Methanex Corporation Financial Analysis
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Comprehensive financial analysis and valuation of Methanex Corporation as of September 2009

Comprehensive financial analysis and valuation of Methanex Corporation as of September 2009

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Methanex Corporation Financial Analysis Document Transcript

  • 1. Methanex Corporation Financial Analysis As at September 2009 Objective: To perform an indepth financial review of Methanex Corp. to determine whether the shares, at current prices, represent compelling value to warrant investment. Things to note with Methanex. Since the product (Methanol) is a commodity, price is a significant determinant in customer purchase decisions and is therefore one of the only ways to differentiate one company against another. Another factor companies can use to differentiate themselves against their competitors is distribution capacity (service). Methanex has the ability to deliver product worldwide via their network of storage facilities as well as their charter vessels. With production and storage facilities located worldwide, the company can source and direct product in the most efficient and cost-effective method available. The company's strategy is to focus on 3 main areas: 1. To be a low-cost producer of methanol 2. To be an industry leader in the production of methanol 3. To maintain operational excellence. This means to operate their facilities in the most efficient manner possible. This is indicative of the capacity utilization rates the company has achieved in the past Areas of weakness(es): 1. Significant production comes from 3 main areas: • company has production facilities that cluster in 3 main areas. The first being Chile with four plants producing approximately 3.8 million tonnes of capacity. Next there are the Trinidad facilities (2) which contribute 1.9 million tonnes of capacity and finally there are the New Zealand facilities (4) of which only a fraction of the total are in operation. The New Zealand facilities had maximum production capacity of 2.2 million tonnes although now are at 1.4 million tonnes. As has occurred in the past, lack of consistent natural gas supplies have caused the company to, from time-to-time, rely on the production capacity of other companies (usually at higher cost), or to shutter facilities altogether. Because the company has decided to cluster production facilities in a limited number of geographic areas, this could potentially lead to the closure of a significant proportion of capacity (53.4%, 26.7%, and 19.9% respectively) and hence severely impact the operations of the company (operationally as well as financially). • With MX's Argentinian natural gas supply cut-off, the company is only able to operate these plants at about 28% of capacity. Although efforts and investments are being made to restore the natural gas supplies to the Chilean facilities, there is no guarantee that these efforts will be successful. As a result, prudence and conservatism require that any production estimates associated with these facilities reflect only the production for which the company will
  • 2. actually receive natural gas for their operations. Therefore, on a going concern basis, these operations will be valued at $0. The facilities do have a value if considered, today, in terms of scrap/liquidation value (the value of the steel making up the facilities). 2. Some of the production locales can be found in earthquake prone areas, which raises the risk of a long-term or permanent loss of production. A quick search of earthquakes in the area around Chile indicates that Chile has experienced about one major earthquake every year since 2002. Of the 4 areas Methanex operates from (Egypt has been included in this list even though the facility is still under construction), Chile and New Zealand are most likely to experience an earthquake. 3. Despite write-downs of several production facilities, the company has mothballed several plants. As a result, not all assets of the company are being used. Potential, drag on earnings because of up-keep expenses, property taxes, etc. (even though asset write-downs help to improve the financial performance of the company in the years following the write-down) 4. Supply of natural gas feedstock, although the company negotiated long-term contracts, the Argentine government has cut all exports of natural gas. Argentine economy is more dependent on natural gas than other areas. Approximately 15% of all vehicles in Argentina use natural gas instead of gasoline (also of note, is that the Argentine government is keeping natural gas prices artificially low). MX will find it difficult to replace this source of natural gas. Although approximately $600 million will be spent on exploration around Methanex's plant in Chile, there can be no assurance of securing new supplies. Also of note is that Bolivia has issues with Chile and for this reason cannot be counted upon for natural gas supplies (see wikipedia article from this link: http://en.wikipedia.org/wiki/Argentine_energy_crisis_(2004)). Sources of strength: 1. Company management is conservative. The company maintains a low debt ratio thereby allowing the company to take advantage of opportunities as they arise. The company has maintained a very high cash balance since 2002. In 2005, the company ended the year with the lowest cash balance ($158,755,000) during the period under review. Though management has returned large portions of cash to shareholders either through dividends or stock repurchases, and have resisted the urge to fritter away company assets away by means of empire-building acquisitions, Methanex has not (yet) purchased assets when available (opportunistically). During the 2002 – 2008 review, the methanol industry has not experienced a decline or contraction due to over-supply. This may be a reason why management hasn't made proposed a transaction; there were a lack of opportunities. 2. Fiscal discipline. The company is cognizant of project costs and diligently about procuring natural gas supplies at reasonable prices. Once the prices have been agreed to, they lock in suppliers to long term agreements. 3. With the large rise in the price of oil from 2007-8, there has been a pronounced movement to explore other energy sources (a few of them being methanol and MBE). With methanol now being considered an alternative fuel, this opens new markets for methanol suppliers and for future demand. 4. The natural gas sourcing troubles the company is experiencing in Chile does present a silver lining. Because of MX's dominance in the methanol industry, and it's concentration of plants in a few select countries, any supply disruptions at any facility could have significant repercussions for the methanol industry. Namely, less supply of methanol. This in turn may cause the price of methanol to rise.
  • 3. 5. Methanex's problems in Chile have also highlighted the company's ability to meet their customers demands by sourcing methanol produced by their competitors. The natural gas supply disruption in Chile has resulted in a loss of approximately 2 million tonnes of production capacity. The fact that the company has met their obligations via other means highlights the company's flexibility. (This view should be tempered with the fact that total demand from MX's customers during the past few years has fallen. In 2004 the company sold 7,427,000 tonnes of product to it's customers, by 2008 this figure had fallen to 6,054,000 tonnes. Also of note is the variability in sales of MX's purchased methanol. Although the figure is relatively unchanged from 2004, there has been a 50% and 30% increase from 2006-2007 and 2007-2008 periods) Opportunities: Over the past 3 years, with the price of oil increasing and ultimately peaking in July 2008 at almost $150 per barrel, consumers and manufacturers have been exploring alternate sources of energy. Methanol is viewed as an alternate source of fuel and as such, its price has risen along with oil (see chart below). Realized Methanol Prices Year $/tonne 1993 136 1994 288 1995 222 1996 149 1997 187 1998 120 1999 105 2000 160 2001 172 2002 155 2003 224 2004 237 2005 254 2006 328 2007 375 2008 424 Use of methanol as a fuel has prompted increased demand for the commodity (this was the primary driver behind the recent rise in methanol prices). This bodes well for methanol's future as a source of energy. Another factor that increases the chance of methanol becoming a significant fuel source, is the trend of methanol plants becoming larger. As per the Production Summary page on the spreadsheet, shows, there is a clear movement away from smaller plants which produce methanol at a significantly higher cash cost than a “mega” methanol plant. Recent developments in the industry have given rise to the “super-mega” methanol plants. These plants have the capacity to produce 10,000 – 15,000 tonnes/day of methanol, at least twice to three times the capacity of current plants. The costs associated with building these new “super-mega” plants makes them comparable to a mid-sized oil refinery, but the cost savings using these plants to manufacture methanol are immense.1 With Methanex management being fiscally conservative and not utilizing significant amounts of 1 http://findarticles.com/p/articles/mi_hb5255/is_6/ai_n29169114/
  • 4. debt, the company has the capacity to undertake large scale projects. Recently, the company has worked with partners to reduce the risk associated with new plants but retain the right to market their partner's portion of the production thereby earning commission on the sale. Threats: Some of the challenges MX is facing relates to the natural gas supplies. Particularly in Chile and New Zealand. In Chile, the bulk of the natural gas is supplied by a firm in Argentina. The Argentinian economy is more dependent on natural gas than other countries. Since about 2005, MX has been experiencing shortages or reductions in supply. The shortages came about because several years earlier (in 2002), the national currency, the peso, was devalued. In the ensuing years since the devaluation, the government has held the price of natural gas artificially low2 (gasoline and diesel fuels have been adjusted to reflect the higher cost). As a result of the artificially low natural gas price, consumers began to use more but at the same time, producers of natural gas have resisted investing in expanding capacity. Because producers' financial motive has been taken away, investments that they would have made to expand production have dried. To counteract this, the government has instituted prohibitive tariffs on exported natural gas making it uneconomical for national producers to sell it outside the country at higher prices. After the initial minor disruptions in their supply, MX has effectively lost all natural gas supplies from Argentina due to curtailment of exports. Management has recognized the loss and is actively seeking alternate supplies In New Zealand, the company experienced loss of production due to a revaluation of the existing natural gas producing fields (the life span of the natural gas producing fields was cut). Exploration since 2004 has yielded new natural gas discoveries and production has been reinstated on a limited basis. It should be noted that the production life of these new fields is limited and only expected to last until the end of the 3rd quarter of 2010.3 Once again contingent on new discoveries at reasonable cost, the New Zealand facilities may be shuttered once current supplies are depleted. http://www.stuff.co.nz/business/industries/2850451/Methanex-ready-to-step-on-gas http://www.aspousa.org/index.php/2009/08/lessons-from-the-barnett-shale-suggest-caution-in-other- shale-plays/ Industry Analysis: World-wide methanol capacity is estimated to be 60 million tonnes. Depending on the region, some countries can produce methanol more cost effectively than others. China, for instance, relies on coal to produce methanol. These plants are less cost-effective than other plants which use natural gas to produce methanol. Additionally, Chinese plants are generally smaller than some of the “world scale” plants in operation elsewhere. Current consumption of methanol (prior to the 2008 recession/depression) was approximately 40 million tonnes. It is estimated that the global slowdown has caused demand to fall about 12-15% to approximately 35 million tonnes. Generally, methanol plants operate less efficiently world-wide hence 2 http://en.wikipedia.org/wiki/Argentine_energy_crisis_(2004) 3 Methanex 2008 Annual Report, page 24
  • 5. the disparity between capacity and production. Between 2007 and 2010, industry capacity is expected to rise 12.6 million tonnes. Certainly China has been and is the driver for much of the growth in the industry. Recently, methanol use has been explored as an alternate source of energy (this explains much of the increase in price for methanol over the past 3 years). In my research, I have found that the cost of converting natural gas into methanol (in terms of energy used to effect the conversion) is not cost effective. Also, the methanol manufacturing process causes more pollution than the current oil into gas refining model that exists today.4 So by this standard, methanol is unlikely to replace gasoline unless: 1. the methanol manufacturing process can become more efficient (i.e. the syngas production step can be skipped). [this step makes up about 70% of the cost of producing methanol]5 2. the manufacturing process produces less pollution This is not to say that methanol is not a superior fuel to gasoline. From the standpoint of reducing carbon emissions, methanol is more environmentally friendly than gas and the power it generates is comparable to gasoline engines. As mentioned above in the Opportunities section, the trend towards mega plants (5,000 tonnes per day of methanol production) and “super-mega” plants (10-15,000 t/d) are clearly the wave of the future. Although smaller facilities are being constructed (in particular in China), these plants manufacture methanol by using coal instead of natural gas. Although this method generates more pollution, the market can temporarily sustain these facilities. As methanol plants become larger, these plants will end up losing due to the cost advantages of the larger plants. Ultimately, as more production comes from these larger plants, smaller facilities cannot compete and will inevitably close. North American plants have for some time been less cost effective than their offshore counterparts. Methanex has already closed their N.A. plants and few, if any, remain active today. 4 http://www.zapla.org/present/methanolresearch.html 5 http://www.technologyreview.com/read_article.aspx?ch=specialsections&sc=transportation&id=16629
  • 6. Company Analysis: Relative income statement analysis: Overall, the company has shown consistent improvement in cost until 2006. Gross margin in 2006 was a record 32.8% then, despite increasing methanol prices, gross margin comes under pressure in 2007 (23.8%) & 2008 (11.2%). Depreciation remains essentially unchanged (in percentage terms) since 2004, due in part to the significant building and purchase of production capacity. Although as we will see later, depreciation expense could be increased to reflect the obsolescence of equipment (See Asset Restructuring Charge). Because of management's prudence and conservatism using leverage, interest expense averages 2.6% of Sales during the review period. In fact because managers keep large cash balances on hand, interest income averages 1.4% over the same period, almost entirely offsetting the interest expense. The company, from time to time, incurs an asset restructuring charge. In the past this was caused by writing down the value of production facilities. In 2005, the Kitimat facility was closed and the company incurred a restructuring charge related to this closure. The Kitimat operation was the last North American plant to close due to it's uncompetitive cost structure compared to other plants worldwide. In 2003, the company wrote down much of the value of the New Zealand operations due to management's assessment of the availability of natural gas supplies for these facilities. In 2002, the company wrote off the Fortier, Louisiana which had been idle since March 1999. The company wrote- off the value of the Medicine Hat operations in 1999, once again to reflect the uncompetitive nature of the business in North America. It is reasonable to assume the company will write down the value of some of the Chilean facilities assuming current efforts to replace the lost Argentinian gas supplies proves fruitless. Since two of the company's Chilean plants are not operating, gross book value could decline by approximately 20%. There have been reports (on the Internet) that the company is reviewing the possibility of building a plant in Vietnam. Should the company decide this is a viable location, the company could save some construction costs by moving one of their existing plants rather than building a new plant. Given the recent activity in stock markets around the world, and the substantial decline in asset prices it makes more sense, from a financial point of view, to focus on acquiring production assets second hand (see chart below). New build or Plant name Capacity Cost Cost/tonne purchase Chile IV 840,000 275,000,000 327.38 New Titan 850,000 313,000,000 368.24 Purchase Atlas 1,000,000 400,000,000 400.00 New Egypt 1,300,000 867,000,000 666.92 New In terms of construction cost per tonne, there is substantial capital investment savings in acquiring existing facilities. Viewing MX in this way, as of April 28, 2009 the market value of the company is $1,814 million with an installed capacity (total used and unused) of 9.493 million tonnes (note that Egyptian facilities are still under construction at the date of writing and does not include any facilities in North America). Using the above rough calculation of Market Value of firm divided by
  • 7. capacity, we determine that the cost to acquire each tonne of capacity from MX is $191.08. Significantly below the cost to build new facilities. Therefore from the perspective of an acquiror, it is more profitable to buy MX's shares instead of investing further cash in the physical assets of the company. The logic behind this is that the cost per tonne of new building is more expensive vs the market value of the firm divided by installed capacity. In this light, MX is more of a take-over candidate simply because of the production capacity available (assuming nat. gas supplies can be secured) is not being recognized in the stock price. This is not to slight or second-guess the managers of MX in any way. Management has operated the company honestly and has done a superb job of returning excess funds to shareholders in the form of dividends and share buybacks. Not only this but management has accomplished this while being disciplined and not over-leveraging the company. Since 1993 the managers have increased book value from $2.46 to $13.98 (note current book value is less than the share price of $9.87). Liquidity Ratios: MX has consistently maintained a conservative financial position. This can be seen even with the Current and Acid test ratios. The Current ratio has fluctuated from a high of 5.4 to a low of 1.33 but in recent years has averaged about 2.6 which is considered reasonable considering the nature of the industry. The Quick ratio, over the same period has been as high as 4.85 and as low as 1.04 but has averaged about 2. In each case the working capital position of the company was helped to a large degree because of the cash on hand (average cash on hand over the last 5 years has been $308 million). Activity Ratios: Inventory Turnover which calculates the number of times inventory needs to be replenished each year has remained consistent at about 8 times a year. According to Thomson Reuters, the industry average inventory turnover ratio is 0.27 times per year. The variance between MX and the industry cannot be taken at face value since few competitors limit themselves to only methanol production. Some of MX's competitors are Eastman Chemical, Celanese Corp. and Lyondell Chemical each of which are diversified chemical producers. So a direct comparison cannot be made with any degree of accuracy. The A/R turnover ratio measures the number of times A/R is collected each year. This has varied between 5.62 to 7.52 during the past 5 years. When converted to a daily figure, we see A/r is outstanding for about 60 days on average (but in 2008 the figure declined to 47 days due mainly to a significant decline in A/R compared to Sales for the year. An industry comparison shows A/R turnover is 0.35 times per year. Once again a direct comparison cannot be made for the same reason as mentioned above. Total Asset Turnover calculates how much revenue the company is able to generate with the assets it controls. Over the past 5 years this has been about 0.81 (for every dollar of assets, the company generates $0.81 in sales. There are some inherent flaws in simply taking this figure as given. Primarily, a number of the company's plants in New Zealand and Chile are out of commission so to speak because of a lack of nat. gas supply. Therefore the value of the equipment is still shown of the books but is not generating any sales. This means the calculation understates the amount of revenue the company is able to generate with it's plants. On the other hand, the company has occassionally written off the value of their plants when they are no longer competitive or when nat. gas supplies are unavailable. When mgmt. does writedown these assets, the company's asset turnover ratio will inevitably improve and thereby overstating the revenue generating capacity of the company. To be fair, this calculation should include the value of all assets the company has spent to
  • 8. obtain. So all plants, those operating or not should be included in the calculation which will ultimately skew the results lower than what has been calculated. Leverage Ratios: As mentioned above, the company has maintained a conservative financial structure. The 5- year TIE ratio was just under 11 times (for fiscal year-end 2008, the ratio was 6.77 which was due to lower operating income). The Total Debt/Total Asset ratio was calculated to be approximately 28% which clearly shows mgmt's prudence in using leverage judiciously. This is slightly more than it has been in the past few years because of mgmt's commitment to building a new facility in Egypt. A variant of this calculation is the Cash to Total Debt ratio which measures the Cash on hand to the total debt of the company. Over the past 10 years, the company has maintained a cash balance equal to at least 30% of total borrowings. This is a significant achievement given that most commodity producers leverage ratios are substantially worse than MX's and are constantly going back to market to raise fresh debt or equity capital to finance a new expansion. Management Effectiveness: ROE for the past 5 years has been 24.4% and in 2008 it fell to 12.3% because of the sharp fall- off of economic activity. The company has been very profitable over during the period of examination. The company has been able to decrease shares outstanding and also total Equity by buying back shares periodically. This has enabled the company to continue to show above average profitability. Industry ROE over the same 5 year period has averaged 13.5%. As a whole, the return from this sector has been relatively good ROA over the past 5 years has been 12.1% substantially better than the industry average of 7.1%. The main driver in both cases was the rise in demand as well as an increase in price for methanol. Chart 3 below shows the increase in the commodity's price. Despite the recent decline in the methanol prices, it is expected that methanol prices will recover somewhat because of the many uses of methanol, and particularly it's use as a substitute fuel. The conclusion from this is that MX and it's manager's should be considered a superior to others in the chemical industry. From the point of view of shareholder . One caveat to this is that the fundamentals of the industry have been very good and as a result have buoyed the results of the business. Therefore, as has been said in the past a rising tide raises all boats. It is only during periods of trial that it becomes clear which managers deserve praise.
  • 9. Forecasted financial statements: In forecasting the financial statements for MX it was necessary to evaluate the current economic environment, namely natural gas prices in addition to methanol prices. An approximate conversion figure was determined from examining historical prices of both nat. gas and methanol. This was used to determine the firstly the expected near-term price of natural gas then the longer-term price for nat. gas. Once calculated we converted the results to reflect the price of methanol. • Note: Several proforma statements were generated to reflect several plausible scenarios. In calculating the value of the company, no one figure truly portrays the worth of MX. Instead as per the author's bias towards fundamental analysis and determining a margin of safety (using the definition from Ben Graham's book Intelligent Investor), capital should only be put at risk if and when a security can be purchased at a substantial discount to the market price of the security. Firstly, the economic contraction of 2008-2009 has resulted in nat. gas prices falling to their lowest level since 2002. Since March 2009, natural gas has been trading in the range of $3.40-3.80 per thousand cubic feet. It is the author's view that natural gas prices will eventually increase. The rationale behind this proposal is the widespread industrial use of methanol and it's increasing acceptance as an alternate source of energy. For the purposes of this report it is assumed the Normal price of nat. gas to be $6.00/tcf. See Chart 1 below. Note the last 6 lines in the Average column below which shows the average market price for nat. gas (we exclude 2009 since it is not representative of the commodity's price during normal periods). Since methanol began widespread acceptance as a source of fuel (this occurred around 2002-2003) a noticeable increase in the price of the commodity can be observed from a price chart for methanol. (see Graph 1) Chart 1: Std. Dev. 5 5 year running year rolling Average average Std. Dev. average Max Min 1976 0.58 0.04 0.64 0.54 1977 0.79 0.06 0.84 0.67 1978 0.91 0.03 0.96 0.87 1979 1.18 0.10 1.31 1.02 1980 1.59 1.01 0.13 1.76 1.37 1981 1.98 1.29 0.13 0.46 2.16 1.77 1982 2.47 1.62 0.13 0.57 2.62 2.23 1983 2.59 1.96 0.05 0.54 2.67 2.52 1984 2.66 2.26 0.04 0.42 2.71 2.57
  • 10. 1985 2.51 2.44 0.13 0.26 2.71 2.28 1986 1.94 2.43 0.21 0.29 2.28 1.73 1987 1.66 2.27 0.06 0.42 1.74 1.56 1988 1.68 2.09 0.15 0.44 1.96 1.52 1989 1.69 1.90 0.14 0.36 1.99 1.55 1990 1.70 1.73 0.26 0.20 2.23 1.47 1991 1.63 1.67 0.23 0.18 2.00 1.34 1992 1.73 1.69 0.34 0.23 2.38 1.26 1993 2.03 1.76 0.10 0.26 2.18 1.76 1994 1.85 1.79 0.09 0.26 2.00 1.70 1995 1.55 1.76 0.11 0.26 1.84 1.43 1996 2.16 1.86 0.39 0.32 3.26 1.85 1997 2.32 1.98 0.48 0.39 3.40 1.79 1998 1.95 1.97 0.13 0.39 2.16 1.70 1999 2.19 2.04 0.34 0.41 2.68 1.70 2000 3.69 2.46 0.97 0.81 5.77 2.60 2001 4.01 2.83 1.12 1.10 6.82 2.78 2002 2.95 2.96 0.49 1.07 3.96 2.19 2003 4.88 3.54 0.74 1.20 6.96 4.26 2004 5.45 4.20 0.40 1.17 6.21 5.02 2005 7.32 4.92 1.72 1.77 10.33 5.73 2006 6.40 5.40 0.71 1.75 8.01 5.09 2007 6.38 6.09 0.51 1.24 6.97 5.42 2008 8.07 6.72 1.71 1.44 10.82 5.87 2009 3.89 0.56 1.74 5.15 3.43 Graph 1: Natural Gas From 1976 to 2009 12 10 8 6 Price 4 2 0 1976 1978 1982 1984 1986 1988 1992 1994 1996 1998 2000 2002 2004 2006 2008 2009 1980 1990 Natural gas Year Natural gas
  • 11. In determining the Normal (in the statisical sense of the word) revenue MX can generate in a stable economy, several assumptions have been made regarding the volume of methanol production. Simply using a historical average for future production could not be plugged into the model. The depressed nature of the economy and the drastically reduced volume of production would not suitable in this instance. Instead, the author has decided to opt for an alternate method; one where past production levels will guide future methanol estimates. Chart 2 indicates the capacity and historic production levels of each of MX's plants. Note the recent trend of declining production due to nat. gas shortages in Chile as well as NZ (see Graph 2). The portion of the chart highlighted in blue is our estimate of the future levels of production. The portion highlighted in red indicates the portion of production not owned by MX. (the orange highlights are not included in calculating the value of the company) Chart 2: 2005 2006 2007 2008 2009 2010 2011 2012 Plant data Capacity Chile Chile I 925,000 844,000 712,000 613,000 Chile II 1,010,000 893,000 850,000 286,000 162,000 162,000 162,000 162,000 162,000 Chile III 1,065,000 919,000 970,000 619,000 926,000 926,000 926,000 926,000 926,000 Chile IV 840,000 373,000 654,000 323,000 3,840,000 3,029,000 3,186,000 1,841,000 1,088,000 1,088,000 1,088,000 1,088,000 1,088,000 47.94% 28.33% Trinidad 44.40% Titan 850,000 715,000 864,000 861,000 871,000 864,000 864,000 864,000 864,000 Atlas 1,073,000 895,000 1,057,000 982,000 1,134,000 1,104,250 1,104,250 1,104,250 1,104,250 Total production from Atlas facility 1,418,384 1,675,119 1,556,260 1,797,147 1,750,000 1,750,000 1,750,000 1,750,000 Minority partner's share of Atlas production (ak a commission sales) 618,119 523,384 574,260 663,147 645,750 645,750 645,750 645,750 1,610,000 1,921,000 1,843,000 2,005,000 1,968,250 1,968,250 1,968,250 1,968,250 132.19% Commission sales New Zealand Waitara 530,000 343,000 404,000 435,000 390,000 Motunui DII 500,000 180,000 500,000 375,000 Motunui DIII 700,000 Motunui DIV 700,000 2,430,000 343,000 404,000 435,000 570,000 500,000 375,000 Egypt Egyptian Methanex Methanol Co. 1,300,000 497,250 663,000 780,000 Total Production from Egyptian facility 828,750 1,105,000 1,300,000 Minority partner's share of Egyptian production (ak a commission sales) 331,500 442,000 520,000 North America Medicine Hat 1 Medicine Hat 2 Medicine Hat 3 470,000 Kitimat 500,000 376000 Fortier (Louisianna) 570,000 Enron, Texas 1,540,000 376,000 0 0 0 11,033,000 Total Production 5,358,000 5,511,000 4,119,000 3,663,000 3,556,250 3,928,500 3,719,250 3,836,250 To summarize the methanol production estimates: • Chile plants produce 1.088 million tonnes of methanol • Trinidad plants produce 1.968 million tonnes of methanol • New Zealand plants do not contribute any production ** • Egyptian plants produce 780 thousand tonnes per annum **Note: Due to the relatively short duration of remaining production available from New Zealand (mgmt. estimates only
  • 12. enough nat. gas supplies to last until 2010), it is assumed that no production from NZ will be forthcoming. To offset this, revenue estimates will include production from Egypt. This will add 280,000 tonnes of production in 2009, reduce 2010 production by 92,000 tonnes and increase 2011 production by 117,000 tonnes. The maximum impact in any one year will be less than 7.3%. For the purposes of this report this variance is acceptable Graph 2: Quarterly sales of Methanol From Q1 2001 - Q2 2009 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Sales of Methanex Sales of Methanex Commission sales production purchased product During the analysis of the price for methanol, it was discovered that viewing the price from the perspective of the entire history (from 1993 to 2009), the data is more variable than simply viewing it over 5 year increments. Since 1993 many changes to the industry have occurred, among the more significant is the wide-spread acceptance of methanol as a source of fuel. This has, as mentioned earlier in this report, increased demand for methanol and thus increased it's price as well. Therefore, a recent price would portray a more accurate price for methanol during more stable economic times. During the period 2003 – 2008, methanol could be purchased between $223 - $545 per tonne. The 5 year trailing average over the same period is $323.60. We will use this as our future expected price (or Normal) and consider the standard deviation over the same period to be $79.19. Chart 3: Std. Dev. Average Natural Gas Year $/tonne 5 year period 5 year period Prices 1993 136 (1000 Cubic feet) 1994 288 1995 222 1996 149 1.54 1997 187 61.30 196.40 1.87
  • 13. 1998 120 63.08 183.67 1.84 1999 105 64.80 172.43 2.35 2000 160 60.16 170.88 4.27 2001 172 56.27 171.00 5.12 2002 155 30.88 147.89 3.69 2003 224 33.94 196.67 5.81 2004 237 14.91 224.20 5.98 2005 254 19.29 227.00 7.87 2006 328 47.59 249.40 6.22 2007 375 65.05 283.60 5.88 2008 424 79.19 323.60 7.47 2009 196 Average 258.87 Standard Deviation 103.73 Valuation: Several scenario analyses have been performed and to consider how the priceof methanol affects company performance. In Scenario 1, all inputs (volume of methanol produced, purchased and the price for the commodity) are set to Normal and the calculated value of the common equity is $19.67. In Scenario 2 & 3, we evaluate a -/+1 standard deviation change in the price for methanol. The value of common equity ranges between $14.89 - $24.45 respectively. In addition to this, the company has $277,600 thousand of cash on the balance sheet (as of Q2 2009) which is the equivalent of $3.02 per share which should be added to all of the above values. (Although the company regularly keeps large amounts of cash on the balance sheet, the NPV calculations do not include the interest earned on these balances. Assuming $10 million of income annually from this highly fluctuating source, the NPV would be $0.90 per share.) Some important assumptions exist with these calculations. First, none of the calculations factor in growth in the business. Given the company's nat. gas predicament, a conservative estimate must exclude any potential production from the mothballed plants until new stable and long-life supplies are in place. Second, all of the company's plants are operating at capacity or are constrained by nat. gas supplies and therefore unable to manufacture significantly more methanol. Only by building new facilities, or by purchasing existing capacity will the company be able to increase production. Recent speculation that MX may buyout their minority partner in Trinidad (Methanol Holdings (Trinidad) Ltd.) or its investigation into building a new facility in Vietnam cannot in any way be included in this evaluation until a transaction appears more likely. Another assumption is that the company finances itself internally and retires debt as it matures. The ramification of this is that cash is spent not for the benefit of the shareholders and therefore drags down the valuation slightly. One final assumption is that the company maintains it's production capacity only to the extent that it refurbishes the catalyst and any other maintenance to keep it's facilities operational. During the review of the financial statements, it became apparent that capital expenditures on PP&E were regulaly less than depreciation. From an individual investor's point of view (one who has limited resources and cannot significantly influence management of the company) the estimated value based on earnings do not necessarily justify purchase of the company stock based on expected production and methanol prices
  • 14. realized. Depending on the investor and their objective, the value of the company can vary significantly. Each investor (i.e. a competitor looking to expand production capacity, or a small independent investor, etc.) has their own view about the value of the company. So in determining the value of the company, one cannot simply give a company list a number and be finished. The value of MX must be examined from the perspective of what is the most likely to occur as well as what might occur. As mentioned above on page 6, based on the cost of plants installed worldwide, MX is attractive to an acquiror if they (the acquiror) already possesses surplus natural gas supplies. Perhaps if a company (or a group of companies) decided some or all of the plants fit their own methanol production plans, then the value of MX could conceiveably be considered higher than it's current stock price. Especially considering the stock is only anticipating production from roughly 1/3 of MX's capacity. Under this scenario (assuming almost full production capacity is utilized) 8.138 million tonnes of methanol could be produced with a realized methanol price of $323.60, the NPV of expected cash flows discounted at 9%, gives MX shares a value of $39.65. Evaluating the cost of PP&E per tonne of methanol produced (see page 6), this gives the production equipment a value of $371.47/tonne, which more closely reflects the cost to build a new facility from the ground up. For the forseeable future, we must be conservative and realistic in terms of the value placed on MX. Therefore the probability of expecting a resolution to the natural gas supply issue to the Australian and Chilean facilities must be considered low (for the time being) and as a result we must lean towards a value for MX closer to the $19.67. Another valuation metric is the Earnings Yield. In this analysis, the calculation is determined by taking the Normal earnings, which were calculated to be $2.35 per share ($216,624/92,031), and dividing it by the current market price (in this case $19.26 as at September 21, 2009). The product is 12.2%. To consider it another way, if the company had only one share outstanding and the shareholder received $2.35 as a cash return, the shareholder would earn 12.2 % annually on their investment if they paid $19.26 for their share.
  • 15. Assumptions in Methanol Production estimates: An analysis of each plant's production history indicates the methanol available for sale. Due to natural gas curtailments from Argentina, the majority of MX's production in Chile has been cut-off. Therefore estimated production from Chile can conservatively be estimated at 1.088 million tonnes per year. Any future natural gas discoveries in the region can only help boost production. In Trinidad, nat. gas supplies are secure and production can proceed unimpeded with minimal delays. Therefore, it is estimated that future production can be expected to reach 2.005 million tonnes (this only includes MX's proportionate production from it's 63.1% share from Atlas). In New Zealand, MX has recently stated that the company is willing to refurbish it's plants so long as nat. gas supplies are available. Current supplies of nat. gas are only expected into the first half of 2010. Afterwhich the fields from which MX is currently receiving gas will be depleted. As a result, a decision was made not to include any production from New Zealand in the future production estimates due to the short remaining secure life of the supplies. To compensate for the early termination of the New Zealand production, the Egyptian facilities will be used in it's place. This is not ideal since this estimate will result in 300,000 tonnes of extra production in 2009/2010, it is considered reasonable and should not affect the valuation to the point that it makes the estimation inaccurate. Production from Egypt is expected to reach 780,000 tonnes (this is MX's proportionate share of the plant production).
  • 16. Comparison of Methanol and natural gas prices 450 9 400 8 350 7 300 6 Natural Gas Methanol 250 5 200 4 150 3 100 2 50 1 0 0 e nn to $/ Year $/tonne Natural Gas Additional web sites: http://www.rice.edu/energy/publications/docs/GAS_LNGPipelines_SouthernCone.pdf http://ncseonline.org/nle/crsreports/energy/eng-10.cfm#WORLD%20NATURAL%20GAS %20DISTRIBUTION%20AND%20PRODUCTION