Sandra Daycock - Director Investor Relations John Floren - President and CEO Ian Cameron - SVP of Finance and CFO.

Steve Hansen - Raymond James & Associates Daniel Jester - Citigroup Hassan Ahmed - Alembic Global Advisors Joel Jackson - BMO Capital Markets Jeff Holford - Jefferies & Co. Robert Kwan - RBC Capital Markets Charles Neivert - Cowen and Company John Roberts - UBS.

Welcome to the Methanex Corp Corporation Q4 2016 Earnings Call. I would like to turn the conference over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead Ms. Daycock. .

Thank you. Good morning ladies and gentlemen. Welcome to our fourth quarter 2016 results conference call.

Our 2016 fourth quarter news release, management's discussion and analysis, financial statements and presentation slides summarizing the Q4 results can be accessed from the reports tab at the investor relations page on 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 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 overlooking information. These refer to our fourth quarter MB&A and our 2015 annual report for more information.

I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters.

For clarification, any references to revenue, EBITDA, cash flow or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% 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 the impact of certain items associated with specific identified events.

We report these non-GAAP measures in this way to make them a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner. I would now turn the call over to Methanex's President and CEO, Mr. John Floren for his comments and a question-and-answer period. .

Thank you Sandra. We delivered a new improved financial performance in the fourth quarter and ended 2016 on a very positive note. Methanol prices continued their strong upward trend which began late in the third quarter resulting in an 18% increase in our average realized price to $270 per tonne in Q4 compared to $236 per tonne in Q3.

The higher pricing contribute to higher fourth quarter adjusted EBITDA of $139 million and adjusted net income of $41 million or $0.46 per share. This compares to adjusted EBITDA of $74 million and an adjusted net loss of $1 million or $0.01 per share in Q3.

We also achieved record production in Q4 at 1.9 million tonnes and record sales volumes up 2.5 million tonnes. As well we experienced a 100,000 metric tonne inventory build in the quarter. Based on higher sales levels and a longer supply chain, we expect to carry higher inventory on a sustained basis.

The strong upturn in methanol prices has continued into 2017. Our posted price for Europe for the first quarter of 2017 is 370 euros, up 120 euros versus the fourth quarter of 2016. Our January contract price in North America was $416 per ton, up $50 per ton in December and $123 per tonne since October.

As well our January Asia contract prices, $430 per tonne up $80 per tonne from December and $145 per tonne since October. We also recently announced our contract prices for February for North America and Asia, both which are unchanged from their higher January levels. We believe the higher methanol pricing is attributable to strong methanol demand.

Demand continues to grow we estimate that Q4 2016 demand was 11% higher than Q4 2015. The strong growth can be primarily attributed to robust methanol to olefins or MTO demand. Two new MTO facilities capable of consuming over 3 million tonnes of methanol built up inventory through the fourth quarter of 2016 and started up at the end of December.

We expect another MTO facility with the capacity to consume up to 1.8 million tonnes of methanol to start up in 2017. We understand that the MTO capacity utilization average roughly 85% to 90% in the quarter. There have been a couple of MTO plants have recently reduced operating rates as a result of technical issues with their downstream operations.

Besides these two plants, we're anticipating operating rates for MTO to be about 90% during Q1. Chemical demand was also strong as we estimate the demand grew at a rate of 4% year-over-year in Q4. Thermal coal prices peaked in October and have since moved back somewhat to their September 2016 levels.

Nonetheless, we estimate that the cost curve has steepened somewhat due to higher Chinese natural gas-based production cost. We estimate the current cost curve to be in the range of $280-$300 per metric ton.

CFR spot prices in China are in the $340 per tonne range which is well above the cost curve supported by strong methanol demand and low coastal Chinese inventory. Our 2016 production was 7 million equity tonnes up 35% versus 2015 and representing another company record.

At 95% our overall plant reliability experienced a big improvement over the 90% achieved in 2015, but remains lower than our target of 97%. We continue to make reliability a key area of focus for the company. In North America, the Geismar plants continue to operate at high rates.

The Medicine Hat facility was idle in Q4 and operated at reduced rates for the remainder of the quarter. Repairs to the plant are planned for Q1 and we expect the plant to return to full rates during the quarter. Our share of the Egypt production increased to 96,000 tonnes in the fourth quarter.

Since mid-November the plant has been receiving sufficient gas to operate at high rates.

Although we continue to expect some gas restrictions in Egypt, gas deliveries have improved significantly in 2016 compared to 2015 and we're optimistic that the strong efforts by the Egyptian government entities are leading to improved gas deliveries and improved Outlook for gas availability in the medium term.

The Chile plant produced 154,000 tonnes of methanol in the fourth quarter which is the highest level of quarterly production since Q1 2011. During the fourth quarter we signed a tolling arrangement with YPF SA in Argentina through April 2018 whereby all natural gas received is converted into methanol and then redelivered to Argentina.

We have not yet received natural gas under this contract, but we expect the first volume to be delivered in the first quarter of 2017. We remain optimistic that our underutilized 1.7 million tonne Chile facilities represent a very low capital cost opportunity for Methanex due to significant progress in developing natural gas reserves in the area.

In Trinidad our share production was 455,000 tonnes in the fourth quarter of 2016 compared with 420,000 tonnes in Q3. Although we continue to experience gas curtailments in Trinidad, we have improved gas availability of both plants during the quarter.

During the quarter, waterfront shipping took delivery of the last of the seven 50,000 dead weight tonne vessels capable of running on methanol. These new vessels have gained considerable attention in the shipping industry.

This past December one of our new vessels, the Lindanger was recognized by the maritime reporter and engineering news as one of the great ships of 2016 for being the first -- world's first methanol-fueled tanker. The publication is the world's largest audited circulation magazine serving the global maritime industry.

Over the coming months ,we will be focused on demonstrating the engine technology for the state-of-the-art vessels. We're optimistic that the data that we gather will encourage others in the shipping industry to choose methanol as a marine fuel that will meet plan and anticipated tighter emission control regulations in the future.

We ended the quarter with $224 million in cash. Methanex's share of the cash including our proportionate share of Egypt and Atlas cash was relatively unchanged at $211 million.

We generated cash from operating activities before changes in nonworking capital of $125 million during the quarter which comfortably exceeds -- exceeded our cash requirements related to debt service dividend and maintenance capital. The total increase in non-cash working capital related to operating activities was $52 million in the quarter.

This was primarily attributable to the impact of a higher average methanol price on accounts receivables and inventory. Although pricing in Q1 looks to be stronger than Q4, we do not anticipate building much cash during the quarter as a result of continued increase working capital requirements.

Our medium term cash requirements excluding any changes in working capital are expected to be limited. Maintenance capital for 2017 is estimated at approximately $80 million and the next bond maturity is 2019.

Other than some modest capital that we may decide to invest in Chile and for front end engineering and design for our advantage projects in North America, we do not anticipate any significant growth capital expenditures in the near term.

We remain committed to a meaningful and growing dividend that is sustainable at the bottom of cycle methanol prices. Our priority for any excess cash will be to return it to shareholders via share buybacks.

Our Outlook for the first quarter of 2017 is positive as evidenced by our posted contract prices thus far in the quarter, we expect higher average methanol prices in Q1 2017 versus Q4 2016. Further we anticipate that production in Q1 2017 will remain at similar levels to Q4 2016.

As a result, we expect EBITDA to be higher in Q1 2017 compared to Q4 2016. I would now be happy to respond to any questions. .

[Operator Instructions]. And the first question is from Steve Hansen from Raymond James. Please go ahead. .

John, maybe just quickly on the discount rates, abnormally low for the quarter, probably a reflection of the fly-up in pricing we saw on the spot side. Maybe just give us some clarity about how we should think about that for the balance of the year. .

I think you're right to point out it was abnormally lower than our guidance and we said in the past when prices fall rapidly, the discount expands and when prices increase rapidly, the discount contracts and that is exactly what happened in the quarter.

Assuming a normal price environment with not a lot of ups and downs you would expect the discount to be higher going forward. .

And just one follow-up on the Argentine gas. You gave a term, stretching out into 2018, but can you give us some sort of sense around the volume that we should expect in terms of how much excess capacity that will take up at Chile and I guess any sort of idea around the margin profile on a tolling basis. .

We have flexibility to take that gas at different rates, so it's for a volume. Based on our outlook for the gas in Chile today, just the Chilean gas and this tolling we think we can get the plant close to 100% rates based on gas availability.

We have not run the plant at 100% rates for a while, we do not anticipate any issues but until we get there, I would rather be a little cautious. As far as the economics, economics are quite favorable for a towing operation. Argentina needs more methanol for their biodiesel business in 2017 so we think it is a win/win arrangement.

I think it will be a positive contributor to EBITDA as well as give us a bit more efficiency on the plant. I think it will be a positive thing in 2017 once the gas starts flowing. .

The next question is from Daniel Jester from Citi. Please go ahead. .

You spoke about how strong demand was in the quarter and also how sturdy kind of traditional chemical demand was, but I think if you back into it, non-NGO related energy demand was down, so can you comment on what you're seeing in those markets?.

We're not seeing that. We actually saw DME increase in the quarter. Gasoline blending MTB were solid so we disagree with what your numbers would say Dan. .

Okay, I will follow up off-line on that. And then, in terms of Trinidad it seems like the government recently has given some comments about reevaluating some of their energy policy. Can you provide any color of conversations you are having with the government and how your outlook for gas in Trinidad may be evolving from here? Thanks. .

Our conversations with the government is to get 100% of our gas allocation under our contracts and that has been consistent for the last five years so there's nothing new to report. We're working with the government to try and get the contracted of volumes that we contracted.

I think there has been a lot of reports about them doing some things in Venezuela etc., but that is not for the short term and probably more for the medium term. So I would continue to guide that we will probably expect 15% restrictions going forward until we see something different. .

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

John, obviously some nice pricing movements in the course of the quarter in particular in Asia. I just wanted your views on what you guys are seeing in terms of trade flows into and out of China. .

China imports have been quite strong. I think for the year they were close to 9 million tonnes which is obviously a record and continues to be quite strong. I think it has been limited by availability from producers that have had unplanned outages. So it might even have been higher if the production hadn't been there.

We're seeing much less basin to basin change. We saw obviously the first half of last year. Right now both European and North American spot markets are extremely tight and prices are increasing.

So we think most of the Atlantic basin material for the foreseeable future will stay in the Atlantic so we would expect imports in China to continue to be strong but limited by productive capability. .

Now changing gears a bit, city volatility in the natural gas markets, in North America, what are your thoughts with regards to some sort of contract with regards to [indiscernible] any guidance with regards to what sort of procurements you may be doing, how many months out or the like for both Medicine Hat and Geismar too. .

For Geismar we're very happy with our current contractual arrangements, so 100% of plant one is contracted on a ten-year basis. I think we have about eight years to go on that one.

We have hedged 40% of our requirements for the second plant, so we can run both facilities at minimum rates if we do see a blowout in gas which is not in our expectation, at least in the short term and we will buy the balance on the spot market. We're set up well there, we're happy with our position.

Always this talking to gasifier, if we can do a deal that would that we couldn't refuse for the balance of the gas requirements or longer than the 10 years we have got covered, we certainly would consider doing that but really nothing to report along those lines. In Canada, it is a better situation.

We do believe that the Western Canadian gas is truly stranded. We have seen the Henry Hub acos spread expand to well over $1 now so forward curve in Alberta at eco looks quite attractive through 2022 and north of $2.

I think you'll see us continue to layer in hedges and physical gas through that period because maybe prices get a little lower, but I think $2 in that market for gas gives us an unbeatable cost position. So you should expect us to continue to layer in gas of those kinds of levels. .

Thank you. [Operator Instructions]. And the next question is from Joel Jackson from BMO Capital Markets. Please go ahead. .

Historically, if you were going to do a new buyback you've announced them in April, you announced any dividend increases in April, concurrent with true on results, you obviously did not do anything on this quarter.

Is the reason why, because you seem to have a lot of excess cash flow this year coming to you, so as things play out decently, is this solely because of the working capital invest you need to make in Q1 or maybe give us a little bit of color of the choice to do a buyback now or wait. Thanks. .

I guess Joel I'm a little old-fashioned. Like to earn the money before I spend it and having the bank before we spend it, so we do not have excess cash in the bank today. Certainly the pricing environment if it holds for any length of time, we will have excess cash. We've been very clear what we're going to do with it.

We're going to invest in the business. We will have a meaningful, sustainable growing dividend and return to balance through share buybacks. I think the share price today is a very attractive price to be looking to buy back shares. You are right to point out on the dividend.

We look at it usually once a year and that is around ATM time and that is coming up in the fourth week in April. We didn't grow it last year for obvious reasons. It is pretty meaningful right now, it was close to 3% yield, it is probably a little bit less this morning.

We proved last year through the bottom end of the cycle of the methanol pricing that it was sustainable despite many experts predicting we would cut it. I think with our increased productive capability we have room to look at growing the dividend and we will make that decision with our board around the AGM time.

As far as a buyback, we will institute NCIB when we have excess cash to distribute, because when we institute an NCIB our intent is to fulfill it each and every day. So until I am in a position to give free cash back to shareholders in the way of buybacks, we won't execute an NCIB. .

So that was helpful. So my second question would be, does seem like on the MTO blocks, that there is neutral or break-even, even negative earnings but if you start looking at some of the downstream margins, some of the downstream products, the margins might still be positive. Can you maybe give a little bit of color on that outlook.

Are we reached as high as methanol prices can go in China before some of the downstream derivatives might be challenged or what do you think?.

This is new space for us, so we watch it every day and every week and it changes on a weekly basis as well. You are right to point out that the derivative prices of Olefins have increased as well in the past 90 days. All I can tell you is what we see.

We have our own models internally for so-called affordability which are different than what you read in some of the trade journals. We would say that most of the operations with the exception of MTP, methanol to propylene are still cash positive.

Obviously their margins have shrunk with the higher methanol prices but it is really a factor of what the overall operation gets in a cash basis for all of the products that they are selling each and every day. Now if they choose to reduce rates are shut down, they still have obligations I would assume to sell a lot of these derivatives.

So we would expect going forward, if operations are really strained on cash that they probably will moderate rates. That is not our anticipation for Q1. Except for the two plants that have had some downstream technical issues.

What we're learning here as the rest of the industry is learning and so far what we're seeing is that these plants are running at many different levels of affordability. .

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

This is Jeff on for Laurence.

You mentioned production is expected to be roughly flat in Q1 sequentially, anything expected out of the normal seasonality as you look at your asset base in the remainder of 2017, any downtime or restrictions that you might see?.

Yes, we do not comment on downtime that we're planning. That is something we do not comment on but our outlook this year is quite robust for production. We see things better in Chile, better in Egypt. Medicine Hat problems will be behind us after Q1 and the other facilities are operating well. We would expect a very solid production performance in 2017.

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And John quickly can you talk about fuel blending in China, maybe the competitiveness today and versus ethanol given recent duties imposed by China, maybe what you're seeing in other emerging markets against MTB etc. .

We see MTB continue to go quite strongly in China and outside China. We expect that market to continue to expand.

As far as fuel blending, recently there has been another couple of provinces adding on high blends, so we do not see any shrinkage and we would expect this is still a trial for China, we would expect us to continue to see it grow in the near future.

As far as affordability it is still very affordable at both high and low level blends versus gasoline in China. .

The next question is from Robert Kwan from RBC Capital Markets. Please go ahead. .

John, coming back to dividends and buybacks. You noted that your dividend was meaningful and that it was sustainable. I am wondering though, historically you've talked about dividend first and then growth and buybacks second.

Does that change though as you look forward here because a lot of that dividend growth has been around past the expansion and so do think about where you were in 2016 and a bias may be shifting to buybacks instead given where you were on cash flow?.

I think we can do both. I think we will look at the dividend around the AGM time. Most investors that are invested in the company for dividends which is a lot, would like to see a grow each and every year and that is our philosophy. We like to grow.

The yield is fairly significant, so we will look at where we're around that period and make a decision on if we grow it and at what levels. Certainly if pricing stays where it is today we will have lots of room to look at the dividend and buy back lots of shares. I think both. It is not a preference.

I think our preference is obviously is once we institute a dividend and grow it, we want it to be sustainable. We have the ability today with our wider production base to sustain a higher dividend than we did 12 months ago. .

And then maybe just shifting to growth.

You had talked about potentially as part of capital around some feed work, as you look at Medicine Hat, I'm just wondering if you have any updated thoughts on some of the work you are talking about egress getting that product out, but as well just with the Alberta government's royalty credit decision, did you get any feedback as to why the government only allocated to the PDH polypropylene facilities and away from you? What the past might be going forward given the government still have left the door open to additional credits.

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Our cheapest growth is in Chile, so we're running today at about 75% rates for one plant. We're spending $7 million in the first half of this year doing some engineering work to see if we can restart Chile 4 on a standalone basis. We'll make that decision mid-year. We think it is around $50 million in 12 months to do that.

That decision will be made based on two factors. What does the gas outlook in Chile look like and by that time which is looking very positive, what does the methanol market look like, does the market need more methanol and those would be the two things that we think about.

If we do execute it for $50 million, that will be the cheapest way to add another 800,000 tonnes of production. So we will look at that. Then we have these two advantage projects that our teams have been working on. Geismar 3 and Medicine Hat, the second plant. We were very disappointed we did not get royalty credits.

We understand that the two projects that we were awarded probably were prepared to make investments right away where we were not. We're not. We're still doing our feasibility work and we're a bit concerned about executing in the market until we see some of the oil sands projects complete. So we have some more work to do.

We're in contact with the government all the time. I think it was a very successful program by the government. I think they were surprised by the amount of response. I think it was very creative and if it is working why wouldn't they look to do similar things in the future.

Certainly that wasn't going to drive our project and we weren't going to make the decision to spend $1 billion plus based on some royalty credits. It would have been helpful, but it certainly did not kill the project. We will continue to work on it and continue to see if we can make the economics and get comfortable with the project execution. .

The next question is from Robert Neivert from Cowen. Please go ahead. .

Quick question on -- is there -- should we still expect even though there's more gas in Chile, should we still expect some winter curtailment there? Obviously not to the extent that it used to be but would we still expect because they haven't really filled it out completely out yet. .

Well, we have curtailment today Charles. We're in the summer. We're only running at 75% so in my mind we're 25% curtailed. I think the advantage of getting this Argentinian tolling gives us flexibility to take that gas at different times.

I would still anticipate everything I know today that we'll be running at lower rates in the wintertime than we do in the summertime. But I think we will be running. And we would have run last year if we do not have the technical or had to do that planned maintenance, so we fully expect to be running the Chile plant through their winter this year. .

And the second question is, on number 4 in Chile, does it still as I understand it, requires number one to be running all the time as well because of the hydrogen combination, is that basically what has to happen?.

Its design Charles, but what we're doing as part of the feasibility I mentioned earlier is to configure that plant to be a standalone operation. We will no longer be connected into Chile 1 and Chile 1 won't have to run for it to run. We're doing that work, we think we might lose about 10% productive capability and 10% efficiency but it is early days. .

The next question is from John Roberts from UBS. Please go ahead. .

Thank you, a nice quarter. If the U.S.

adopted year one expensing of capital spending and/or a destination tax system that would advantage exports, would that be enough incentive for you to build another unit in the U.S.?.

We're looking to build another unit in the U.S. under the current circumstances, so anything that would make it more positive would be more encouraging. We're unsure what is going to happen. There are lots of rumors. We have our plant in Canada that mainly sells its product in Canada and we have our two plants in the U.S.

that mainly sell this product in the U.S.. We think we have tremendous flexibility to adjust based on whatever rules and regulations or laws might be passed. We think we're in a very good position to adopt and adapt our supply chain depending on or whatever might come down.

Certainly a lower tax rate, corporate tax rate over time is very positive for our existing operation and would be positive as we're considering a third plant there. We will see. We will watch this space and we're in a great position to adapt accordingly depending on what is actually passed and comes into law. .

[Operator Instructions]. And the next question is from Daniel Jester from Citi. Please go ahead. .

Just wanted to follow up on Egypt. I think in the past you said that you might have to put a little bit more capital spending into it because the plant had been going on and off due to gas availability.

Was this maintenance that you did in the fourth quarter? Did that fix that issue or is that something you will have to address in the future still? Thanks. .

The plant is running at very high rates and extremely well. I'll remind you the plant was commissioned in 2011 and has not had a turnaround since then. Just in the normal maintenance forget all of the ups and downs we had in Egypt you would expect plants to have turnarounds every 3 to 4 years. I would call that regular maintenance.

As far as how the plant is performing we're very, very happy after the repairs we made in November about the performance of the plant. .

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

Just one quick follow-up on housekeeping items.

Depreciation has been one of the various [indiscernible] that has had some variance in our model of late and I understand there's been some nuances around the new ships, but could you give us a sense for now that the ships are delivered sort of a run rate depreciation figure we should try to get our heads wrapped around here?.

Yes, sure, I will ask Ian Cameron, our CFO to answer that one Steve. .

Yes, hi Steve, you'll notice that the depreciation was been a little bit lower than last quarter, $55 million versus $60 million last quarter.

Primarily related to reduction in production for the sales of produced product in the quarter and a little bit of issues that we saw in Q3 around unabsorbed depreciation but on a run rate basis going forward, you should plan around the $60 million level per quarter. .

And actually just one last one if I could, John could you just give us a little bit more of your views around the cost curve in China? I know you cited a higher number than prior quarters and I think will understand that coal is coming down, but maybe just some commentary around the gas dynamics there domestically in China and how that is pushed the curve higher at that upper end.

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Gas is not as available in the wintertime for making chemicals, so that has an impact. And the pricing is adjusted on a regular basis as well based on international oil prices. As we have seen higher oil prices you would expect to see higher gas prices in China.

That is what is really setting the high end of the cost curve but the middle part where coal is a big factor has also raised as a result of the large coal prices. It has come back a little bit in the last month or so but the overall cost curve is much steeper than it was 12 months ago. .

[Operator Instructions]. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Floren. .

Okay, thank you. With the strong increase in methanol price in the second half of 2016 the methanol industry environment has improved. The company has come out of the recent bottom of the methanol price cycle in good shape.

I'm very pleased with the record production results we achieved in Q4 and in 2016 and I'm encouraged by the improvements we have seen in the gas availability in Egypt, Trinidad and Chile. In the current methanol price environment our assets are capable of generating significant cash flows.

Our priorities for capital allocation are to meet our financial commitments, invest to grow the company and return excess cash to shareholders. Thank you for the interest in our company. .

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