Methanex Corporation
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

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.

[Sandra 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 non-operating items. We report our results this way to make them a better measure of underlying operating performance and we encourage analysts covering the company to report the results in this manner. I would like now to turn over the call over to Methanex’s President and CEO, Mr. John Floren, for his comments and a question-and-answer period.

[John Floren:]

Good afternoon. We are extremely pleased with results we have 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 are excited to have completed our various expansion projects in Q3 on time and on budget to add 1 million metric tons of annual operating capacity. The full impact of the additional production will be realized when we complete the Motunui 2 refurbishment in early December. Our production in Q2 was in line with our plan. 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 remained very low. Demand remains quite robust for traditional chemical and energy applications. Today, we have not seen significant demand destruction despite spot prices reaching over $460 a metric ton 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 are 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 2 and continue to actively pursue a contract similar to what we have secured for Geismar 1. 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 ton of installed capacity. In Q3, we successfully restarted Chile I and expect to operate the plan at around 40% rates during the Chile in 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 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 will stop there and take questions from the audience.

[Operator:]

Thank you. (Operator Instructions) The first question is from Ben Isaacson with Scotia Bank. Your line is now open. Please go ahead.

[Ben Isaacson:]

Thank you very much. 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 are seeing now, we saw 17% to 22% discount rate, yes what we are seeing now is the discount rate moving lower. Can you just explain the difference between then and now?

[John Floren:]

Yes, 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 much significant, more amounts. 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 are seeing in 2007. We have very few fixed price contracts today, so that’s really the accounts for the difference.

[Ben Isaacson:]

Okay. And then just a follow-up question, you sold about 10% of the Egyptian plant, I mean if you like 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 mean I am just trying to understand why you are selling a portion of it?

[John Floren:]

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 is a win-win opportunity for both us Egypt and APICORP. We have been discussing this potential transaction for quite a bit of time. We thought it was win-win for all three parties and that’s why we executed it.

[Ben Isaacson:]

Okay, thanks.

[Operator:]

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

[Hassan Ahmed:]

Good morning, John.

[John Floren:]

Good morning.

[Hassan Ahmed:]

Recently, we saw an MLP IPO within the methanol demand in the U.S. obviously with Geismar I happening than Geismar II happening by 2016, are you guys considering sort of maybe even bundling up these two facilities within this MLP structure?

[John Floren:]

It’s certainly an opportunity for us to look at. That decision for us doesn’t come till the end of next year when we plan to be starting up Geismar I. We are looking at the data that as public as a result of OCI transaction. I’ll remind you that it’s not just methanol involved there, there is ammonia that’s involved. So we are doing quite a bit of analysis on that transaction as well as looking at possibilities for Geismar I and II and MLP structure, but 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.

[Hassan Ahmed:]

Very good. Now a quick follow up, obviously coal prices out in China have had come under considerable downward pressure, just wondering your views about in terms of the cost curves what sort of marginal production economics look like right now and what your expectations are for call it operatingly it’s for these marginal Chinese facilities?

[John Floren:]

Yes. I think I mentioned in my opening comments that with pricing at around $460 a ton in China we would have expected a little bit more supply side reaction, especially on the coal-based methanol producers. We will 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 is 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 estimated around $420 Hassan today for the cost curve. So we are 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 bit. I think they are just under RMB600 today. So that’s probably a cash cost of around mid 300. So you would expect at current prices anybody that could run coal-based methanol is running. So I think the operating rate that we are recently seeing is around 58%. When we saw prices hit $700 a ton in ‘07 I think the highest operating rate we saw was low 60, so there might be a little bit more room, but we have to watch it on a day-by-day basis.

[Hassan Ahmed:]

Very good, thank you so much.

[Operator:]

Thank you. The next question is from Jacob Bout from CIBC. Please go ahead.

[Jacob Bout:]

Hi good morning and I guess good afternoon over here. Just on Chile, the two remaining plants that have there. You talk a little bit about the latest on potential gas supply there in which you expect the operating rate is going to be like going into 2014?

[John Floren:]

Yes, so I mentioned we expect to operate the Chile 1 plant at around 40% rates through the Chilean summer. We are continuing to get some gas from Argentina on a tolling basis and continue to get gas in Chile. There has been some recent announcements from ENAP about wells they have drilled in what the formation called the G7 and those wells have been successful. I think its early days to know exactly how much gas is there in the region. We had 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 1 at that 40% rates through the Chilean summer.

[Jacob Bout:]

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

[John Floren:]

Well, Chile 1 I think when we looked at it Jacob probably to move at as the same as new build capital in our recent estimation. So I think you will always see a tab 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 is the second largest in the world. Chile 4 is an option for us to relocate probably look at a decision around that later in 2014 certainly we would like to make sure that we do a good job on Geismar 1 and Geismar 2 with the schedule and the budget before we make any decisions on Chile 4.

[Jacob Bout:]

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

[John Floren:]

Yes, so I think I mentioned in my opening comments we are comfortable that we will achieve higher than 70% in 2013. The last few weeks we were achieving very, very high operating rates and we are into their less demand period which is their winter time 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 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 win-win opportunity for us.

[Jacob Bout:]

Okay, thank you.

[Operator:]

Thank you. And the next question is from Steve Hansen with Raymond James. Your line is now open. Please go ahead.

[Steve Hansen:]

Yes, good morning everyone. John as survey the landscape today in the Atlantic Basin in particular just maybe some commentary on the inventory situation that might be there and what kind of supply really if you might see on horizon. The pricing is obviously very rich here. I am just trying understand how just some molecules might make into the basin over the next several months?

[John Floren:]

I think the next big change should be Lyondell startup which we would understand will be late in the fourth quarter. That should provide some relief to the tight conditions we are seeing. We have been bringing some of our own material from New Zealand into the basin to deal with some of the tightness we have seen. I mentioned that we expect restrictions, gas restrictions from Trinidad to be a better in Q4 than in Q3 and I am sure our competitors should benefit as well. So I think a combination of better gas availability in Trinidad the Lyondell plant starting up some time 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 tons of deals. But it’s hard to predict what other plant outages there might be I know there is a quite a few turnarounds in the Middle East at this time of the year. And Venezuela is certainly experiencing some restrictions as well and we have seen in previous winters they also have gas restricted. So the future is really hard to predict Steve.

[Steve Hansen:]

And just maybe a follow-up to that to your later point there, I mean the outages that we have seen, the unplanned outages I should say we have seen over the past several months, just at the global supply base level, big ones three, four, five months even in some cases. And you are attributing this to just some sort of broader trend or what are we seeing in the supply bases making it so erratic in, over the last six to eight months?

[John Floren:]

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

[Steve Hansen:]

Very good. Thank you. Operator Thank you. (Operator Instructions) The next question is from Alex Syrnyk with BMO Capital Markets. Please go ahead.

[Alex Syrnyk:]

Yes. Good morning, so maybe if you could provide us a status update on the progress of the Geismar 1 and Geismar 2 activities you know 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 are taking step to mitigate those and if you could just kind of provide a little bit more color on that that would be great?

[John Floren:]

Yes. Well, this is very complicated project something that we haven’t done before and in any complicated project there is puts and takes. I think we were planning to have all the big pieces on side 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 on to their foundations with very little problems. So that’s a positive, now certainly things like grillage on a ship it’s a technical term and how they tie things down these big pieces of a ship, the amount the steel we use to make sure these didn’t shipped at sea. So there is quite a bit of learning that we are doing on Geismar 1 and I think the schedule has puts and takes in it. We are optimistic we will 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 is lots of projects that have been announced and a lots of expectations on labor increase and construction labor shortages etcetera. 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 etcetera and there has been puts and takes on that. So we are about more than half way through the project. And we are pretty comfortable with the progress we have made and to see the big pieces on site and the site starting to look a little bit but like methanol plant. If you were to look – go and look at Chile today where the plant was it's a blank row and reformers now sitting on a platform on a ship there. So I think we have done a really, really good job on this project and we are just being cautious about what might come out as here in 2014. I will remind you Alex that this is a timely materials based contract. So we are just putting extra resource to manage the situation that we are seeing that could develop in the Southern United States.

[Alex Syrnyk:]

Okay great and thanks for that. And then just second question, regarding the natural gas I guess the supply situation in Trinidad previously you had mentioned that you are expecting to see I guess a better availability as we move into 2014, is there anything that’s changed there, is that still the case?

[John Floren:]

Well again what I have said is until we see normal situation we will watch the issue. We have seen better availability in Q4 and Q3 I have 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 will continue to monitor and guide accordingly.

[Alex Syrnyk:]

Okay great. And I will turn over, nice quarter.

[Operator:]

Thank you. The question is from Laurence Alexander with Jefferies. Please go ahead.

[Rob Walker:]

Hey good morning John and this is Rob Walker on for Laurence.

[John Floren:]

Hi Rob.

[Rob Walker:]

I guess why was EBITDA per ton able to increase faster than realized price growth?

[John Floren:]

Yes, I think that you are talking about our cost structure EBITDA per ton. And 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 is a number of reasons for that purchase part is part of it. Some of the great things that our logistics group has done to lower our logistics cost overall this year versus last year is part of it. Some of the things we have done in Chile when we were down we were on selling some of our gas to the city. So there is a lot of puts and takes in there Rob that has led to a lower our cost structure in the quarter.

[Rob Walker:]

Is that something that should continue in Q4?

[John Floren:]

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 produce products 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.

[Rob Walker:]

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

[John Floren:]

Yes. We’re seeing quite a bit of interest in Europe it’s allowed to be used up to 3% in the fuel pools and 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 fuel so gasoline, ethanol, methanol trials being done in Egypt – sorry in Israel as well as Australia we know that methanol is being used in Iran and to some extent in Libya. So it continues to get traction outside of China. There’s building front of the congress about these gem type fuels so what they call alternative fuels. I think that’s a longer term issue but the U.S. has lots of natural gas and 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. Its economical it's clean burning and 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.

[Rob Walker:]

Alright, thank you.

[Operator:]

Thank you. The next question is from Chris McDougall with Westlake Securities. Please go ahead.

[Chris McDougall:]

Hello, congrats on the great quarter and thanks for taking the question. So touching back on your cost differences, just looking at the comparison between the quarters and your total cash cost on page seven, 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 was 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?

[John Floren:]

Again, there is lot of moving parts in any given quarter and as inventory flows through into our sales there is a mix issue that change from quarter to quarter not all plants are created equal from a cost structure basis. Purchase product has a something to do we guided over time that we expect a breakeven on purchase product throughout the cycle but when prices are going up quite rapidly then you know we do have purchase products gains in any given period. There is other puts and takes you know but I think we're very, you are right about the logistics in the third quarter but I think for the year its been quite positive and we would expect that trend to continue to. 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 directionally we're working hard on our cost structure and I think we’ve made some good progress on it.

[Chris McDougall:]

Yes, and….

[John Floren:]

I guess Medicine Hat to I’ll remind you that Medicine Hat its not all contracted gas there and I think we saw gas at Medicine Hat touch already in the quarter something like that so that has an impact. So what's the price of gas going to be Alberta in the next coming years who knows.

[Chris McDougall:]

Yes, yes fair enough. And then kind of on a related topic when I look at the minority interest income pulled out of your income statement and compare that versus the tons produced in Egypt and the tons produced overall is kind of doing some simple math there on the income per ton. It look likes Egypt is significantly more profitable than the overall mix of plans. Is that directionally correct and am I going about that right or is I am?

[John Floren:]

Well again, there is a lot of puts and takes you know that the way the gas contracts work and how the sharing formula works and I think in Egypt – we really done a great job in logistic side just to sell most of the products close to the plant. So I think plants cost structure has changed over time. I think we’re happy with the cost structure we have in Egypt and you know 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.

[Chris McDougall:]

Okay, thanks a lot John. I will re-queue with some follow-ups. Thanks.

[Operator:]

Thank you. (Operator Instructions) The next question is from Robert Kwan with RBC Capital Markets. Your line is open. Please go ahead.

[Robert Kwan:]

Good morning. Just recognizing there is good growth visibility through Geismar 2 just wondering if there is, you have any additional thoughts as 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 drawing the next wave of capital?

[John Floren:]

Well, I think the increase 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 tons in Geismar of 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 ground fuel site in Medicine Hat. We've applied for some permits with the government, the FID on that will be at the end of next year. We’re doing some work we have a small team in place to understand the number of the drivers to that project and bring capital cost, 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 do in Chile for. I still believe the best use of Chile for 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 to Geismar 1 on time on budget. So those are next two logical growth opportunities for us and getting those 2 million tons capacity that’s remaining in Chile running at full rate is the best use of our capital. And we won’t pull the trigger on a new Brownfield or Greenfield side unless we think we can meet our hurdle of returns which are 13% and we’re not just going grow for growth sake and we'll be discipline in how we allocate capital. I think that’s the number one thing that CEO should do is be very disciplined on capital allocation. And if we don’t have a project to go for they make sense and we’ll do what we done in the past which is return excess cash to shareholders to – like growing dividend that’s sustainable and significant. And excess cash through share buybacks.

[Robert Kwan:]

It’s great. And just last question here coming back to cost and you mentioned number of line items maybe if I can wrap this up into kind of one question, are you able to quantify or do you have numbers to quantify the EBITDA impact of FIFO accounting given the rising methanol price?

[John Floren:]

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

[Robert Kwan:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Charles Neivert with Cowen. Your line is now open. Please go ahead.

[Charles Neivert:]

Good morning. Fresh morning guys. Quick question well two actually, one do you see any risk that – China is going to in fact force shutdowns of the methanol from natural gas and in fact I mean you said the economics is sort of close anyway but they are 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 so they're going maybe allocate away from the methanol guys, you have it?

[John Floren:]

The nearest, the nearest past as we hit into the Chinese winter we do see your restrictions on natural gas-based methanol. Its difficult to predict this winter what's happening but directionally we’re seeing natural gas more and more be used for heating electricity. If you look at the five year plan, that’s what they've indicated that’s their direction and its more and more I think the pollution issue is becoming more significant especially in the North and there are stories everyday 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 the pollution is quite severe. So I think directionally they have 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 is a big country and in certain areas like Inner Mongolia or Schwann or even (indiscernible) Inland you know there is probably a little bit more availability of gas which 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. Coal is burning in a Inner Mongolia or Shanxi 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.

[Charles Neivert:]

Okay. And then on another subject, I’ve been hearing things about a use of methanol with 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?

[John Floren:]

Yes, it’s always.

[Charles Neivert:]

Not necessarily in our home but like in a restaurant or something on that line?

[John Floren:]

Yes, methanol has been widely used in China as a cooking fuel. I’ll remind you if you ever had fondue Charlie the Sterno that’s in the East.

[Charles Neivert:]

Right.

[John Floren:]

It’s really methanol. It’s in a solid form and there’s a company that make it solid or to bit safer but if you go to China, many in the restaurants, many as your 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 in the fuel blending and we think there’s probably just under 1 million tons going into this application for cooking. So, it’s not insignificant.

[Charles Neivert:]

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

[John Floren:]

Yes. It’s really hard to get to that finer detail. What we say energy is more as country’s go through in getting more and more middle class so energy becomes an issue in many different sources of energy are going to be used including for a number of different applications.

[Charles Neivert:]

Okay. Great, I'll get back in the queue with other questions. Thanks.

[Operator:]

Thank you. The next question is from Ben Isaacson with Scotia Bank. Please go ahead.

[Ben Isaacson:]

Thank you. Just two more quick ones here, John. First of all, there is going to be a 3.5% import duty on methanol in the EU from Jan 1, I understand. Do you think that caused a little bit of pull of Q1 demand into Q3 and Q4?

[John Floren:]

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, but we won't be impacted by that because where we source our material for Europe but I don’t think there is enough product out there to have a significant pull of methanol in Q4.

[Ben Isaacson:]

Okay. And then just second question, on Chile why is Chile one operating, from what I understood Chile 4 is a more efficient plant, is that not right and shouldn’t the gas be diverted to Chile 4?

[John Floren:]

Yes, I'll remind you when we built Chile 4 it was integrated to the other three plants and it cannot operate as a standalone entity, it needs to have another plant running to operate unless we were to invest capital to make it a standalone plant. So I think that’s the reason you saw startup Chile 1.

[Ben Isaacson:]

Great, thank you.

[Operator:]

Thank you. Next question is from Chris Shaw with Monness, Crespi. Please go ahead.

[Chris Shaw:]

Yes, good afternoon. I was just interested on what you're saying about not being able to get – just you had a long-term gas contract for Geismar 2, and maybe your thoughts on why that might be and suppliers worried about future demands in terms of other opportunities that they can sell gas to and just you’re thoughts around that?

[John Floren:]

Well when we signed the first ones the conditions were quite different the spot price Henry Hub was quite a bit lower I think we had an unique opportunity with Chesapeake at the time to sign that agreement. We’re working hard with others to sign similar type of contract I think the stumbling block is with most of our contracts as you know we have methanol price formula sharing agreement and most gas suppliers in the U.S. don’t know the methanol market. There is no futures market where they can de-risk any tie to a methanol price, so its getting them comfortable with how methanol tracks oil and you know is there an opportunity for them to arbitrage their gas more to oil through methanol. So it’s a learning process. I think most companies as well don’t want to be out of step with what other are doing so they like to sell on the forward curve and so its more of an educational process and some companies just don’t want to sell their gas except for on the forward curve. So everybody is 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 de-risked the first plant, we prefer to have a supply contract for the second one but we're not concerned that the economics to get our money back we're going be a period I mean at less than current prices. You know that the paybacks on these projects are quite quick and you know 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 kind of numbers.

[Chris Shaw:]

And the issues I guess if the guys were to buy contract, is it somewhere at all what’s going on that's how secure a long-term contract for a Medicine Hat and would that getting one or not would that have any impact on Medicine Hat 2?

[John Floren:]

I think those are different issues. I think the Western Canadian gas is really stranded. In the U.S. 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 – the only sources we would see today is that LNG pipeline is going 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 tons requirement today. So I think we look at North America as a basin and we’re comfortable in being exposes to the spot market for some portion of our portfolio which is today about 1.5 million tons but beyond that I don’t think we’ll be comfortable in being exposed to the spot markets so whether we're successful in getting the Geismar 2 gas contract or Medicine Hat 2 gas contract I don’t think you'd see us add supply in North America without some sort of security on the supply and from a price point of view.

[Chris Shaw:]

Okay. Just quickly Waitara Valley is that going to get full rates yet or?

[John Floren:]

Yes, Waitara Valley is running at a 100% rates.

[Chris Shaw:]

Okay. Thanks.

[Operator:]

(Operator Instructions) The next question is from Steve Hansen with Raymond James Please go ahead.

[Steve Hansen:]

Yes John just a bit of philosophical question around pricing right now in the fly up we’ve seen of late and its great to see those metrics frankly. But at the same time you have weigh the longer term prospective and potential demand destruction that it could have on some of these newer sort of budding technologies or upticks so demand is how do you call them. Just trying to understand how you're managing that process with electricity spend and others who are spending a lot of time on evaluating conversions but watch methanol price really move higher here?

[John Floren:]

Yes again Steve we’re above the cost curve, we're above where we think we'd be, the future is hard to predict. I am 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 project and they are more concerned I think today about security of supply of the molecule and the economics. And I think we have to think of how the economics look for them versus your next best alternative. So again its not going to methanol or this it going to be all of the above. So I think the pricing today is for MTO not terribly out of whack its certainly not as good if it was $350 but they're relative next best alternative for Chinese goal is naphtha and naphtha trades at oil and I think to predict the future of oil prices is higher not lower. So these are cause, 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 $200 methanol environment they'd be a lot happier than $400 methanol environment.

[Steve Hansen:]

Sure. And then just recognizing that legal issues climb at a snail pace, I just want to get update if there any on some of your litigation efforts done south, well you also seeing gas supply issue?

[John Floren:]

Early days, we launched one arbitration, we are in discussion with a number of different parties but officially we want launch 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 pace and can be quite expensive. So I think we chosen to do one. Again in arbitration your successful in one doesn’t mean you're going to be successful in another because there is no precedent. But I think directionally we think the arbitration that we've launched is certainly let say on part some of the negotiations on what we might be own under the non-performance of existing contract.

[Steve Hansen:]

Okay, very good. Thank you.

[Operator:]

Thank you. And the next question is from Brian MacArthur with UBS. Please go ahead.

[Brian MacArthur:]

Good morning. John, just since we mentioned that Chile 4 and the integration with the other plants there and I understand why make sense to keep it in Chile partly because of capital efficient, but let say you did have to move it its not set up to work another plant. Whatever is needed to be done to make it equal with say doing a new plant the fact it wasn’t fully built as a standalone plant. Are we talking something that tens of million of dollars decision or a hundreds of millions of dollars to get it to whatever you would do on a relocation basis?

[John Floren:]

Yeah, I think we would have to examine that that would be depending on where we locate it. If we locate it at a site where we have existing capacity it’s a non-issue.

[Brian MacArthur:]

Right.

[John Floren:]

Because we booked in a better site, like we did in Chile that had to be a total standalone which is highly unlikely, we'd had to do the work to really understand the amount of capital and I would be based on the capital cost to that particular time. So I think its premature to be guiding on that.

[Brian MacArthur:]

Okay, great. Thanks.

[Operator:]

Thank you. The next question is from Gregg Hillman with First Wilshire. Please go ahead.

[Gregg Hillman:]

Yeah, good morning. I was wondering if you could comment on an article on Wall Street Journal on I think October 11 by this guy George Olah, chemistry professor of USC when you had a new way to convert carbon dioxide into methanol I believe and I was just wondering how you think that might impact your company sometime in the future?

[John Floren:]

George Olah, all has been around a long time. He has written a book called The Methanol Economy, encourage you to read it. It’s a very well done book, he’s a noble price winner. He’s also the plant that we’ve invested in Iceland is named the George Olah plant. So he was involved in from day one in that technology. So I’ll remind you the plant we’ve invested in Iceland takes CO2 from our waste stream of our power plant and combines it with hydrogen, they’re producing the hydrogen through electrolysis, using cheap electricity in Iceland taking the hydrogen and combining with the CO2 and making methanol. So this is not only possible it is happening today and that’s one of the main reason we made the investment in Iceland. So this product is called renewable for the process in Europe which allows it to be traded at 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 base technology but I think it’s very interesting to be able to take a CO2 which is waste stream product and make a useful product that’s clean burning and could be used as an energy product. So I think we're at early stages and its happening and that’s why we're very excited to invest in the Iceland project.

[Gregg Hillman:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Laurence Alexander with Jefferies. Please go ahead.

[Laurence Alexander:]

Hi just a quick follow up. In New Zealand, when will you know whether the gas is going to support at 2.4 million run rate?

[John Floren:]

Well we know today that there is 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 yeah when we have secured it we'll certainly announce it.

[Laurence Alexander:]

Okay. And then just if you could expand a bit on the demand comments you made in the slide on page four. Just specifically can 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 appears those economics are underwater right now?

[John Floren:]

Yes, so we saw as most other 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 empty old plant that we saw in project in (indiscernible) started up in Q3 and that consumes about 800,000 tons of methanol annually and traditional formaldehydes and acidics et cetera have been stronger in Q3 and look to be quite healthy in Q4 as well so traditional demand I'll remind you kind of 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 are little surprised as well what's happened is the DME as methanol prices gone up they been successful increasing the DME prices in China. So we have seen no substantial change in the DME operating rates and in fact we're coming into the winter where we would expect more DME to be used than in the summer period. One the factors is propane is now being used as a raw material for Olefins and I know there is a plant that came on in China recently using a lot of propane. So what's happened in the DME industry is the discount propane has gone down as methanol prices has gone up. So we, at currently don’t expect to see much demand destruction in DME despite what we were anticipating some months ago, we did see prices go above the $420, $430 level.

[Laurence Alexander:]

Even in the post winter?

[John Floren:]

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

[Laurence Alexander:]

Great, thank you.

[Operator:]

Thank you. (Operator Instructions) And the next question is from Chris McDougall. Your line is now open. Please go ahead.

[Chris McDougall:]

Yes, thanks again. So on Trinidad on an industry wide basis how much capacity is under utilized in Trinidad right now, and then could potentially come back as gas restrictions are lifted over the next year?

[John Floren:]

Yeah, I think we guided this, 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 it will be back to full availability in 2014 and again until we see it we'll be cautious but you know about 10% is what I would say on average we've seen restrictions throughout 2013.

[Chris McDougall:]

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

[John Floren:]

End of next year that’s right.

[Chris McDougall:]

Yes okay thanks very much.

[Operator:]

Thank you. And the next question is from Charles Neivert from Cowen. Please go ahead.

[Charles Neivert:]

Back again okay, the discount as we talked, you talked about earlier its come down a bit obviously its has a lot to do with conditions and you said there are few still six place contract floating around in our portfolio. Do you expect that the number will continue to sort of ease its way down over the next year or two years whatever and how far down, well, I guess its hard to say how far down it go, that’s going to be on a negotiated basis. But do you think it can continue to go down as you would negotiate some of those contracts?

[John Floren:]

Well what we said we have about a quarter of our 20% to 25% of our portfolio comes due every calendar basis. We said in conditions where they’re tight and there's more demand then there is supply directionally discounts improve in the favor of suppliers. And when there is 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've seen this 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 in January 1 but directionally I think discounts are headed down. To what extent? Its really early days to make that definitive. But you should watch your discount on a quarterly basis; I think you’ll see it continuing to go in a positive direction. Again this quarter we saw spot price go up quite quickly and it had an impact.

[Charles Neivert:]

Okay. And one other question, China obviously they're looking at building MTO or MTP all the different processes that consume a lot of methanol. And obviously you think they're not going to go and build these things without any sort of situating – any sort of contract or some sort of agreement to get themselves methanol to run the plant. consisdering that you’re building in the U.S, and that should free up you would think I guess some of your Trinidad sub that was coming to the U.S. 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 U.S. start to come up or you're just going to spot with that?

[John Floren:]

The plants that are in the U.S. today and the ones that are on what we call firm plants to be built but the U.S. will still be an import market. So I don’t think that’s an issue for us in the coming years. I think there has been a raft of announcements in the U.S. if they all get build then certainly some of that products is going to have to find its way outside of the U.S. We’re talking to a lot people, 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 secured supply of methanol as I mentioned with (indiscernible) and others. So we're working with a number of potential consumer 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 and namely China. So you're going to have to somehow put in your economics to freight and tunneling to get the product to China.

[Charles Neivert:]

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

[John Floren:]

I think that’s logical to assume and I think especially if you project financing something that's difficult the 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 is going before you decide to spend $1 billion of capital.

[Charles Neivert:]

Okay. Thanks, very much.

[Operator:]

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

[John 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 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 and good morning.

[Operator:]

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