Methanex Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Business Update. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.

Good morning, everyone. Welcome to our Methanex Corporation Business Update conference call to discuss our decision to restart construction on our Geismar 3 project and to provide a business update. A news release announcing our decision was distributed earlier this morning and posted along with presentation materials on the Investor Relations page of our website at methanx.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 a 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 the forward-looking information warning that is at the end of our news release from earlier today regarding Methanex Restart's construction on Geisman III project or slide 22 of our investor presentation that was also posted on our website earlier today. 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, adjusted EBITDA, cash flow, illustrative free 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. These items are non-GAAP measures that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies. 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 like to turn the call over to Methenyx's President and CEO, Mr. John Florin, for his comments and a question and answer period.

Thanks, Kim. Hello, and thank you for joining us. Our news release and presentation posted earlier today provided an update on our business and capital allocation priorities. including our decision to restart construction on our Geismar 3 project. We have a few remarks that we'd like to share this morning, and then we'll open up the call for your questions. I wanted to start by sharing our outlook for the methanol industry. Current methanol industry dynamics are favorable. Methanol prices have rebounded quickly over the last year, supported by a healthy recovery in methanol demand, low global inventory levels, ongoing industry supply challenges, and a constructive energy price environment. Over the last few months, we completed an in-depth review to reassess our medium to long-term industry outlook, including our growth outlook for methanol demand following the sharp demand shock we saw in 2020, our outlook for new industry capacity additions, particularly in Iran and China, and how we expect new and existing methanol plants will operate over the coming years. Our conclusion from this detailed work is that the methanol industry outlook is positive. We believe that new industry supply, including our Geismar 3 plant, will be needed to meet growing methanol demand. Forecasts for methanol demand growth are strong, and we expect growth of approximately 16 million tons over the next five years. Healthy global GDP forecasts over the next few years support this outlook. In addition, a rising energy price environment and increasing interest in methanol as a lower emission fuel provide additional support for methanol demand growth. Regarding methanol industry supply, we foresee approximately 14 million tons of new capacity additions, including G3, mainly in the US, Iran, and China over the next few years, and limited new project commitments beyond 2022. Based on our forecast for methanol demand and supply, Our view on methanol prices over the coming years is positive. Now turning to our financial position. Today we have a strong financial position to restart construction on G3 project and execute on our capital allocation priorities. We have a healthy balance, a cash balance with over 800 million in cash on our balance sheet at the end of Q1 2021. We have taken steps to deliver through a strategic partnership with Mitsui OSK with proceeds of $145 million and by repaying $173 million drawn on our G3 construction facility. And we continue to generate meaningful cash flow across a wide range of methanol prices and have an undrawn backup liquidity, including our $600 million G3 construction facility and our $300 million revolving credit facility. Our strategic partnership with Mitsui OSK enables us to generate value from existing assets to further enhance our financial strength and flexibility without diluting the significant cash generation potential from the G3 project. With MOL, we will expand our 30-year methanol shipping relationship and benefit from MOL's broad shipping experience to enhance our waterfront shipping operations. We will also work with MOL to advance commercialization of methanol as a lower emission marine fuel. At current realized prices of approximately $375 per ton, we estimate that we have the potential to generate approximately $125 million in free cash flow before G3 CapEx every quarter. We intend to fund our remaining G3 capital costs with cash on hand and future cash flow. We expect to be able to fund the project without incurring incremental debt at methanol prices of approximately $275 per ton and above. Now turning to our G3 project. The timing is right to restart construction on Geismar III, which is a unique project with significant capital and operating cost advantages that enhance the project's returns. An abundant and low-cost natural gas supply in the U.S. underpins production for this project. In addition, we estimate that G3 will have one of the lowest CO2 emission intensity profiles in the industry. Ultimately, Geismar 3 will strengthen our asset portfolio and substantially improve our future cash generation capability. We believe that Geismar 3 will deliver significant long-term value to our shareholders. Based on the remaining capital cost for the project, we estimate the project's IRR to be approximately 20% to 28% And that's all prices between 350 to $400 per ton. This price range is in line with current third party industry publication long run up at all price forecast. Our capital cost estimate for the project is 1.25 billion to 1.35 billion dollars. We expect that approximately 435 million dollars will be committed to the project to the end of Q 3 2020 through the care and maintenance period. We expect approximately $800 to $900 million of remaining capital costs after resuming construction in October 2021. The remaining budget includes healthy allowances for both cost escalation and remaining risks on the project. We are confident in our ability to compete this project on time and on budget. We have substantially reduced the project execution risk profile of the project over the last 24 months. The key remaining risks for the project are construction labor and bulk material costs. Firstly, we're well positioned from a labor availability perspective ahead of other major capital projects in the U.S. Gulf Coast. We also benefit from our proven experience in the local area gained through our Geismar I and Geismar II projects. Secondly, we have secured prices for most of our bulk material costs, which reflect mainly piping and structural steel. We will confirm prices for our remaining bulk materials before the end of 2021, limiting our cost escalation exposure. We are confident in our ability to compete G3 on time and on budget, and we believe G3 will deliver significant long-term value to our shareholders. Now turning to our capital allocation priorities. Our capital allocation priorities remain the same. We use the cash that we generate to maintain our business, pursue value accretive growth opportunities and continue our strong track record of returning excess cash to shareholders. Going forward, we will increase our emphasis on financial flexibility in three ways. We plan to hold more cash, targeting a minimum of $300 million of cash on hand plus our remaining G3 capital costs during construction. We plan to target lower leverage and reduce our debt levels over time to a target of approximately three times debt to EBITDA at ethanol prices between $275 and $300 per ton. And we will increase our weighting on flexible vehicles for distribution, such as share buybacks, combined with a sustainable dividend to return capital to shareholders. We announced that we reset our quarterly dividend to $0.125 per share. Over the coming quarters, as we progress with the project, we anticipate that we will have the ability to further de-lever and increase shareholder distribution at methanol prices of approximately $325 per ton or higher. Geismar 3 is the only significant growth capital in our plans over the next few years. We expect that G3 will substantially increase our cash generation capability and support a significant increase in our future shareholder distribution potential. It is an exciting time for our company, and we believe that the steps we are taking today will enable us to deliver meaningful long-term value to shareholders. We would now be happy to answer questions.