Methanex Corp (MEOH) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation third quarter results conference call. As a reminder, this call is being recorded on Thursday, October 27, 2011. I would like to now 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 forecast 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, and for clarification, any references to EBITDA, cash flow or income made in today's remarks reflect our 60% economic interest in the Egypt project. I would like to turn the call over to Methanex's President and CEO, Mr. Bruce Aitken, for his comments.

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

Over the last 4 to 5 quarters we have seen a steady improvement in the key underlining drivers of our business. Sales, volumes, production and prices have all shown increasing trend, which in turn has led to higher EBITDA and net income. Sale's volumes in the third quarter of 1.9 million tons was slightly higher than the second quarter, and this reflects continuing strong demand for methanol.

We reported EBITDA $135 million and net income of $62 million or $0.67 basic net income per share. The average realized price for methanol was $14 a ton higher than last quarter and we saw higher volumes from the produced methanol from our Egypt and Medicine Hat plants that are now fully integrated into our results.

Produced sales would normally have been higher. However, production and sales for our Atlas plant were lower than normal, as the plant has been operating at reduced rates.

Our the third quarter EBITDA includes recovery of about $21 million related to stock-based compensation, as our share price was down by over 30% during the quarter. Related to this you will see in our results an unusually large difference between the basic net income per share of $0.67 and our fully diluted earnings per share of $0.59.

The reason for the difference is the IFRS accounting rules that we recently adopted allowed for less of the stock-based compensation recovery to be reflected in the diluted earnings per share calculation. Had we still been reporting on the US or Canadian GAAP, the dilution affect would have been somewhat lower.

I will summarize the quarter by saying our core business continued to demonstrate good improvements over prior quarters, while market-to-market accounting created some noise in our reported numbers. I will be commenting for on the expectations in the fourth quarter and the industry and pricing outlook a little later in the call, but before I do that I will make some brief comments on our operations.

Our Trinidad operations produced 394,000 tons of methanol in Q3 compared to production capacity of about 0.5 million tons. As mentioned on the last conference call, the Atlas plant experienced a 3-week outage early in the third quarter due to an equipment failure. As a result of this issue, the plant has been operating at about 70% rate. We expect the plant to be back operating at full rates after we complete a planned turn around and equipment repair in the first quarter of next year.

The Titan plant ran very well in the third quarter and produced at full capacity, although we are experiencing some gas curtailments at that site. The natural gas delivery system in Trinidad is not well established to manage outages in the upstream.

This has been the primary cause of the supply disruptions. All of the downstream gas users in Trinidad are engaged with the government to find a solution to this issue, but in the meantime we expect to continue to see a modest level of shortfall of gas supply commitments.

Shareholders may also have noted that BP announced their intention to sell their share holding in the Atlas plant but are tied up to close the sale this year. We own over 60% of this facility and so obviously are very interested in acquiring BP's interest and are working through their process.

Motunui plant in New Zealand also operated very well, running at full operating rates and produced 209,000 tons in the third quarter. In Chile, we were only able to run one plant continuously throughout the southern hemisphere winter at about 40% capacity and produced 116,000 tons of methanol. I will comment more on our outlook for the operations in both Chile and New Zealand in just a few moments.

The Egypt plant operated at full capacity in the third quarter and produced 191,000 tons based on our 60% interest. Production from the Egypt plant has been excellent, and has exceeded our expectations. While it is normal to expect a lower operating run in the first year of operation for a new plant, the Egypt plant has consistently operated at full rates since starting out in March.

Finally, our plant in Medicine Hat, Alberta also achieved excellent operating performance in the third quarter producing 125,000 tons, slightly above the capacity of that plant. Over the last quarter we contracted a further gas supply on the (inaudible) market that will provide certainty regarding production economics until March 2013. We remain confident that long-term natural gas dynamics in North America will support the long-term operations of the facility.

Turning to industry conditions, despite increasing concerns over the global economy, we have not seen any significant impact from global methanol demand. Methanol demand continues to be healthy in the third quarter and we are currently expecting further demand growth in the fourth quarter.

Demand in Europe and the United States has been relatively stable, while in Asia which represents over 60% of global methanol demand, the market has continued to grow. Healthy industrial production rates in Asia, and particularly China, continue to drive methanol demand into chemical applications. Also, both fuel blending and DME demand in China has been strong and both uses have continued to grow at double-digit rates over the last year.

During Q4, colder temperatures in China are expected to increase DME demand for heating purposes. Two new methanol plants came on line in the past quarter in China, in Inner Mongolia and the Hainan province. There are now 4 operating MTO plants in China consuming over 5 million tons of methanol per year when operating at capacity.

While these plants are integrated with their own captive methanol supply, some of these plants also rely on merchant methanol supplement for methanol production and this has been another factor that has contributed to tied up market conditions over the last few quarters.

Turning to methanol supply. The industry operated at a low rate in the third quarter. As is typical, there were many planned and unplanned outages across the global industry and a high level of planned outages is expected in the fourth quarter, as well. Chinese production also continued to operate at low rates due to various factors including feed stock, logistical constraints, maintenance outages and economics.

Despite moderating crude oil prices, coal pricing in China has continued to be strong over the past quarter. This has placed further pressure on higher cost producers in their country. These factors, combined with the healthy methanol demand environment led to lower inventories and higher prices in the third quarter and pricing has strengthened further early in the fourth quarter.

The European quarterly contract price is higher in Q4, and earlier this week we posted methanol prices for November at the same level as October pricing. Looking at longer term, there is little new capacity expected, which suggests that even with modest industry demand growth it will be a challenge for supply to satisfy demand.

This implies that a strong pricing environment will be needed to entice high cost industry capacity to operate. This outlook matches well with our plans to increase production over the next few years. So, on this note I will switch topics and provide you with an update on the key initiatives to increase production and capitalize on this favorable industry outlook.

In Chile, as mentioned earlier, we have been operating one plant at about 40% capacity, and we expect a similar operating rate over the next few quarters. In recent weeks temperatures in the southern hemisphere have increased, and we have received higher gas deliveries, as less gas is required for residential heating purpose.

However, offsetting this, there are natural declines in gas in the existing wells, so our operating rate continues to be quite low. While we expect the short term to continue to be challenging in terms of natural gas availability, longer term we continue to believe there is considerable upside to Chile production, and that natural gas supplies in southern Chile can sustain a multi-plant operation.

During the next few months there is a fracking campaign that is expected to improve delivery volumes, and as winter in the southern hemisphere ends, drilling and exploration activity is increasing. In addition, the Chilean government is in the process of grounding 5 new exploration blocks in southern Chile, GeoPark, Repsol/YPF, and Wintershall. These blocks are located on the Island of Tierra del Fuego, most of them close to existing infrastructure.

As I mentioned on earlier calls, we are looking at other potential options to recover capacity for our Chile operations. We are working on a project to relocate one plant to the US Gulf Coast and another project to convert one of the plants to cold feed stock from local supply sources.

We continue to make good progress on both of these projects. We are currently evaluating a number of potential sites on the US Gulf Coast, and we commenced the preliminary engineering studies for both projects. We expect to complete the field work and be in the position to finalize commercial arrangements by mid 2012.

We are working to an aggressive time table with both of these projects, off of the potential for long-term competitive cost methanol capacity and we believe they can be executed in about half the time and at lower capital cost than a Greenfield methanol project.

Based on these factors, they have the potential to create significant value for shareholders and the timing is excellent. As I mentioned a moment ago, there is little capacity expected to enter the market over the next several years, during which these projects would come online.

Finally, turning to our operations in New Zealand, as I mentioned on previous occasions, based on improved natural gas supply positions developing in this zone over the last several years, we believe that we will be able to secure more natural gas supply to enable us to restart the second plant. We are continuing discussions with gas suppliers and are optimistic that we can secure sufficient gas contracts to underpin the restart of a second plant in mid 2012.

In addition, earlier this month under an agreement with Kia Petroleum, we agreed to fund 50% of the drilling activity in the mountain prospect in the Taranaki region near our plants. The capital commitment for this investment is modest, at under $10 million US dollars, which we secure rights to all gas discovered in the prospect. So while it is a speculative investment, it offers the potential to provide a significant long-term gas supply with a very competitive cost structure.

I will change topics now and make a few comments regarding liquidity and capital allocation. During the third quarter we generated $119 million of cash flow from operations. We have conservative leverage, $200 million undrawn operating facility, and a cash balance of $261 million at the end of the third quarter.

We plan to continue committing capital to gas development in both southern Chile and New Zealand, and if we are successful in securing gas for the restart of a second plant in New Zealand, we would expect to spend about $60 billion to refurbish the plant.

We are well positioned to satisfy these initiatives and planned maintenance expenditures and, as mentioned earlier, we are aggressively working on coal relocation projects in Chile and working through the process concerning BP selling its share of the Atlas plant.

We believe these are all excellent projects that will provide great returns for shareholders and that we have the financial capacity to fund these projects from existing resources and (inaudible) capacity. Longer term, we expect to build on our strong track record and return more cash to shareholders through dividend increases and share repurchases.

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

Bruce has commented earlier, the industry and pricing environment has remained strong, and we expect a slightly higher price realization in Q4. Secondly, while it is difficult to forecast produced methanol cells, the reasonable assumption would be for an improvement in our produced sales in Q4 compared to Q3.

Combining these 2 factors should result in higher cash flow generation and core EBITDA in Q4, before adjusting for stock-based compensation. At I noted earlier, IFRS accounting rules are creating considerably more volatility to our earnings. The stock price the 3rd of September was what looks like a cyclical low. We have seen a substantial recovery in recent weeks.

If our share price is maintained at about today's levels for the balance of this quarter, we would expect there to be a stock-based compensation expense of approximately $10 million in Q4 compared to the $21 million recovery in Q3. Although we expect our core earnings to improve in Q4, after taking into account stock-based compensation, earnings per share may be a little lower. Looking out to next year, we have further upside to our earnings when the Atlas plant is back operating at full rates and with the potential for second plant in New Zealand. At this point, I am happy to stop and take any questions that you might have.

Thank you. (Operator Instructions) The first question is from Jacob Bout with CIBC. Please go ahead.

My question had to do around free cash flow and how you are prioritize it. It sounds like you have a lot going on at Chile, Trinidad and New Zealand. So, what I was hoping you could do for us is, just prioritize how you are looking at how you are spending your cash flow, from the dividend to the share buy back to the gas explosion in Chile to buying the BP stake.

Thank you, Jacob. Dividend is, I was going to say, sancrosanct, is probably a bit too strong. But we believe the dividend is very affordable, and we think we have further capacity to increase our dividend, based on the increased capacity that we have and based on our cost structure. So, I feel that the dividend is very affordable, and you will see further increases in our dividend going forward. After that, I think our challenge as management is to do whatever is best for shareholders.

If we have the opportunities to grow our Company with projects that offer substantial rates of return, then we need to compare that against the economics of share repurchase, and I would say today in the environment that we have within the methanol industry and the opportunity sitting in front of us, all the projects that I talked about, to me represent a better return to shareholders than buying back shares.

So, as long as we have these 3 or 4 projects that are sitting here that enable us basically to double the size of the Company in a very short period of time, we would be inclined to concentrate our cash flows in doing that, rather than consideration of share repurchase today.

Then as far as the projects you are actually looking at, as far as what is being considered in Trinidad versus Chile, how are you looking at gas exploration there or investing more in to gas exploration or moving the plants or coal gasification. What is the hierarchy there as far as the opportunities?

I think the first opportunity is clearly to BP. One that they have targeted the end of this year is, being their desire to close that sale. As I indicated, we know that asset very well. We know all the risks around it. So, it is a very easy asset for us to value, and it would be one that we are very keen to do. And that could happen quite quickly.

The -- I would say the same with New Zealand and the -- we already started spending some money on beginning some early works in anticipation of success in New Zealand. There are some 10's of millions to be spent there, and that is happening as we speak.

I think continuing to spend money in the upstream in both Chile and New Zealand is important. And again we are talking 10's of millions of dollars, so all of those things are happening as we speak.

The projects that still have a little bit of work to do before we make final business decisions are basically the relocation project and the coal gasification project. There, we've made a lot of progress on an aggressive timetable. We began early engineering in both of those projects. Both projects are of several 100 million dollars.

But as we have looked out at time tables to execute those projects, along with the other things we are doing and run cash flow predictions and looking at that time balance sheet, we think we have the capacity to do all of those things in the next 2 to 3 years. I hope that gives you some idea of the timing. It is not too precise, because there are decision to be made in the future.

Thank you. That was very helpful.

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

Yes. Good morning, everyone. I just wanted to follow up on the BP stake first I suppose. Bruce, just to clarify, did you mention that they were aiming to have the negotiations done by the end of the year, or concluded?

Yes. I think that is their timetable, yes.

Okay. And just for some perspective, I understand you can't speak too much to it or the details, but can you give us a sense for how we should think about valuing the asset? Would it be on replacement cost, on multiple EBITDA, anything around sort of the plant specifics or the stake of the plant that could give us a sense of what a realistic evaluation might be?

It is a difficult, Steve. We are under confidentiality, for start. I am very cautious of what we can and can't say related to that project. But I will make a general comment we will always value assets based on the cash flow generation potential. So, this stake will be no different than any other evaluation we do.

Okay. And as I understand it there are some commercial arrangements likely in place given BP's stake there. Would that be something we should incorporate in to the valuation or, in other words, the stake you have today that runs through your P&L is probably not represented of the exact economics that the residual stake would be. Is that a fair statement?

I probably -- I think I better not go there, Steve. I would love to say a bit more, but I am kind of weary of saying more than I should. So, I would ask you to please be patient. I know that is not very helpful, but that project represents 600,000 tons of competitive cost capacity.

There are lots of issues in Trinidad and we know what those issues are and so we are very well-positioned to value them. So, I think you can assume if we buy this, it will be a good deal.

Okay. Fair enough. And just as a second question on the strategic options in front of you. The option to go ahead with the gasification versus the relocation, how do you assess the different risk profiles there? It would strike me the gasification would be a lower risk, but I wanted to get your perspective.

I'm not sure. It depends on your outlook on North American natural gas. As time has passed, we are becoming more and more comfortable that gas particularly in the US Gulf is long and prices are going to continue to be constrained. So, I think that is probably the big risk around relocation, the North American gas market changes dramatically.

But, all of the analysis we have done would suggest that natural gas prices in that part of the world are going to be relatively soft compared to liquid prices. So, we feel pretty comfortable around relocation. We are talking to a number of people about gas contracts, which are not particularly common in the US.

And we may be successful with that, but even if we weren't, we are not particularly put off by the absence of a contract. Coal gasification is a bit new for us, so say if there is one thing that the biggest risk there is, it is a little bit of a different business.

You are handling solids and there are some environmental challenges we think we can manage very well and overcome in southern Chile, but that is not to say it isn't something that had a bit new and different. I think we can do a good job with both of them, so I am inclined to continue aggressively with both of them.

That is helpful. One last one if I may on the gas situation down in Chile. You mentioned a few things in your remarks, one on the fracking campaign that is going to get started soon, as well as some additional exploration efforts. Is there -- as I also recall in the release, virtually all the gas you are getting right now is from the Dorado Riquelme block, effectively from GeoPark.

What are ENAP's plans to accelerate or re-accelerate their exploration efforts down there? Is that part of those efforts you discussed?

They have been drilling quite actively in the last few months and have quite an active program over the summer period, as well. There is a bit of seasonality in the exploration business in southern Chile that I guess we have learned a bit about over the last few months, as well. It is clearly there is a step up in activity as soon as temperatures increase and a slowdown of activity in the winter time.

So, there are a number of campaigns that are just beginning now and we don't assume a lot of success in the forecast that we provided for the next few quarters, but the outlook could be different. One of the key things, I think, we talked about on a number of occasions is that Dorado Riquelme and the fell block where GeoPark operate are both important sources of supply for us today, and we are totally dependant on them.

Those 2 blocks are relatively small in relation to the total area. They will never do much than do what they are doing today, which is keeping us alive. We need to see more activity in those other blocks. That is what we are beginning to see.

Every time I think about this, it reminds me that the timelines in this industry are very long and it seems they spend a bit of money. They take a year evaluating results, spend a bit more money, and before you know it 3 or 4 years have gone by and now we are starting to think about drilling wells.

It feels that that is the sort of timeline that we are on with some of these exploration blocks. But in talking to different companies down there, there is lots of enthusiasm and lots of interest in natural gas, so that's where I maintain my confidence around a multi plant operation in southern Chile.

I experience some of the same frustrations that I am sure our shareholders do. I just wish this could happen a lot quicker. I feel that my confidence is not misplaced and we will all be rewarded with our patience and our efforts.

Okay. Thank you very much. Appreciate it.

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

Good morning. I just wanted to talk a little about the discount you are receiving now. I would have thought with Atlas operating at lower, that effectively, with no discount, would have shrunk this quarter, but obviously I am wrong. Can you just go through what is happening, please?

Well, it is hard to be too precise, Brian. You are right. The fixed price contracts revolve around the Atlas plant. When they are operating at lower rates, we tend to [cut off] volumes into those contracts but there are timing differences quarter-to-quarter.

I wouldn't read too much into it. I think our guidance going forward is that discounts will be around 12% to 15%, is probably about the right number, so some quarters it might be a bit lower and other quarters it might be a bit higher. But there are a number of different discount structures around the world, so it just depends on where the sales fall in a particular quarter. I wouldn't read anything into this quarter's number.

Perfect. Second question, just quickly on Titan. I am not familiar enough, obviously there is a little shortage of gas there, but there is nothing here to make you -- if I remember, that contract runs out in 2014. There is nothing in what is happening now that makes you think it will be more difficult to get gas under a new contract in 2014? Like the risk will be the same as they were before?

We have a high degree of confidence we can renew that gas contract. There is a 5 year right to renew it, so I think the chances of us getting to 20 40 and (inaudible) offer are close to zero. So, I certainly don't worry about that.

The issue in Trinidad is much more of a structural issue. It is an issue between basically the government and the upstream industry, as to how do they provide flexibility when there are disruptions in the upstream. And historically one of the upstream players has played their role of providing flexibility, and they no longer have the capability, and it is really up to the government and the regulators to evolve a system that provides more flexibility.

So, today there is no shortage of gas, but in the country today -- but there is this -- there are these commercial restraints around how gas is delivered. So, it is all a bit frustrating. As I mentioned before, all the downstream users are working together and emphasizing to the government the cost of the current disruption and really pressing them hard to find a sensible solution.

Great. One last quick one. Did you say Atlas would work at a higher capacity in the fourth quarter? I thought I read in the press release it was still going to be at 70% until the turn around next year.

If I said that, it was misunderstood. It should be around 70% until we do the turn around. We are still planning on doing that turn around in January next year, but we haven't confirmed that date completely either.

So, if you do that turn around we could run at sort of 70% through to that turn around basically.

Yes, that's correct.

I may have misheard you, I wasn't saying you said that. I wanted to clarify that. Thank you very much.

Okay.

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

Hi there, Bruce.

Hi there.

Moving geographies a bit, I know a bunch of questions around Trinidad and the like. On the Egypt side of things, obviously the plant seems to be functioning very well. A lot of chatter is coming from Egypt about obviously things are fairly unclear right now in terms of governance and the like.

But, what are you hearing on the tax rate regime side of things and the longevity of your contracts? Covering Orascom construction, one of the things I've heard is, that the government has approach Orascom and talked about retroactively taxing them on their earlier sort of cheap natural gas contracts. Are you hearing anything like that?

Not at all, Hassan, it is almost the opposite. What we are told by the people that we deal with regularly is that Methanex is being a good example of the sort of companies that they want to attract into Egypt. They recognize there's a need for foreign direct investment and they wish there were more companies like us, and that we represent an example for others. So, I think the chances of them coming back and doing anything that you described, I think are very slight and we have had no indication at all that that is their intention.

Thank you. Another quick one on the demand side, if I may. Obviously you talked about around 6% demand growth for the course of 2011. Maybe or maybe not, you could sort of talk through some of the sort of moving parts about thinking about demand growth into 2012?

I am going to ask John to make the comment on that, Hassan.

Let's split it into 2, the energy applications and traditional chemical derivatives. Whatever you are going to forecast for GDPIP growth that is what the traditional chemical derivatives should grow at. I think the latest number I saw for the global economy next year is around 4% to 4.5%. So, for 2/3 of the industry that is what we would expect to grow on derivatives.

On the energy side, we continue to see double-digit growth. So, fuel binding and DME continue to grow quite strong. Bio diesel is performing quite well, as well especially in Latin America and the US now that the US has put that dollar tax back on, subsidies, sorry, as well as the MTO.

We are seeing a lot of activity in MTO and Bruce mentioned, there are 4 plants running now. Those have integrated methanol facilities into them, but 2 of those 4 are buying methanol on the merchant market today, so that is creating quite a bit of extra demand.

And we see that continuing because there are quite a number of projects on the coast in China that are going to be relying on merchant and imported methanol to make olefins. So, we would expect it in the double-digit growth to continue in the energy applications, provided oil doesn't get back to somewhere like $30 or $40.

Of course. Of course. Very helpful. Thank you.

One point on Egypt, Hassan, before we pass on, that I meant to mention. The gas prices we pay is not particularly cheap. Our gas price is linked to the price of methanol and as the price of methanol is at a relatively high level, when we incorporate the gas sharing into the price, we are paying a pretty decent price for gas in Egypt.

It still very competitive to other parts of the world, but I think perhaps the companies in Egypt that are under a lot more pressure are those that don't have the sharing mechanism with their commodity, and perhaps due to have truly very cheap gas prices. So I think that is another reason that I don't feel any sort of threat at all through our existing contractual arrangements.

Thank you. (Operator Instructions) The next question is from [Fey Lee] with (inaudible) Brown. Please go ahead.

Hi. Thanks. Bruce, you mentioned the demand in Europe being stable. I wonder if you are sensing any concerns from the buyers on the economic outlook for the continent, or do you think there is a disconnect between what this financial markets are concerned about and what you are actually seeing?

Again, John has been in Europe recently, so he is in a better position to answer that than I am.

Yes, I think on the methanol demand side we are not seeing a decline in demand at this point. I mentioned earlier that demand on the chemical side is based on IP and GDP growth. The GDP growth is low so demand for methanol has been quite stable, I would say, not growing at great rates.

Now there has been a lot of talk about China declining from 9.7% to 9.1%, but I will remind everybody, it is a 22 million ton market today so even on GDP growth at 10% or 9% it is still growing at a very healthy rate, never mind the energy applications. So, we do focus on Europe and see slow growth in Europe, especially the southern part of Europe, but in the northern part of Europe we continue to see good demand out of countries like France, Germany and the UK.

We have not seen in our fourth quarter numbers any downturn that the point. Obviously we are looking at it very closely and monitoring it on a daily, weekly basis, but until we see something in our numbers, we are going to have to say that we expect demand to be quite stable in both Europe and North America.

Okay. That was helpful. Just another question. Regarding the covenant extension for lease, that we extended from September to March, could you elaborate a bit on what is still required to complete the land title registrations and mortgages?

It is really dotting I's and crossing T's, Fey. I think this project is no different than any other project. [Inaudible] a plant down in Trinidad, which is the last project we completed, it took us forever to do the fine little things and really there is nothing of much significance about it, but I think in the current environment the banking syndicate clearly does not want to let us off the hook at all.

[Inaudible]. We are working hard to do exactly that, but these land registration are needed and I think there is a high probability that we are not going to do them before March, so we are going to need a further waiver and I think there is a very low probability that they won't give us that waiver. So, I think it is a lot of noise about nothing, really, but there is a bit of work for us to do.

Okay. Thank you.

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

I wanted to follow up briefly on the integrated MTO complexes in China. Can you help us on the merchant side. I think I recall in the past you mentioned there were some quality issues on the upstream methanol units, but is that still to be the case?

It is not 100% transparent, Steve. It could be economics, it could be operating issues, it could be quality. We are not 100% sure. We were a little surprised as some of these plants started up earlier in the year, that they were buying merchant.

I will remind you these plants are quite large, so when they step in and buy, they are soaking up a lot of the interior methanol that sometimes finds its way to the coast. We are not 100% sure, but we would expect, based on our current information that there are 4 plants running that are integrated and one of them at any particular time would probably be buying merchant methanol.

It is probably also a little bit related to the price of methanol to coal availability as well as what is available in methanol in that particular area at any given point in time. So, we are not exactly 100% sure of the exact reasons, and I think they are different for each plant.

Okay. That's helpful. And just on the China market again, I understand there is a futures market that will be opened up briefly on the methanol side. Is that something you see beneficial in the industry? I am trying to understand how that will impact you, if at all.

We are looking at it. Our view at this point it will have no impact on the physical market at all. It is a paper market and there is not a lot of liquidity, so our current view is there will be very little impact on our business and on the Chinese pricing models.

Okay. Very helpful. Thank you.

Thank you. (Operator Instructions) The next question is from Paul D'Amico with TD Securities. Please go ahead.

Good afternoon, Bruce. Two quick ones. First, on the BP situation. Can you just tell us whether or not you have a right of first refusal? And the other question I have, with respect to China, can you -- to piggy back on the last question, can you update us on the cost curve there?

Simple answer is no. We don't have a right of first refusal, and the second one, maybe I will ask John again to comment on the cost curve in China.

For those that are buying coal that is not right at the mine mouth, and that is quite a bit, maybe 6 million to 7 million tons of production in China, the coal price today is around $130 a ton. Provided you are buying coal at that price, the cost curve is around $3.95.

The high cost producers in China are still under pressure there, even in today's elevated pricing environment. It is hard to make money in those sort of economics.

Thanks, guys.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Bruce Aitken.

Thanks, everyone, for participating. As I reiterated in the last few quarters, this is a really exciting time for our Company. The methanol industry is in a great position, with continued strong demand growth and despite all the economic turbulence we see, stability of demand, with very little happening on the supply side in the next few years. And into this environment we have lots of growth opportunities.

Whether it is acquiring a further stake in Trinidad, or expanding in New Zealand, or relocating to the US Gulf, or coal, we have lots of things we can do to grow our company in a very positive demand environment. I hope you all feel as excited about that as I do and I look forward to continuing to report to strong earnings in the future. Thank you for your participation and good morning to all of you.

Thank you. The conference has now ended. Please disonnect your lines at times and we thank you for your participation.