Methanex Corp (MEOH) 2013 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.

I would now like to turn the call over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead, Ms. Daycock.

Thanks. Good morning, ladies and gentlemen. Happy Halloween and welcome to our third-quarter 2013 results conference call. Our 2013 third-quarter report along with presentation slides summarizing the Q3 results can be accessed at our website at www.methanex.com.

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 2012 annual report for more information.

For clarification, any references to EBITDA, cash flow or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 60% economic interest in the Egypt facility. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and other nonoperating items. We report our results this way to make a better measure of underlying operating performance, and we encourage analysts covering the Company to report their results in this manner. I would like now to turn over the call to Methanex's President and CEO, Mr. John Floren, for his comments and a question-and-answer period.

Good afternoon. We're extremely pleased with the results we've delivered in Q3. The key driver for higher earnings and EBITDA in Q3 versus Q2 was price. Our discounts improved in the quarter, which is reflective of tight market conditions. We're excited to have completed our various expansion projects in Q3 on time and on budget to add 1 million metric tonnes of annual operating capacity. The full impact of the additional production will be realized when we complete the Motunui II refurbishment in early December.

Our production in Q2 was in line with our plans. We had a few technical issues at some of our plants, which was largely offset by better than expected gas availability, especially in Egypt. Industry supply was impacted in Q3 by both planned and unplanned outages and ongoing gas restrictions in various parts of the world. Inventories, especially in China, remain very low. Demand remains quite robust for traditional chemical and energy applications. To date, we have not seen significant demand destruction despite spot prices reaching over $460 a metric tonne in China.

Methanol prices continue to be strong in all regions, with price levels above the cost curve, which today is set based on natural gas prices in China. We're in fact a little surprised that there has not been more of a supply side reaction to the higher prices in China. We continue to be on schedule with regards to the Geismar relocation projects. Most of the equipment is now on site, and we expect the last shipment to arrive next month. We are witnessing some cost pressure and are taking steps to mitigate any potential budget escalations. We have not yet been successful in achieving a gas contract for Geismar II and continue to actively pursue a contract similar to what we have secured for Geismar I.

We have reached an agreement to sell 10% of EMethanex to APICORP. The transaction is positive for Egypt, meets APICORP's investment strategy in the region and values the operation at about $1,200 per metric tonne of installed capacity. In Q3, we successfully restarted Chile I, and expect to operate the plant at around 40% rates during the Chilean summer.

Our Titan plant in Trinidad completed a major turnaround in the month of September. We are still experiencing some natural gas restrictions in Trinidad and expect these restrictions to be less in Q4 than Q3. Egypt has operated very well in Q3. We had a short unplanned outage in the quarter. Based on natural gas availability, without this outage we would have had an approximately 90% operating rate in Q3. We expect to have high operating rates in Q4, and now believe we will exceed the 70% operating rate we have guided to in 2013. I'll stop there and take questions from the audience.

(Operator Instructions)

Ben Isaacson, Scotiabank.

John, my first question is on your discount rate. When I go back and look at 2007 and 2008 when the market was tight and methanol prices were rising above the level that we're seeing now, we saw 17% to 22% discount rates. Yet what we're seeing now is the discount rate moving lower. Can you explain the difference between then and now?

I think back then if you looked at our mix of contracts, Ben, we had a few more fixed price contracts at that time than we would have had today, a much significant more amount. So any time the price goes up and you have a fixed price contract, the average discount gets distorted. So I think that's what you were seeing in 2007. We have very few fixed price contracts today, so that really accounts for the difference.

Okay and then a follow-up question. You sold about 10% of the Egyptian plant. If you liked the investment, why wouldn't you keep it and if you don't like it, why wouldn't you try and sell the whole thing? I'm trying to understand why you're selling a portion of it.

I don't want to get into the specifics of our contractual obligations in any of the regions that we do business in. We saw this as a win/win opportunity for both us, Egypt and APICORP. We've been discussing this potential transaction for quite a bit of time. We thought it was a win/win for all three parties, and that's why we executed it.

Okay. Thanks.

Hassan Ahmed, Alembic Global.

Recently we saw an MLP IPO within the methanol domain in the US. Obviously with Geismar I happening and Geismar II happening by 2016, are you guys considering maybe even bundling up the two facilities within this MLP structure?

It's certainly an opportunity for us to look at. That decision for us doesn't come til the end of next year when we plan to be starting up Geismar I. We're looking at the data that is public as a result of the OCI transaction. I'll remind you that it's not just methanol involved there, there's ammonia that's involved. So we're doing quite a bit of analysis on that transaction, as well as looking at possibilities for a Geismar I and II in an MLP structure. What I would say is we'll do whatever is best for shareholders. We'll look at the pros and cons, and whatever we think is best for shareholders at that time is what we'll do.

Very good. Now a quick follow up, obviously coal prices out in China have come under considerable downward pressure. Wondering your views about in terms of the cost curve, what marginal production economics look like right now and what your expectations are for call it operating rates for these marginal Chinese facilities?

Yes, I think I mentioned in my opening comments that with pricing at around $460 a tonne in China we would have expected a little bit more supply side reaction especially on the coal-based methanol producers. We'll continue to monitor it. The cost curve, as I mentioned in China today, is being set by the natural gas-based producers. I think natural gas continues to be quite snug in China.

There's a movement to use natural gas to replace coal for electricity, to try to clean up some of the environmental issues, especially around Beijing and in the north. So I think there is less gas available. The prices were increased in July, so that's what's setting the cost curve today. We estimate at around $420, Hassan, today for the cost curve. So we're above the cost curve and continue to see pricing overnight rise a little bit more in China.

Coal prices did bottom out and they have rebounded a little. I think they're just under [RMB600] today. So that's probably a cash cost of around mid-300s. So you would expect at current prices anybody that could run coal-based methanol is running. So I think the operating rate I've recently seen is around 58%. When we saw prices hit $700 a tonne in 2007, I think the highest operating rate we saw was low 60s. So there might be a little bit more room, but we're -- have to watch it on a day-by-day basis.

Very good. Thank you so much.

Jacob Bout, CIBC.

On Chile, the two remaining plants that you have there, you talk a little bit about the latest on potential gas supply there and what you expect the operating rate is going to be like going into 2014.

Yes, so I mentioned we expect to operate the Chile I plant at around 40% rates through the Chilean summer. We're continuing to get some gas from Argentina on a tolling basis and continue to get gas in Chile. There's been some recent announcements from ENAP about wells they've drilled into a formation called the G7, and those wells have been successful. I think it's early days to know exactly how much gas is there in the region. We have a couple of wells that we had committed to some time ago that we have to frac here in the next months, as well. So I think it's premature to know exactly how much gas is in that region. But we would expect to operate Chile I at that 40% rate through the Chilean summer.

At what point would you think about moving one of those plants?

Well, Chile I, I think when we've looked at it, Jacob, probably to move it is the same as new build capital in our recent estimation. So I think you'll always see us have that one plant in Chile to take advantage of potentially Chile gas or longer term Argentina gas as they look to develop their shale reserves, which are the second largest in the world. Chile IV is an option for us to relocate. Probably look at a decision around that later in 2014. Certainly would like to make sure that we do a good job on Geismar I and Geismar II with the schedule and the budget before we make any decisions on Chile IV.

Maybe a follow up on Egypt. That 10% equity deal you did, does that help you secure gas in any way? And then that 70% operating ratio rate, how do you think about that longer term? I think that has been the assumption previously.

Yes, so I think I mentioned in my opening comments, we're comfortable that we'll achieve higher than 70% in 2013. The last few weeks we've been achieving very, very high operating rates and we're into their less demand period which is their wintertime coming up. And I think the reserves in Egypt have always been quite solid. And it's been an issue of developing the reserves and we see some positive things happening in Egypt to develop those reserves. So I think going forward next year we would expect to be operating at quite decent rates. The transaction that we did with APICORP had really nothing to do with gas supply at all. It was really a transaction to -- that they were looking to increase their holdings in Egypt, and so it was a win/win opportunity for us.

Okay, thank you.

Steve Hansen, Raymond James.

John, as you survey the landscape today in the Atlantic Basin in particular, maybe some commentary on the inventory situation that might be there and what kind of supply relief you might see on the horizon. The pricing environment is obviously very rich here. I'm trying to understand how additional molecules might make it into the basin over the next several months.

Well, I think the next big change should be the Lyondell startup, which we understand will be late in the fourth quarter. That should provide some relief to the tight conditions we're seeing. We've been bringing some of our own material from New Zealand into the basin to deal with some of the tightness we've seen. I mentioned that we expect restrictions, gas restrictions from Trinidad to be a better in Q4 than in Q3, and I'm sure our competitor should benefit as well. So I think a combination of better gas availability in Trinidad, the Lyondell plant starting up sometime later in the quarter could alleviate the current tightness in supply.

I think inventories are quite low. Spot prices have been quite reactive to even a few thousand tonnes of deals. But it's hard to predict what other plant outages there might be. I know there's quite a few turnarounds in the Middle East at this time of year. And Venezuela is certainly experiencing some restrictions, as well. And we've seen in previous winters, they also have gas restricted. So the future is really hard to predict, Steve.

And maybe a follow up to that, to your latter point there. The outages that we've seen, the unplanned outages, I should say, we've seen over the past several months at the global supply base level, big ones, three, four, five months, even in some cases, is it -- can you attribute any of this to some broader trend, or what are we seeing in the supply base that's making it erratic in the last six or eight months?

Well, I think what we've said over time is as you had plants go -- new plants and new geographies and new technologies, they're more difficult to run and less reliable. We take the Malaysian plant, we do have a copy of that plant in Trinidad that we've been running since 2005. And we've had many of our own issues with that plant. So we don't know the specifics regarding the (inaudible) of the Brunei situation, but certainly it's unusual to have plants down for that length of time in this industry.

Very good. Thank you for the color.

(Operator Instructions)

Alex Syrnyk, BMO Capital Markets.

I was wondering if you could provide us a status update on the progress of the Geismar I and Geismar II activities, what the status of the shipments are? And then John, I think in your opening comments you mentioned that you are seeing some cost pressures, but you're taking steps to mitigate those. If you could provide a little more color on that, that would be great.

Yes, well this is a very complicated project. Something that we haven't done before and in any complicated project, there's puts and takes. I think we were planning to have all the big pieces on site by the end of the third quarter. We've had some minor delay. But you would have seen many of the big pieces move over the delay -- sorry, over the levy and placed onto their foundations with very little problems. So that's a positive.

Certainly things like grillage on a ship, it's a technical term in how they tie things down, these big pieces to the ship. The amount of steel we use to make sure these didn't shift at sea. So there's quite a bit of learning that we're doing on Geismar I. And I think the schedule has puts and takes in it, and we're optimistic we'll meet the schedule by the end of 2014. And it's a matter of resource, and it's a matter of managing the things that are unexpected in a timely and good way.

So I think the cost pressure is more of an anticipated thing. There's lots of projects that have been announced and lots of expectations on labor increase and construction labor shortages, et cetera. So again, when we started this project, we hadn't done it before we estimated what labor rates would be and how much labor we would use, et cetera. And there's been puts and takes on that. So we're about more than halfway through the project, and we're pretty comfortable with the progress we've made and to see the big pieces on site and the site starting to look a little like a methanol plant.

If you were to go and look at Chile today where the plant was, it's a blank row. And the reformer is now sitting on a platform on a ship there. So I think we've done a really, really good job on this project. And we're just being cautious about what might come at us here in 2014. I'll remind you, Alex, that this is a time and materials-based contract. So we're putting extra resource to manage the situation that we're seeing that could develop in the Southern United States.

Okay, great. Thanks for that. And then second question, regarding the natural gas I guess supply situation in Trinidad, previously you had mentioned that you expected to see a better availability as we move into 2014. Is there anything that's changed there? Is that still the case?

Well, again, when what I've said is until we see a normal situation, we'll watch the issue. We have seen better availability in Q4 than Q3. I've read the Minister of Energy indicating he expects a normal situation in 2014. So that's our expectation. But until we get the actual gas, all the gas we need in 2014, we'll continue to monitor and guide accordingly.

Okay, great. I'll turn it over. Nice quarter.

Laurence Alexander, Jefferies.

Good morning, John. This is Rob Walker on for Laurence. Why was EBITDA per tonne able to increase faster than realized price growth?

I think that you're talking about our cost structure, EBITDA per tonne. If you look at our cost structure, it went down in the quarter which is unusual in a rising methanol environment due to our gas contracts. You would expect the cost structure to go up. And there's a number of reasons for that. Purchase product is part of it. Some of the great things that our logistics group has done to lower our logistics costs overall this year versus last year is part of it. Some of the things we've done in Chile when we were down, we were on selling some of our gas to the city. So there's a lot of put and takes in there, Rob, that has led to a lower cost structure in the quarter.

Is that something that should continue in Q4?

Again, the future is hard to predict, but we're not selling gas in Q4 to the city. The logistics savings that we have made we would expect to continue to benefit from, especially as we're selling more produced product and using our logistic infrastructure more and more. And so there's -- every quarter there's puts and takes, and we're happy with the direction of our cost structure within the organization.

Okay, thanks. And then can you elaborate a bit more on the traction that you're seeing in methanol blending outside of China?

Yes. We're seeing quite a bit of interest. And in Europe, it's allowed to be used up to 3% in the fuel pool. So we're seeing it being used in Iceland, the UK, Holland, most recently Denmark has announced fuel blending in their pool. We're seeing these GEM fuels. So gasoline, ethanol, methanol trials being done in Egypt, sorry, in Israel, as well as Australia. We know that methanol's being used in Iran to some extent in Libya. So it continues to get traction outside of China.

There's a bill in front of the Congress about these GEM-type fuels or what they call alternative fuels. I think that's a longer term issue. But the US has lots of natural gas they still import quite a bit of oil. So I think methanol to be used in their fuel pool at some time in the future makes a lot of sense. It's economical. It's clean burning. It can take advantage of using its own abundant natural gas. So I think over time you would expect countries that have those type of situations to be looking to use methanol and other products in their fuel pool.

All right. Thank you.

Chris McDougall, Westlake Securities.

Hello, congrats on the great quarter and thanks for taking the question. So touching back on your cost differences, looking at the comparison between the quarters and your total cash costs on page 7. So I was impressed with how the cost structure actually improved with pricing going up. And then when I look at it, logistics was a big gain for the year, but not so much during the quarter. At least according to this table. So it looks like produced methanol cost was better. And I wanted to understand if that of a mix issue among the plants, if that was because of the Chile selling the gas, or what was really the effect on a sequential quarterly basis there?

Again, there's a lot of moving parts in any given quarter. And as inventory flows through into our sales, there is a mix issue that changed from quarter to quarter. Not all plants are created equal from a cost structure basis. Purchase product has something to do. We've guided over time that we expect to break even on purchase product throughout the cycle. But when prices are going up quite rapidly, then we do have purchase product gains in any given period.

There's other put and takes, but I think we're very -- you're right about the logistics in the third quarter, but I think for the year it's been quite positive. And we would expect that trend to continue. So to give you specific line-by-line why the cost structure is improving is probably a little bit more disclosure than I'm prepared to do. I would just say directly we're working hard on our cost structure, and I think we've made some good progress on it.

Yes. And --

I guess Medicine Hat too, I'll remind you that Medicine Hat, it's not all contracted gas there. And I think we saw gas in Medicine Hat touch $1.80 in the quarter or something like that. So that has an impact. So what's the price of gas going to be in Alberta in the next coming years? Who knows.

Yes. Yes, fair enough. And then on a related topic, when I look at the minority interest income pulled out of your income statement and compare that versus the tonnes produced in Egypt and the tonnes produced overall, doing simple math there on the income per tonne, it looks like Egypt is significantly more profitable than the overall mix of plants. Is that directionally correct? And am I going about that right or is -- ?

Again, there's a lot of puts and takes the way the gas contracts work and how the sharing formula works. And I think in Egypt we've really have done a great job on the logistics side to sell most of the product close to the plant. So I think plants' cost structures change over time. I think we're happy with the cost structure we have in Egypt. And I think our other plants, depending on the gas contracts we have in place and the sharing mechanisms, they change over time. So I think you're right to say Egypt had a good quarter, but that doesn't mean that's predictive of the future.

Okay. Thank you a lot, John. I'll requeue with some follow ups. Thanks.

(Operator Instructions)

Robert Kwan, RBC Capital Markets.

Recognizing there's some good growth visibility through Geismar II, wondering if there's -- you have any additional thoughts as to where you could see the next wave of capital deployment? And then with the strong free cash flow that you've got right now, which at current prices presumably is ahead of where you thought you would have been when you pursued Geismar, does this change your thought process as to the pace of when you'd want to think about deploying the next wave of capital?

Well I think the increased or better than expected cash flow gives us a lot more flexibility, which is nice and makes us really confident about concluding the projects we have on the way the 2 million tonnes in Geismar off our current balance sheet. And with the sale of the 10% to APICORP, that really helps our balance sheet, as well.

As far as the next new build projects, I think we have a number of opportunities I think we announced that we're looking at a potential brownfield site in Medicine Hat. We've applied for some permits with the government. The FID on that will be the end of next year. We're doing some work, we have a small team in place to understand a number of the drivers for that project including capital costs, gas contracting, logistics, et cetera. So that team will continue to work throughout the next 12 months.

I mentioned earlier we have an opportunity to think about what we want to do with Chile IV. I still believe the best use of Chile IV is in Chile based on Chile and Argentina gas. We'll have a lot more information about those two basins of gas in 12 months. And we'll have a lot more information on having met Geismar I on time, on budget. So those are the next two logical growth opportunities for us. And getting those 2 million tonnes of capacity that's remaining in Chile running at full rates is the best use of our capital. And we won't pull the trigger on a new brownfield or greenfield site unless we think we can meet our hurdle returns which are 13%.

And we're not just going to grow for growth sake, and we'll be disciplined in how we allocate capital. I think that's the number one thing that CEOs should do is be very disciplined on capital allocation. And if we don't have a project to go forward that makes sense, then we'll do what we've done this the past which is return access cash to shareholders through growing dividend that's sustainable and significant and excess cash through share buybacks.

That's great. Last question here, coming back to costs and you mentioned a number of line items, maybe if I can wrap this up into one question. Are you able to quantify or do you have the numbers to quantify the EBITDA impact of FIFO accounting given the rising methanol price?

No, it's really complicated even internally. And I'm looking at our finance guys across the table, and -- I really -- the sales move and where we move product and how much we buy in a certain market any given quarter, really is tough to predict. So I can't give you any guidance there, Robert.

Okay. Thank you.

Charles Neivert, Cowen.

Quick question, well two, actually. One, do you see any risk that there's -- that China's going to in effect force shutdowns of the methanol from natural gas? In effect, I mean, you said the economics is close anyway, but they're still running. Is China going to start asking for the gas back and basically not allocate that? Is that a possibility at this point, considering like you said they're trying to go away from coal and the power production and, therefore, needing gas? Are they going to maybe allocate away from the methanol guys who have it?

In years past, as we head into the Chinese winter, we do see restrictions on natural gas-based methanol. It's difficult to predict this winter what's happening. But directionally, we're seeing natural gas more and more used for heating and electricity. If you look at the five-year plan, that's what they've indicated, that's their direction. And it's more and more I think the pollution issue is becoming more significant, especially in the north.

And there's stories every day of Harbin or Beijing about the amounts of particulate in the air. And I read a story yesterday in Harbin it was 50 times the UN guideline. That can't be great. If you've been to China, you know certain times the air is quite -- the cities are quite foggy and it's -- the pollution is quite severe. So I think directionally they've said they're going to use natural gas for heating and electricity. And I think that's what they're going to do.

I'll remind you, though, China's a big country. And in certain areas like inner Mongolia, or Sichuan, or even Hainan Island, there's probably a little bit more availability of gas we would expect to see continue to produce methanol. But directionally, I think less and less natural gas is going to go not only to methanol but all petrochemicals, and that means they have to switch to coal or other raw materials. And coal is burning in inner Mongolia, or Shanxi Province, is also an issue. And so I think you're going to require more and more capital to address some of these environmental issues over time.

Okay. And then on another subject, I've been hearing things about use of methanol with a variety of different additives to it used as a cooking fuel in some cases in China. And it's apparently a fairly large market. Can you talk to that a little bit?

Yes it's --

Not necessarily in a home but like in a restaurant or something along that line.

Yes. Methanol's been widely used in China as a cooking fuel. I'll remind you if you've ever had a fondue, Charlie, the sterno that's used --

Right --

It's really methanol. It's in a solid form, and there's a company that makes it solid so it's a bit safer. But if you go to China, many of the restaurants, many of the homes use methanol to cook on a regular basis. And when we do our estimate of the demand in China, we try to figure out how much goes into fuel blending. And we think there's probably just under 1 million tonnes going into this application for cooking. So it's not insignificant.

Yes. Is this something that's growing? I mean, not maybe at the rate of blending, but does it continue to be a growing market on a GDP type of line, or is it a little better than a GDP growth rate? What do we see for that?

It's really hard to get to that fine a detail. What we say is energy is more -- as countries go through getting more and more middle class, the energy becomes an issue and many different sources of energy are going to be used including methanol for a number of different applications.

Okay, great. I'll get back in the queue for other questions. Thanks.

Ben Isaacson, Scotiabank.

Two more quick ones here, John. First of all, there's going to be a 3.5% import duty on methanol in the EU come January 1 I understand. Do you think that's caused a little bit of pull of Q1 demand into Q3 and Q4?

I don't think so. I think you're talking about some changes to the duty rates from certain countries into Europe. And I think the number I've seen, Ben, is 5.5% from certain countries. We won't be impacted by that because of where we source our material for Europe. But I don't think there's enough product out there to have a significant pull of methanol in Q4.

Okay. And then second question on Chile, why is Chile I operating? From what I understood, Chile IV is a more efficient plant. Is that not right? And shouldn't the gas be diverted to Chile IV?

I'll remind you when we built Chile IV, it was integrated to the other three plants. And it can not operate as a stand-alone entity. It needs to have another plant running to operate, unless we were to invest capital to make it a stand-alone plant. So I think that's the reason you saw startup Chile I.

Great. Thank you.

Chris Shaw, Monness Crespi.

I was interested in what you were saying about not being able to get just yet a long-term gas contract for Geismar II. Maybe your thoughts on why that might be. And than are the suppliers worried about future demand in terms of other opportunities that they could sell gas to and your thoughts around that?

Well, I think when we signed the first one, the conditions were quite different. The spot price Henry Hub was quite a bit lower. I think we had a unique opportunity with Chesapeake at the time to sign that agreement. We're working hard with others to sign similar type of contracts. I think the stumbling block is most of our contracts, as you know, we have a methanol price formula sharing agreement. And most gas suppliers in the US don't know the methanol market. There's no futures market where they can derisk any tie to a methanol price, so it's getting them comfortable with how methanol tracks oil. And is there an opportunity for them to arbitrage their gas more to oil through methanol. So it's a learning process.

And I think most companies, as well, don't want to be stuck with what others are doing. So they like to sell on the forward curve. And so it's more of an educational process. And some companies just don't want to sell their gas except for on the forward curve. So everybody's a little different. I'd say as time goes by and reserves are more plentiful due to shale gas and the pricing outlook may not be as robust as it was a few months ago or quarters ago, then there could be opportunities.

But I've mentioned before we've derisked the first plant, we'd prefer to have a supply contract for the second one. But we're not concerned that the economics to get our money back are going to be strained through the period. At less than current prices, the paybacks on these projects are quite quick. And I think our forecast for gas in North America over the coming five, six years is between $4 and $6 and we'd be very happy with those kinds of numbers.

And I guess with the Geismar II supply contract, is it similar at all with what's going on and trying to secure a long-term contract for Medicine Hat? And would that getting one or not, would that have any impact on Medicine Hat II?

Well I think those are different issues. I think the Western Canadian gas is really stranded. The US still imports about 15% of its needs from Canada. Today we would expect that to go to almost nothing over the coming years. The proposed LNG pipeline to the west coast of British Columbia is certainly not progressing to the speed that the industry would like to see. So without something to get that gas out of Western Canada, and the only source we would see today is that LNG pipeline, it's going to be really stranded.

So I think we have better opportunity to get a longer term gas contract in Medicine Hat for a potential new build or our existing facility. Which is about 570,000-tonne requirement today. So I think we look at North America as a basin. And we're comfortable in being exposed to the spot market for some portion of our portfolio which is today about 1.5 million tonnes. But beyond that, I don't think we'd be comfortable in being exposed to the spot market. So whether we're successful in a getting Geismar II contract or a Medicine Hat II gas contract, I don't think you'd see us add supply in North America without some sort of security on the supply from a price point of view.

Okay. Quickly, Waitara Valley, is that running at full rates rate yet, or --

Yes, Waitara Valley is running at 100% rates.

Okay, thanks.

(Operator Instructions)

Steven Hansen, Raymond James.

Yes, John, a bit of a philosophical question around pricing right now in the fly up we've seen of late. It's great to see those metrics, frankly. But at the same time, you have to weigh the longer term perspective and potential demand destruction that it could have on some of these newer budding technologies or uptakes or demand cells, whatever you want to call them. Trying to understand how you're managing that process with the likes of Stena and others who are spending a lot of time on evaluating conversions but watching the methanol price really move higher here.

Yes, again, Steve, we're above the cost curve. We're above where we think we'd be. The future's hard to predict. I'm more of an economist than a philosopher. So that's not my strength. I think when people are looking to invest in technologies that would use methanol as a raw material, they're looking over a cycle of a product. They're looking at what full returns are to people investing in projects. And they're more concerned, I think, today about security of supply at the molecule than the economics. And I think we have to think of how the economics look for them versus their next best alternative.

So again, it's not going to be methanol or this, it's going to be all of the above. So I think the pricing today is for MTO not terribly out of whack. It's certainly not as good as if it was [$350]. Their relative next best alternative for Chinese olephins is Naptha. And Naptha trades at oil. And I think the -- to predict the future of oil prices is higher not lower. So these are calls that these customers make based on a 10 or 20-year forecasting. And as you know, forecasting is a very difficult thing to do. Certainly if it was a $200 methanol environment, they'd be a lot happier than a $400 methanol environment.

Sure. And then recognizing that legal issues grind at a snail's pace, I wanted to get an update, if there is any, on some of your litigation efforts town south with the Argentina gas supply issue.

Early days. We've launched one arbitration. We're in discussion with a number of different parties. But officially, we've launched one arbitration. I think the three arbitrators have been appointed, and we're starting the process. So you're right, litigation moves along at a snail's pace and can be quite expensive. So I think we've chosen to do one. Again in arbitrations you're successful in one doesn't mean you're going to be successful in another because there's no precedent. But I think directionally, we think the arbitration that we've launched is certainly, let's say, unthawed some of the negotiations on what we might be owed under the nonperformance of the existing contracts.

Okay. Very good, thank you.

Brian MacArthur, UBS.

John, since we mentioned the Chile IV and the integration with the other plants there, and I understand why it makes sense to keep it in Chile partly because of capital efficient, but let's say you did have to move it, and it's not set up to work with another plant. Is whatever is needed to be done to make it equal with, say, doing a new plant, the fact that it wasn't fully built as a stand-alone plant, are we talking something that's tens of millions of dollar decision or hundreds of millions of dollars to get it to whatever you would do on a relocation basis?

Yes. I think we'd have to examine that. And that would be depending on where we located it. If we located it at a site where we have existing capacity, it's a non issue because we --

Right.

Didn't treat it like we did in Chile. If it had to be a total stand-alone, which is highly unlikely, we'd have to do the work to really understand the amount of capital. And it would be based on the capital costs at that particular time. So I think it's premature to be guiding on that.

Okay, great. Thanks.

Gregg Hillman, First Wilshire.

I was wondering if you could comment on an article in the Wall Street Journal on I think October 11 by this guy George Olah, a chemistry professor at USC when he had a new weight to convert carbon dioxide into methanol, I believe. And I was wondering how you think that might impact your Company sometime in the future?

Well George Olah has been around a long time. He's written a book called The Methanol Economy, I encourage you to read it. It's a very well-done book. He's a Nobel Prize winner. He's also -- the plant that we've invested in Iceland is named The George Olah Plant. So he was involved from day one in that technology.

So I'll remind you the plant we've invested in Iceland takes CO2 from a waste stream off of a power plant and combines it with hydrogen, they're producing the hydrogen through electrolysis using cheap electricity in Iceland. Taking the hydrogen and combining it with the CO2 and making methanol. So this is not only possible, it is happening today. And that's one of the main reasons we made the investment in Iceland.

So this product is called renewable for the process in Europe which allows it to be traded at a -- on a credit basis at four times a normal molecule. So I think the cost structure of this technology is still quite a bit higher than natural gas-based technology, but I think it's very interesting to be able to take CO2, which is a waste stream product, and make a useful product that's clean burning and can be used as an energy product. So I think we're at early stages. It's happening, and that's why we were very excited to invest in the Iceland project.

Okay. Thank you.

Laurence Alexander, Jefferies.

In New Zealand, when will you know whether the gas is going to support a $2.4 million run rate?

Well we know today that there's enough gas to support a $2.4 million run rate, the challenge is securing the high CO2 gas. And that's what we're working on. We've been successful in securing some of the high CO2 gas, but not enough today to run at $2.4 million. But we're working really hard to secure that high CO2 gas. So when we have secured it, we'll certainly announce it.

Okay. And then if you could expand a bit on the demand comments you made in the slide on page 4. Specifically, could you talk a bit about the growth you're seeing in the chemical markets in China, if whether those are accelerating? And your thoughts on DME, it would appear that those economics are under water now.

Yes, so we saw, as most others saw in Q2 on the traditional chemical demand in China and other places, not a great robust demand performance. We've seen it better in Q3. The third MTO plant that we saw in project (inaudible) started up in Q3, and that consumes about 800,000 tonnes of methanol annually. And the traditional formaldehydes and ascetics et cetera have been stronger in Q3 and look to be quite healthy in Q4 as well. So traditional demand, I'll remind you, grows annually at somewhere between GDP and IP growth on average. So the more GDP and IP growth the more of those traditional chemical derivatives will grow.

As far as DME, we're a little surprised as well. What's happened is the DME, as methanol price has gone up, they've been successful increasing the DME price in China. So we have seen no substantial change in the DME operating rates and, in fact, we're coming into their winter where we would expect more DME to be used than in the summer period.

One of the factors is that propane is now being used as a raw material for olefins. And I know there's a plant that came on in China recently using a lot of propane. So what's happened in the DME industry is the discount to propane has gone down as methanol prices has gone up. So we currently don't expect to see much demand destruction in DME despite what we were anticipating some months ago if we did see prices go above the $420, $430 level.

Even in the post winter?

That's our current view. I mean, we watch this on a regular basis, and I think it'd be a factor of propane demand and propane pricing.

Great. Thank you.

(Operator Instructions)

Chris McDougall.

So on Trinidad on an industry-wide basis, how much capacity is underutilized in Trinidad right now and then could potentially come back as gas restrictions are lifted over the next year?

I think we've guided it's been around 10% gas restrictions. We're still seeing some restrictions in the quarter. I think I said in my opening remarks, less than Q3. And the anticipation is we'll be back to full availability in 2014. And again, until we see it, we'll be cautious. But about 10% is what I would say on average we've seen restrictions throughout 2013.

Okay., great. And then on Medicine Hat, you said FID next year, and so we would expect the end of 2014 for a potential expansion announcement if that decides to go forward?

End of next year, that's right.

Yes, okay. Thank you very much.

Charles Neivert, Cowen.

Okay, the discount as we talked -- you talked about earlier, it's come down a bit. Obviously it has a lot to do with conditions. And you said there are a few still fixed price contracts floating around in your portfolio. Do you expect that the number will continue to ease its way down over the next year or two years, whatever? And how far down -- well, I guess it's hard to say how far down it'd go that's on a -- going to be on a negotiated basis. But do you go think it continue to go down as you renegotiate some of those contracts?

Well, what we've said, we have about a quarter of our -- 20% to 25% of our portfolio comes due every calendar basis. We've said in conditions where they're tight and there's more demand than there is supply, directionally discounts improve in the favor of suppliers. And when there's more length, when new plants come on all at the same time, discounts go more in the favor of consumers. And this is again a cycle. We seem to be in the cycle now where we saw high discounts in the late 2009, 2010 period and now discounts reverting to a lower level. And I've seen some talks -- somebody asked about the duties into Europe, and I've seen some talk of discounts in Europe decreasing as a result of those extra duties.

But until you actually go through the process, as we are right now in the fourth quarter, as our competitors are, you don't know where you're going to end up January 1. But directionally, I think discounts are headed down. To what extent it's really early days to make that definitive. But you should watch our discount on a quarterly basis and I think you'll see it continuing to go in a positive direction. Again this quarter, we saw spot prices go up quite quickly and it had an impact.

Okay and one other question. China, obviously, they're looking at building MTO, MTP, all these different process that consume a lot of methanol. And obviously, or you'd think, that they're not going and build these without any sort of situation -- contract or some sort of agreement to get themselves methanol to run the plant. Considering that you're building in -- north in the US and that should free up, you would think, I guess, some of your Trinidad stuff that was coming to the US, are you getting -- having talks with Chinese buyers and trying to lock up significant amounts of product over the next few years as the plants in the US start to come up? Or are you just going to go to spot with that?

Well the plants that are in the US today and the ones that are on what we call firm plants that'll be built, the US will still be an import market. So I don't think that's an issue for us in the coming years. I think there's been a raft of announcements in the US and if they all get built, then certainly some of that product is going to have to find it's way outside of the US. We're talking to a lot of people, a lot of different Chinese companies that are looking to secure methanol supply. You're right the number one risk for them is to not have a secure supply of methanol, as I mentioned earlier with Stena and others. So we're working with a number of different potential consumers of methanol for MTO and other applications.

I think our Medicine Hat economics, we're basing it on that product going to China or to Northeast Asia. So when we make the FID on that project, it won't be to sell that product in North America, it will be based on selling it in Asia. Because directionally, I think the challenge for the industry is the cheaper gas available around the world today is in North America. The availability of gas today is in North America, and most of the growth is in Asia, namely China. So you're going to have to somehow put in your economics, the freight and terminalling to get the product to China.

I mean, yes, I mean given all of that, is it reasonable to assume that if there's an expansion done in Canada or in even any other places that for the most part there's going to be an almost immediate, if not already locked in, call on that product even before or as it starts up?

I think that's logical to assume. I think especially if your project financing something. It's difficult to project finance without having a customer on the other end. So I think for us, we don't have to project finance. We may choose to do so, but it would be important to know where the product's going before you decide to spend $1 billion of capital.

Okay. Thanks very much.

Thank you. There are no further questions registered on the telephone lines at this time. I'd now like to turn the meeting back over to Mr. Floren.

Okay well thanks very much for all the interest in the Company. We're really excited about the prospects for our Company. In the current environment with the rising prices in Q4 and higher production from our operations in Q4 versus Q3, we would expect earnings and EBITDA to be higher in Q4 and Q3. So thanks for the interest. Good afternoon, good morning.

Thank you. The conference call has now ended. Please disconnect your lines at this time. Thank you for your participation.