that you might be getting more of a Brent index price than a WTI price. I know these are separate markets that aren't 100% indexed. But, have you gotten any feeling to that?

Not really, Chris. And, I don't think -- the correlation between methanol prices and crude prices, over a long period of time, I think is quite remarkable. In the chart that we have in our investor presentation, we put an annual average in. So, I wouldn't for a moment suggest the price of methanol moves on a daily or weekly or even monthly basis with crude. It will be up and down with much more -- the correlation short-term is much less definitive. But, over the long term, the correlation is precise.

And again, if you look at our investor presentation, on the chart we've got on there that methanol prices have always tracked above I think we put WTI in there, Jason. So, maybe you're correct -- maybe the better comparison is with Brent. And if we overlaid Brent crude on it, maybe the lines are even closer together. I'm still a bit leery of making too close a comparison with either of those markets. I just think the methanol prices do up and down with crude. I think that's a fair statement to make.

True. Thanks a lot.

Okay. First one more question, if there's one on the line.

[ Operator Instructions ]

If we finished the queue, that's great. We're just about on one hour.

So, I think it's a good time to bring the call to an end, and I hope you've picked out of my comments this morning that we continue to be excited and optimistic about the future. And, the story has not changed. We've been digging ourselves out of a production hole for the last two or three years, and we are getting perilously close to demonstrating success. And, it's frustrating to me that we've had, I think, another disappointing level of production in Q4, and we've signaled an even more disappointing level of production in Q1.

There are some reasons for that. They're mostly -- I think they're temporary, and we are going to get into a position where we can demonstrate our ability to produce much larger quantities of methanol. And, that's a very positive outlook for our company, in terms of both earnings and cash flows.

And then when I look at the industry, I think the -- our industry's in very good shape. And, in all of our forecasts, we don't put much in for MTO, but John's talked about MTO this morning and what impact that might have on demand. And, it certainly suggest that when we look at demand and supply, that we do need high cost capacity to operate, and in any industry where that's the case, that implies high prices, and a robust environment for companies that have well positioned assets.

So I think there is good reason to continue to be optimistic, and I hope that we're going to be able to demonstrate -- more than hope, I expect and plan to be able to demonstrate that to you as this year unfolds. So again thanks for all of your questions and your interest in the Company and we'll talk to you again next quarter.

Thank you. The conference now ended. Please disconnect your lines this time. We thank you for your participation.