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Rising demand for methanol puts focus on Methanex

Bruce Aitken, president and CEO of Methanex.

CHUCK STOODY/Chuck Stoody/The Canadian Press

There is an adage that says the best time to buy a stock is when there is blood on the streets. That macabre old saw might apply right now to Methanex Corp.

The Vancouver-based petrochemical producer is in the final stages of commissioning a new methanol plant in the Egyptian port city of Damietta, and the unrest in the country is a major reason the stock has been selling off. The shares have tumbled as much as 9 per cent since Wednesday, but posted a sharp recovery Tuesday with the big rally in markets over all.

Methanex has a 60-per-cent stake in the plant, which will have 1.3 million tonnes of capacity and is expected to be one of the most competitive facilities of its kind when fully operational. A third of the operation is owned by Egyptian government entities and 7 per cent by Arab Petroleum Investments Corp.

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Despite the hit to Methanex's shares, the protests will probably have no long-term impact on the facility, which is far from the main centre of protest action on the streets of Cairo, says Steve Hansen, equity analyst at Raymond James in Vancouver. He is a bull on the stock and says the recent downdraft has made it an even more compelling buy.

"Absolutely, we think this is a buying opportunity," he says.

The company has reacted cautiously to the civil unrest. In a statement, company president Bruce Aitken said Methanex has temporarily closed its Cairo office, removed international staff and their families, and curtailed work at its plant site.

"Over the next few days we will be developing plans to re-initiate the commissioning and start-up of the plant as and when conditions allow," he said.

To be sure, not all market watchers view the unrest as a buying opportunity. CIBC analyst Jacob Bout in a note to clients Tuesday lowered his target price to $29 from $33, partly because he wants "more clarity" on how the Egyptian situation will affect cash flow next year. He also cautioned that the Egyptian ownership structure includes a ministry whose head was sacked as part of a housecleaning of the country's cabinet last week.

As its name implies, Methanex is a producer of methanol, a key chemical used in paints, sealants, wind shield washer fluid and gasoline additives. Methanex is the world's largest producer of the chemical and the only publicly listed pure play on it.

Mr. Hansen says the Egyptian plant will be the company's "crown jewel," a valuable addition to its existing plants in Canada, New Zealand, Trinidad and Chile.

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According to analysts, methanol demand is rising, while the capacity to produce it is increasing slowly. As a result, Methanex is being touted as a takeover candidate.

"In all the times that we've followed the company, the supply-demand outlook has rarely looked so positive," comments Mr. Hansen. He expects consumption of the product to rise by 8 per cent to 10 per cent a year over the next five years.

Demand is rising in part because methanol is used as a gasoline additive in China, in much the same way that ethanol is added to motor fuel in the west as a replacement for petroleum.

If the trends hold as forecast, the company will have a large increase in cash flow over the next few years, raising the possibility it may reinstate its share buyback program, possibly as early as this year, and increase its dividend next year. In its previous round of buybacks, Methanex retired nearly half its stock float, according to Mr. Hansen.

Methanex has "an outstanding track record for returning cash to shareholders and being shareholder friendly," he says.

On the takeover front, market data provider Morningstar Inc. said last month that Methanex was on its list of companies most likely to be acquired during 2011.

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Morningstar analyst Basili Alukos says the company would make an attractive acquisition for a natural gas producer since the feedstock used to make methanol comes from natural gas.

It costs about $700 a tonne to build capacity to produce methanol, while the market value of production implied by Methanex's share price is around $413 a tonne, according to Mr. Alukos.

But Mr. Hansen discounts a deal by natural gas producer. He said more likely candidates are petrochemical firms wanting to diversify, private equity firms, or an oil company trying to hedge itself against lost gasoline production from methanol use as a fuel additive.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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