Methanex Corp (MEOH) 2011 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Methanex Corporation first quarter conference call. As a reminder, this call is being recorded on Thursday, April 28, 2011. I would now like to turn the conference call over to Mr. Jason Chesko, Director of Investor Relations. Please go ahead, Mr. Chesko.

Good morning, ladies and gentlemen. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections which are included in the forward-looking information. Please refer to our latest MD&A and to our 2010 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.

Great. Thank you, Jason, and good morning, everyone. Welcome to Methanex's first quarter investor conference call. I have a number of colleagues with me here in the room and they will be available to help answer questions a little later on. I'll first say some comments on our results.

Methanol demand has continued to be strong and our sales volumes were up 4% to 1.85 million tons on the quarter. This is our highest level of quarterly sales since the third quarter of 2006. So, I think that indicates the strength of demand and our positioning in the market. We also reported better results with EBITDA of $77 million and net income of $35 million, or $0.37 per share. Our average price realization was about $20 per ton higher than last quarter and this was a key reason for our higher earnings in the first quarter.

I will comment more on the industry and pricing outlook a little later in the call, but I first want to provide you some brief comments on our operations. In Trinidad in the first quarter we produced 394,000 tons of methanol compared to production capacity of about 0.5 million tons, as our Titan Plant was offline for about a month to complete a repair.

The Atlas plant operated well during the quarter and produced at near full capacity. Our production in Chile was down in the first quarter as a result of lower gas supply, and we produced about 183,000 tons of methanol, while in New Zealand the Motunui Plant continued to operate well and produced 203,000 tons. I will comment more on the outlook for our operations in both Chile and New Zealand in a few more moments.

Methanol demand has continued to be strong and we estimate that it has grown to about 47 million tons on an annualized basis. Demand has been healthy any all regions, and in both traditional and energy derivatives. We're also anticipating further growth in demand in the second quarter, particularly in China and Europe . High crude oil and gasoline prices and affordable methanol prices continued to drive growth at methanol fuel blending in China.

On the last call I mentioned the in Xinjiang province in Eastern China had implemented a methanol fuel-blending program late last year. Over the past month, Shanxi province, which is a neighboring province of Xinjiang province, introduced M15 methanol gasoline starting in Liping City, with plans to roll out M15 and methanol diesel throughout the province over the next couple of years. And just to remind you, M-15 is a mixture of 15% methanol, 85% gasoline.

The Company introducing the fuel cited the attractive economics of methanol fuel relative to other fuels as one of its key advantages. There was also an interesting article in the China Chemical News commenting on trial taxis using M100 fuel. The trial has involved more than 700,000 kilometers of driving, with the drivers also commenting positively on the performance and the economy of methanol fuel. We certainly have seen that methanol as a fuel is set for further growth.

Escalating crude oil prices are continuing to provide further momentum from methanol in a wide variety of energy applications. Higher crude oil prices have forced refineries in China to cut back on some gasoline production, shortages have been reported, export restrictions have been put in place, and the government has again raised gasoline prices. Of course, whenever gasoline prices increase, the economic case for blending methanol improves.

Similar dynamics are also impacting LPG production at the Methanex refineries, and this has been positive for the DME industry, as DME is used as a substitute for LPG. These developments highlight the impact of higher energy prices on the methanol industry and while China is increasingly adopting methanol to meet its growing energy needs.

Turning to methanol supply, over the last quarter we have seen the industry operate at slightly higher rates, including in China. However, as is normal, there continue to be a number of planned and unplanned outages in oil producing regions. These outages, coupled with continued strong demand environment, have caused markets to remain relatively balanced and prices to be quite stable.

Methanex non-discounted prices have averaged over $400 a ton over the last few months. And yesterday we announced the roll in prices in both North America and Asia. The same level in May as for April.

Pricing direction over the next few months is a bit difficult to predict. While there is new supply coming on from our plants in Egypt and Medicine Hat, demand growth is expected to continue and high energy prices tend to support stronger pricing. I believe that relative pricing stability is a reasonable expectation.

Over the longer-term, the outlook for supply and demand indicates that market conditions should be tight. Relative to anticipated demand growth there is little new capacity that is expected to come online over the next few years. This suggests that higher cost capacity will need to operate in order to satisfy industry demand growth, which in turn implies a strong pricing environment. This supply and demand outlook matches well with our plans to increase production. And on this note, I will switch topics and provide you with an update on our key initiatives in this area.

First in Egypt, we made excellent progress starting up the plant. To recap the situation, in late January for the safety and security of our employees, we made the decision to minimize our activities in starting levels at the Damietta plant site as a result of the civil unrest in their country. As conditions stabilized over the quarter, we returned our staff and recommenced the start-up of the plant, a process that went very well. We made first shipments of methanol in early April and the plant is now being producing at reasonably high rates since the start-up.

While it is still normal to expect a new plant like Egypt to be up and down a little over the next few months, we think the major risks are behind us and that the plant will operate at reasonably higher rates going forward. It is pleasing to add this asset into our supply chain, as it represents an important new supply source for our customers, and we expect it will have a significant positive impact on our production and cash flows in 2011. I will comment more on this in just a few moments.

Next, I wanted to provide an update on the restart of our plant in Medicine Hat in Alberta. Despite some challenging cold weather during this winter, the refurbishment of the 470,000-ton plant has progressed well. I am pleased to report that it produced first methanol over the past week and shipments are expected to commence soon. As I mentioned on previous occasions, we have purchased natural gas to underpin the production of the majority of the plant's capacity until the end of 2012.

We are continuing to pursue options to secure gas supply on a longer-term basis. We are very excited to be bringing this plant back online. It is very well-situated to supply our customers in Western Canada and in the Pacific Northwest, and based on the current methanol price environment, the project offers an excellent return for shareholders.

Turning to our operations in Chile, production there has been less than planned during Q1 as a result of shortfalls in gas supply. We have been explaining over the last few quarters that drilling and exploration activity is increasing, and while we now receive the majority of our gas and wells that have been drilled in the last couple of years, the results have not yet allowed any sustainable increase in the utilization of our plants.

One of our suppliers experienced drilling delays over the last few months as a result of commissioning a new rig, which is now operational. This is not helped short-term availability of gas, but the introduction of more modern and more efficient equipment is positive for the longer term.

While we have not seen any incremental gas in the blocks that were allocated during the 2007 international bidding round, gas discoveries have been announced. More exploratory drilling is planned on the license round blocks this year and the Tranquilo block, where we hold a small minority participation, drilling of the first exploratory well commenced last week.

Shareholders will recall that in the southern hemisphere winter, it is a period when demand for natural gas from the residential sector increases and we tend to receive less gas during this period. The is a risk during the upcoming winter that gas supply to our plants may fall below the level necessary to maintain the operation of 1 plant. We are working hard to avoid this outcome, but there are factors such as the weather that are clearly beyond our control.

So, while the short-term for us in Chile is a continuing challenge, we still believe that in the medium- to long-term the assets that we have in Chile offer lots of upside. We're confident that the increasing momentum and upstream activities will yield results. We expect about 110 wells to be drilled in southern Chile during 2011 to 2012, a substantial step-up on the number drilled in the past 2 years.

We observe, as in other regions of the world, that the exploration industry has a bias towards oil rather than gas exploration, which is not surprising given the relative value of the 2 products. However, Southern Chile is gas-prone and exploration has in the past yielded a quite high success rate. But, given our experience over the last few years, we are beginning to explore options such as alternative feed stocks and plant relocation. Our assets in Chile represent a unique opportunity to develop incremental methanol in a supply-constrained world more quickly and less expensively than any other option and we're working hard to take advantage of this opportunity.

Finally, turning to our operations in New Zealand. As I've mentioned on previous occasions, we currently have gas contracts with a number of gas suppliers which will underpin production of our existing 850,000-ton Motunui plant through 2012. Based on the improved natural gas supply position that has developed in New Zealand, we believe that we will be able to secure more gas supply to enable us to restart a second plant. We are currently working with gas suppliers in New Zealand to meet this goal and are targeting to have sufficient gas contracts in place later this year, which would allow us to make the decision to restart the second plant. If we are successful, we anticipate the restart would occur in the first half of 2012.

I will change topics now and make a few comments regarding the liquidity and capital allocation. During the first quarter we generated $80 million of cash from operations before changes in non-cash working capital. We have conservative leverage of an $200 million undrawn operating facility and a cash balance of $240 million at the end of the first quarter. We plan to continue committing capital to gas development in both Southern Chile and New Zealand, and we are planning for a modest amount of capital for the restart of a second plant in New Zealand.

We're well-positioned to satisfy these initiatives and planned maintenance expenditures, and with the positive outlook for the methanol industry and the recent start-up of Egypt in Medicine Hat, our Company is now in a stronger position to generate cash flow.

In this regard, I am pleased to report that yesterday our Board approved a 10% increase to our regular dividend. This marks the seventh time that we have increased dividends, initiating it in 2002. There is significantly more upside potential to our production and cash flow generation, and as we build excess cash we expect to be in a position to return more cash to shareholders through dividend increases and share repurchases.

So, before stopping for questions, I will briefly comment on our expectations for the second quarter. As ever, there are lots of moving parts and assumptions that will evolve over the quarter, and it's difficult to provide precise guidance.

Firstly, Egypt and Medicine Hat will begin to have an impact on our results in the second quarter, with some of the production from these plants starting to flow through inventory and into sales. Our expectation is about 120,000 tons being our share of Egypt product, and 30,000 tons of Medicine Hat product will be sold in Q2. In both cases this is substantially less than production and assumes the build of a base inventory in both locations.

There is one other issue related to Egypt gas that also begins to impact our second-quarter earnings. In our recent annual disclosure documents, we noted that there have been some discussions with our gas supplier. These discussions relate to the interpretation of a provision as to when methanol price sharing begins.

Our view was that it was to start in the middle of 2012. However, our supplier believes that it starts immediately. We are inclined to a pragmatic resolution of this issue, which suggests that in modeling our results it will be sensible to assume methanol price sharing starts immediately.

Methanol prices have been relatively stable in recent months, as I commented earlier. We have rolled April prices into May so there are now 2 months in the quarter with stable prices. Putting all of these factors together, we expect second-quarter earnings to be a little higher than Q1 earnings. We have further upside potential to our earnings in the second half of the year when we expect to see full benefits from Egypt and Medicine Hat plants.

It's also worth noting, though, at on a cash-flow-per-share-basis the addition of these 2 new plants looks particularly attractive, as they all bring down the average cash tax rate of the Company while increasing depreciation expense more than maintenance capital. So, this point, it is a good point to stop and I am happy to take any questions that you might have. If I could ask you just to limit yourself to 1 question. We have had a bit of an issue in recent calls with multiple questions and people -- others not get a fair turn to ask questions. So if you wouldn't mind limiting yourself to 1 question and then if you have another, feel free to hop back on the line

Jacob Bout from CIBC. Please go ahead.

Hello. My question is just on the Chilean gas supply. When do you expect to get the second plant up and running? And then maybe just comment on about the investment opportunities to ENAP, GeoPark and others.

What is that scope of the investment? What are you considering? And order of magnitude, is this 10s of millions or 100s of millions of dollars? How are you looking at that?

Okay. All right, well I think over recent quarters, we have been substantially reducing our expectations in terms of the record recovery of capacity in Chile, and that's just based on our experience and the knowledge that it takes a long time to develop oil and gas resources. I feel as though over the time, Jacob, we have been a bit unlucky. Since 2007 we have had a financial crisis that took a lot of capital out of -- risk capital out of industries like exploration. We had an earthquake down in Chile that, while it didn't have any direct impact on us, it certainly had an indirect impact and diverted ENAP's attention away from exploring. I have talked about things like drilling rigs and the absence of contractors and lots and lots of issues, and then I think the reality today as we talk to a lot of companies, is that in an industry where they're allocating capital, they prefer to allocate capital where they have a higher probability of finding oil rather than gas.

And I understand that, it makes good logical sense. So, it feels that we have been fighting into a headwind ever since the challenges that we have had with Argentina back in 2007. That said, we have invested now over $100 million. I think the returns that we have made on those investments have been outstanding, strong double-digit returns.

So, what do we know? We know that there is gas in that province. We know that we're able to generate good returns out of those investments. So, we're inclined to continue making investments that will give us higher volumes of gas and allow us to run our plants at higher rates of utilization.

So, is this 10s of millions or 100s of millions, I think it is in the 10s of millions, Jacob. I think our budget this year is $50 million to $60-million-odd, and I think as long as we can find good investments with moderate risk, then we're inclined to continue spending to support our operations in Chile. And I think based on all the knowledge, we have we will continue to see increases in gas supply coming from the new wells.

But 1 of the challenges that we've had is that new gas supply is barely, or if it has, kept pace with declines in some of the older fields. So, we have been running hard to stand still in the last year or so, and that's the reality we faced. But as I mentioned in my prepared notes, we think momentum is building and we have reason to have optimism around higher rates of utilization going forward.

Maybe just as a follow-up, so you have invested you said just over $100 million here, but yet we only have 1 plant operational. Let's say you are to invest another $100 million, does that mean you'd basically bet at 2 plants? How should we think about that?

I think in terms of your expectations for the future, we certainly have an expectation that we'll be running 2 plants in 2012. Now, will it be continuous throughout the year, probably not. I think the guidance we've offered is that we expect production this year to be similar to last year and based on Q1 and the comments I made for Q2, we're probably going to be struggling to make that expectation a reality. So, there is no doubt that short-term, we are struggling, but I think based on the activity that we're seeing and the prospectivity we think there is a realistic possibility of getting back to 2 plants next year, which implies some growth in production relative to 2010 and relative to 2011.

Thank you. I will jump back in queue.

Bert Powell from BMO Capital Markets. Please go ahead.

Thanks. I am wondering if you can give us an update just in terms of what's going on with shipping costs back haul, and any update in terms of your fleet? Well, we have I think 18 vessels in our fleet, some of which we own and others are on long-term time share. We think our shipping business gives us still quite a significant competitive advantage relative to others in this industry. Of the order, I would say today around 20%.

So, I think what we have developed is a really robust organization that improves reliability and quality for us and saves us money, so that's a good thing. In terms of costs, there is no doubt that bunker fuel costs have continued to escalate along with crude oil, and represent a much more significant part of freight today than they did 4 to 5 years ago. So, shipping costs are going up, but I think the high crude oil prices have a lot of impact on our business.

The biggest impact, of course, is on the price of methanol, and we have been big beneficiaries of higher crude oil prices, higher methanol prices. One of the not-so-good aspects is that we have some increase in costs, and bunker fuel is 1 of those costs. So, in some ways you'd say we're hedged, sure, we get some increased costs but we have even more increased revenues. So, it is something we don't tend to lose a lot of sleep about, but I think we lose a lot more sleep about just being very efficient and very good at what we're doing in the shipping business. What about -- just as a follow-up, on the back haul in the past that's been an ability for you to generate an offset, and then through the downturn not so much. Has that come back at all?

Come back? Not to the extent, --not to the pre-recession levels, but it certainly has come back. I think last year about 30% of what we hauled, I'm looking at John, was product other than our methanol. So, 30% of our revenues out of our shipping business came from non-methanol related products. It is certainly -- so rates have improved, utilizations have improved. That helps us be more efficient and maintain costs as well.

Is there any expectation that that back haul ramps significantly this year in terms of what you're seeing in trade flows?

In terms of volume, no, the fact that we're producing more volume in Egypt means that we have higher utilization of our vessels. So, the important question is around rates, would we -- can we make more margin out of back hauls? And my general knowledge is the tanker market and the CPP market is better than it was but it's not favorable. So, I would think that said, we're going to do out of back hauls but we're not going to make a lot of money out of them.

Thanks, Bruce.

Okay.

Thank you. Steve Hansen from Raymond James.

Good morning, gentlemen. Just a question, I am torn with a single question here, but I think I will go with the -- I think you mentioned, Bruce, the examining the option to move one of the Chilean plants and alternative feed stocks is another one. If you had to look at your complex today, the different positions have you around the world, where is the most logical place to move that plant? Would it be adjacent to one of your existing sites, such as in Egypt, and how would the timing and costs around that type of move play out?

I would rather not speak out on this, Steve. I would say today we have about 3 to 4 locations that we're thinking about, and we have done some engineering studies, so we're beginning to understand capital costs, practicality and timing, and we will narrow down our list of preferred options I think over the next six months. But in the meantime, I prefer not to be too public about where we're thinking about moving those sites.

And I would say over the last 15 years we have studied moving plants -- I have lost count of how many times we have done it. We had lots of idle capacity, as you know. We have never moved anything, and the reality is, at the end you end up saving a little bit of capital and a bit of time. So, from a net-present value point of view, this is a lot better than building a new greenfields plant somewhere, so that's what motivates us.

I think we're in a supply--constrained world, and we've got some hardware that I think is very helpful in generating incremental methanol and therefore incremental earnings. So, this time around maybe we will find somewhere that really works. We are getting a little bit enthused about coal in Southern Chile. There is a lot of coal, so we get away from all of the issues around feed stock security and concern about the long-term viability, and maybe this is a really good place to invest in coal gasification. So, again we are spending a little bit of money and understanding that as an opportunity.

Okay. All very intriguing. Thanks. I will jump back in the queue.

Take care

Thank you. Sam Kanes from Scotia Capital.

Good morning, Bruce. I am going to ask a question from the past. It is in a geography called North America, and Alberta to be specific. And my question is generally this. It's got to be pretty high priced to reach inland Alberta, for that matter US/Midwest, where there is a big step-up here in soybean based biodiesel lately, 1.2 billion-gallons next year, needs 120 million of methanol, as the math works on that. And my question is, in general, about what type of realized price expectations, what are the prices right now for importing, it has to be really high relative to other price points like Houston, Rotterdam, or Japan?

And what are you expecting? How much will that market now you are about to take over, be entirely yours, I guess, and eventually, of course, Texas might make a difference on that, if that plant goes ahead. So, that's the framework of the question of how is selling price, your expectations to selling price, how far will that product go? What have you got lined up going forward?

I'll make a few comments, then I might ask John Gordon just to say words some words as well, to offer you his reflections. It is an interesting question, and it's really what's driven us to invest in Medicine Hat. We were able to sell out Medicine Hat within a few-hundred-mile-radius of that site. Because there is some chemical industry in that area, there's formaldehyde and some other derivatives, and then of course the growing demand for methanol into the biodiesel industry. And of course the oil and gas industry consumes a favorite of methanol, as well.

So, we're in a really, really nice position with Medicine Hat and I think there is a sustainable disconnect, certainly in the medium-term between gas in Alberta and crude oil, so our positioning there couldn't be better. But currently the size of that plant pretty well matches the market, so if the follow-up question is would we think about increasing capacity?

I am not sure that that would be a smart thing to do because then we start further afield and potentially competing with methanol carriers that are sea born. Maybe I'll pass on to John. Any additions, John?

The premium in that market is basically the freight from Eastern Canada or Houston, which depending on the time of year, is around $90. We expect that to continue into the future.

With regards to biodiesel, I will remind you that 10% of methanol is for transesterification but there is another 7% or so used in the catalyst, so sodium methylate is the preferred catalyst for biodiesel production and about 7% for every gallon of biodiesel uses 7% of methanol for sodium methylate. So, using your numbers, Sam, between 350,000 to 400,000 tonnes of methanol for transesterification based on 1.2 billion gallons, and another 250 million to 300 million for sodium methylate.

Thank you for all that. Since, Bruce, you surmised I had a follow-up and you answered the follow-up, that wasn't my follow-up. Thank you for that. Just make it real simple. Obviously your inventory levels having to go up here as well, and just curious as to, you drew down your inventories Q1 modest, albeit. I imagine you needed 50 million to 100 million or something along that line to beef up your inventory levels for your new facilities, no?

Yes, our inventories are really low. We're tracking just over 30 days of sales, which, given one-third of our inventories are at plant sites and one- third are on the water and another one-third on the market, that leaves you with 10 to 12 days of supply in the market, which is just not enough. So, we are very short and we continue to run a little bit hand-to-mouth. We have done that intentionally, we have got new supply coming on-stream and I think we're well-positioned to be sure we can supply our customers. But, yes, your expectation is correct that we will be looking to increase inventories a little over the next few quarters.

Thank you, gentlemen.

Okay.

Jaret Anderson from Salman Partners.

Thanks very much. Maybe a 2-part question. You mentioned that moving a plant in Chile might save you a little bit of capital and considerable time. Is it fair, just as a broad guesstimate, to think that you might be able to save perhaps one-third of the capital costs versus greenfield?

That's not a bad guesstimate. If you say that $700 is replacement cost today, you can probably move something for about $500, so -- per ton of capacity. And then you probably, if it is a 3-year construction frame, you'd probably chop a year off that, so you save one-third of that. So, it certainly, in net present value terms, if you compare relocation to greenfields developments, the economics are quite compelling. But it still means you need to spend a chunk of money and it doesn't happen instantaneously.

Great, that's helpful. Lastly, can you talk a little about the economics on coal gasification in terms of capital costs, potential operating costs, those sorts of things, if you delve into it at all?

We have only done a little work and I don't want to go into too much detail, Jaret, but it would make much more sense if we didn't have the hardware that we had available in Southern Chile. So, we do have an oxygen plant there and that's a critical element of coal gasification, and it is 1 of the more expensive elements and it is 1 of the longest lead time as well. So, the fact that we have an oxygen plant that's operational down there, that's 1 big addition.

The fact that our plants there are long on hydrogen is another good thing, that it means that we can potentially add coal gasification without an increase in emissions, and I think that's ant important thing for us, as well. And certainly in terms of capital-cost-per-ton, the numbers that I have seen are much more like the relocation numbers I quoted just a few minutes ago. But all of those numbers are a little bit preliminary, but I think they give you an idea that there is an interesting opportunity here that we should spend some time on and I hope we can provide a lot more detail going forward.

Great. Thanks very much.

Okay.

Charles Neivert from Dahlman Rose.

Good morning. Just a little progress on what's going on in China relative to MTO. I know we have the one plant that's more or less operational in Boutou that's using coal-based product, but there are coastal operations that are, I guess, in construction now. Can you give us some detail on that?

That's a very interesting question, and I will ask John to give us his reflection on that, as well.

So there are 2 plants in the interior of China using end-to-end coal-to-methanol-to-olefins. I believe right now 1 of them is running, the other 2 have run on and off. The new developments as you've mentioned are the MTO plants on the coast and the Nanxing area, Tanxin area. They are under what I'd call feasibility. I don't think there is any one under construction, but they're planning to start construction sometime this year. There will be a phase process again. So, if you see announcements around 800,000 tons of olefins, it will probably start with 200,000-ton plant and then phase over time.

The most recent numbers we got this week of all the planned plants totals up over time of about 12 million tons of methanol demand, and so this is all merchant methanol, there is not any associated methanol plants being considered to be built with these plants. So, we'll import methanol or take methanol from another part of China and convert it into olefins, and the value proposition really is to replace olefins that are based on NAFTA today, which follows crude oil, which is around $110 to $120 a barrel. So it is another way of arbitraging lower gas or coal-based methanol to take advantage of the high oil environment.

And those economics are quite compelling, John. There has been some discussion in China about limiting capacity. I don't want to see a huge overbuild, but I think the economics are compelling and we are going to see I think a significant step-up in the merchant methanol flowing into olefins, which is something we never -- only really in the last 12 months we've even started to think about.

And more recently there has been talk about methanol to glycols, as well, which is a very large market and brand new.

Okay. Thank you.

Hassan Ahmed from Alembic Global.

Hi, Bruce.

Hi, Hassan.

Question around demand, specifically related to China and then just broadly sort of end-market-related. As I look at trade data for the month of March, there was a substantial uptick in terms of Chinese imports of methanol. We're looking at the tunes of 30% uptick year-over-year, over 90% month-over-month, so first question is how sustainable is that? And then again associated with demand, the second question is that in Q1 you had a fair number of outages on the acetic acid side of things. So, going forward as those facilities ramp up production and the like, should we expect further demand improvements relative to Q1 levels?

So the answer to question one is I wouldn't read too much into monthly variations. It just requires 1 shipment to either slip from 1 month to the next or to be brought forward, and our view is that the ongoing run rate of imports today is around 5 million to 6 million tons on a per annum basis, and we'll see some months where it's a bit lower and other months when it's a bit higher, so I think that's a reasonable expectation, at least in the short-term. The second part of your question is definitely yes. We do expect to see an uptick in demand in Q2. China demand in Q1 was relatively flat because of the reason that you mentioned, and the fact that Chinese New Year inserts itself into the middle of the quarter.

Of course.

So I think those two factors mean that demand was relatively flat in Q1. We're expecting quite a strong pickup in Q2.

Fantastic. Thanks so much, Bruce.

The next question will be from Paul D'Amico from TD Newcrest.

Hi, Bruce. Two quick ones, if you could. The commercial sales volume you expected from EMethanex and Medicine Hat. Can you explain how that came about? Is there lack of clarity in the agreement?

Sure, our share of Egypt in 120,000 tons, so 60%. And Medicine Hat around 30,000 tons.

Got it. And just the 1 questions, in terms of that dispute or disagreement with respect to the revenue sharing on the methanol price, can you explain how that came about? Was there some lack of clarity on the agreement?

I would rather not go into the chapter and verse. It is an interpretation issue, and I can understand their point of view and I would say they understand our point of view. We could choose to say let's litigate this and resolve it, that's not a very happy thing to do, particularly at the time we're at in Egypt. And frankly if the price of methanol was less than $250 a ton we wouldn't talk about this today, because it has an absolutely insignificant impact.

So, the reason that we're talking about it is because the price of methanol is $350 a ton and it has a bit more of an impact on our results. So, as I mentioned in my prepared remarks, the pragmatic response to this, we're really pleased the plant is up, it's operating really well. The best thing we can do in that country is just do a really good job of running our facility, selling the methanol for as high a price as we can, and returning cash flows and share and dividends to our shareholders there, and that's what we intend to do.

Okay. I appreciate it. Thank you.

Dax Vlassis of Gates Capital Management.

Yes, I was curious, what is the probability as you currently see it that you actually shut down the 1 facility in Chile?

I would say quite low, Dax. I am relatively confident that we can get through this winter, but we wanted to be very straightforward with our shareholders and with the analysts who follow our Company that there is a risk here. And as I mentioned there is some things that we don't have much control over, if it is a particularly cold winter or if there are some failures in some of the larger wells that produce, those are things we have no input into and that could blindside us.

Okay. Also about Chile, I think you have 4 plants there of various ages. I mean, what is the realistic ability of moving -- does the age of the facility weigh on your decision whether it makes sense to move a facility, and the costs that are much less, are you taking into account like transportation costs and all that? I don't even know how you move a plant, maybe you could just -- how you can do that?

Yes, the age doesn't matter too much, and as one example I'll offer you, there used to be 8 million tons of methanol capacity in the US Gulf. Most of that's ended up in China somewhere. Most of that methanol capacity was built in the -- some of it was in the 1970s, some in the 1980s. So, our plants in Chile, the oldest plant there is, I think started up operation in 1988. The more modern plant started up less than 10 years ago.

So, I think the average age of our facilities there is reasonable, and all of those plants are able to be moved. And there is quite an industry of companies that have the capability of relocating these facilities. So, I think there's no issue with practicality, there's no issue with engineering, it's all about finding a right location with a right set of economics that makes good sense.

And if you're thinking about moving in that direction, why does it still make sense -- I mean are you just, as you said it, you're fighting an uphill battle just to maintain the volumes that you have. Why spend additional money in Chile? I think you were talking about another $50 million this year. Why wouldn't you just put that towards moving the facility, or do you still think there is some hope that --?

I would rather do both, frankly. Those facilities are built down there to consume natural gas, and we have a big marginal opportunity by bringing incremental natural gas into those facilities and making more methanol. And as I mentioned earlier, again the investments we made down there have made great returns. So, we're inclined, as long as we can find projects that make great returns, we'll carry on executing those.

So, my inclination is do both things. We'll carry on investing and finding more gas. To the extent that we decide to move another plant or we decide to adopt an alternative feed stock, then what we're doing is I think extending the life of the existing facilities down there, we're spreading out gas over a longer period of time. So, I think there is some capital that we can spend in Southern Chile that makes lots of sense in terms of returns and cash flows.

Thank you.

Okay.

Robert Mark from MacDougall, MacDougall & MacTier.

Hi, Bruce. You touched on this when you were talking about the dividend. But is it fair to say that this 10% increase is just the first step regards to how much cash flow the new facilities bring to the Company?

Well, we've established quite a track record of paying dividends and increasing dividends, and we have talked about wanting to demonstrate our confidence in the future of the Company by increasing dividends whenever we have a step change in our production capability.

So, this is a modest step change relative to the increments of Egypt and Medicine Hat. So, do we have more capability to increase the dividend in the future? I think absolutely we do. But we think this is a good, strong increase that indicates our confidence in the future, both the industry and our positioning in it.

Beyond that we talk a lot about, well we have in the past, we've talked a lot about share repurchases. And we're still committed to using excess cash to repurchase shares. I think my definition of excess cash is probably a little more conservative than some of our shareholders'.

I think as long as we have good opportunities to invest and grow our Company and to improve the quality of our Company, we're really inclined to go after those and to grow and to improve. So, as long as we have those opportunities, we're more inclined to want to improve our Company, and I've said many times in the past, we're not interested in diversification. This is all about methanol. We think this is a really interesting industry, we have a great position in it and we're going to invest to continue to grow and develop our position in the industry.

That's fair. Thanks.

Fi Lee, a private investor.

Thanks. Bruce, I am just wondering, do you see any risks at the discussions with E-gas moving beyond the sharing agreement to perhaps seeking higher pricing for gas supply given the political uncertainty in the country?

I don't think so, Fi. Egypt and the whole Middle East is a rather unsettled part of the world, to put it politely. So, of course, there probably is increased country risk in that region, but in our discussions there has been no suggestion whatsoever. There has been some controversy that I am sure we have all read about in terms of gas contracts in Israel and Jordan, and there has been no suggestion that the gas contracts to domestic consumers are part of that controversy at all, so I don't think so.

I think the way we have constructed this project with Egyptian shareholders and gas price sharing, the reality today is that for every incremental dollar of revenue that we earn in Chile -- sorry in Egypt, 60% of that goes back to Egypt (inaudible) in some way or another. So, I think it is a really good deal for Egypt and at the same time it is a really good deal for Methanex and our shareholders.

So, it feels like a really good win-win, and I know in reading about the country today, they're talking about the need for foreign investment and encouraging new investments. So, to do what you are suggesting would be rather counter to their view of being a positive environment for foreign investors. We have no expectations of any other changes or any other discussion and our gas supplier has been quite explicit in that as well.

Okay. I just wanted to confirm that, because it wasn't the topic wasn't broached. Thanks.

Okay.

Follow-up from Steve Hanson at Raymond James.

Bruce, could be for you or John, I am curious about the cost curve at the moment. If you recall back to November/October timeframe last year we had a large fly-up in pricing and a lot of people talked about a break from the traditional cost curve and prices have actually held in extremely well here from that point despite expectations from the fall-through for the early spring.

And I think there has been a number of factors behind that, including energy. But is there anything, if you had to highlight 1, 2, 3 key factors driving the sustained prices, energy being the obvious 1, do you just want to talk through that scenario a little bit and why you expect prices to stay sustained here through the balance of the summer?

Yes, Steve, it's John. Right now the cost curve is pretty stable and it's being underpinned of course in China, which is in the high-end of the cost curve, and that's really a factor of coal pricing. So, traditionally we have seen coal pricing follow oil pricing globally and in China. Due to the very -- the extreme concerns of the central government about inflation in China, we have seen coal pricing there stay stable over the last 3 or 4 months, where in previous times when oil went up, coal went up. So, we don't expect that to change significantly, but we do expect as we get through the quarter, about a 5% increase in coal in China, which will have the impact of moving the cost curve up by about $20 2 $25.

What's sustained the pricing? I think we had a number of planned and continue to have a lot of unplanned outages outside of China and in China. So, right now you have got 1 of the large plant in Saudi Arabia down, you have Brunei turnaround, the Malaysian plant, the large 1 is down and the small 1 is running on less-than-full capacity because of gas restrictions. The refineries in Germany have been in turnaround. So, again ongoing planned and unplanned outages, even though the operating rate was a little higher in Q1 than Q4 of last year.

That's very helpful. Thank you.

Follow-up from Jacob Bout at CIBC.

Just as far as the coal gasification option for the Chilean assets, can you comment on the your operating costs for the coal gasification versus natural gas? And maybe comment a little bit about the cost of coal delivered into Southern Chile?

Well, the coal is close to our plants, it's within 40 kilometers or 50 kilometers of our plants, so there is a large resource there that has been substantially under exploited. They're beginning to develop and grow the coal mining business there and exporting coal up to Northern Chile, but there is a huge resource, it's relatively low-cost. So, the real compelling part of the story, jacob, is that the capital costs of new production based on coal gasification is very competitive relative to a new build, and the operating and the delivered cash costs are the same.

It would be very hard to find a better investment anywhere in the world than one based on coal from Southern Chile today. So, it is quite a compelling case. It is a bit of a stick-out for us. We have never invested in coal gasification before. We've looked at lots of opportunities in China and never found the right 1 to fit the criteria that we set for ourselves. So we have some work to do on this, but --

But at this point you think the operating costs would be similar from coal as it is from natural gas?

This will be a low-cost plant that would fit, I would say in the middle-to the bottom-end of the cost curve. It is in the bottom-half of the cost curve.

Thank you.

Okay.

(Operator Instructions) Cory Armand from Rice Voelker.

I know your focus is on Chile, but I was wondering if you could update us on the progress of additional natural gas availability in New Zealand?

Sure.

And any timetable that you may have there?

Yes. We have done a lot of analysis of natural gas demand and supply in that country, and the 1 big difference in New Zealand is that most of the gas is condensate-rich. So, the industry in that country is much more interested in exploratory drilling and development based on condensate, not on -- they're not interested in producing low-cost natural gas.

The good news for us is when you produce condensate, you have got gas and you need to do something with it. So, I think the win-win here is that we have capacity available to consume incremental natural gas, so I think that the positioning we have got there is good for us and it's good for the exploration industry.

Now that said, there is a pricing regime in that country that's developed over time that doesn't necessarily fit our objectives, and we have been working hard to align ourselves with explorers in that country that are able to meet our economic criteria. I think we're making good progress, but we're not there yet.

Our current feeling is that we should close on some sort of gas deal before the end of this year and that the restart of a second plant will be in the first half of next year. I would say there is a high probability of success, but there is water to flow under that bridge yet, and we may not be successful.

And in terms of the amount of tonnes that that translates into, the incremental capacity that could be utilized?

Probably about an incremental 750,000 tons, so we would have a total of about 1.6 million tons on that site, whereas today we're more like 850,000 tons.

Okay. Great. Thank you.

Maybe we can take one more question, and we have our AGM actually coming up in 30 minutes so we need to get ourselves in position for that.

Certainly. Chris McDougal from Treaty Oak Capital.

Thanks a lot, and great quarter. Just one more thing on this new development here with Chile using coal as an alternative feed stock. Just walk me through the comparison of you putting in capital to utilize coal in Chile versus somebody doing a new build of coal in China. So, as I was thinking about it, there is kind of the capital up front, there is the timing, and then there is the ongoing operating costs, and the last 1 I think you already touched on, but the first 2 I would like to understand.

I will ask Michael MacDonald, our Senior VP of Operations, who is more knowledgeable on this topic than I am and can speak about it more intelligently, I am sure, as well. Michael?

Thanks, Bruce. So if we think about the methanol plant as being 2 parts, one is to convert raw materials into synthesis gas, and the second part to convert that synthesis gas into methanol. We have the second part in Chile already, and for coal gasification we have part of the first part, which is the oxygen plant. So, substantially there is less than half the capital that we would need to put in place.

So, from a capital perspective, on a new build basis, competitive, I think Bruce already made the comment that what we have seen so far in looking at the coal availability and possession in Chile, the feed stock would be quite competitive with what we're seeing with gas down there right now, from both a capital and an operating perspective, very competitive.

Just to add to that, in China, the plants that have been built based -- the recent ones, on coal gasification, 600,000-ton plant between $350 million and $400 million to build.

Okay.

Okay, well, thank you, everybody. I hope you've gathered from this, this is really exciting time for our Company. We really have really struggled since I think middle of 2007 when we lost that gas in Chile with levels of production. And now we're beginning to dig ourselves out of that hole with both Egypt and Medicine Hat up and operating. On an annualized base our production now is around 5 million tons per annum, which is a 40% step-up from where we were in 2010.

So, we feel as though we're beginning to make good progress and there is a lot more to come. And at the same time our industry is in great shape. Demand continues to grow supported by high crude oil prices. I think pricing is strong and will continue to be so. So, we're really well-positioned in a very interesting industry. So, I want to thank you for your continued support and wish you all a good morning.

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