Methanex Corp.
(MEOH-Q, MX-T) US$32.51 | C$41.03
Geismar 3 Restart and Dividend Increase Announced Event
On Friday before market open, Methanex announced: 1) the restart of the Geismar 3 project; 2) a dividend increase to $0.50/share vs. $0.15/share; and 3) a strategic partnership with Mitsui O.S.K. Lines (MOL).
Impact: POSITIVE
MOL Strategic Partnership: MOL has agreed to acquire a 40% stake in Methanex's Waterfront Shipping business for $145mm and to collaborate with Methanex on the commercialization of methanol as a lower-emission marine fuel. No earnings information is available to put the $145mm valuation in context.
Very Attractive Brownfield Project: Geismar 3 is well-positioned to access low-cost U.S. natural gas and benefits from meaningful capex/opex advantages because of shared infrastructure with Geismar 1 and 2. Methanex's capital cost estimate has declined ~4% to $1.25bln-$1.35bln (~$725/tonne), inclusive of a "healthy" contingency, even though much of the spending is now fixed, which represents a substantial discount to the cost of greenfield capacity ($1,100/tonne +). Methanex anticipates that Geismar 3 will be one of its lowest-cost plants and will have among the lowest CO2 emissions intensity profiles in the industry, with the capacity to generate $275mm of EBITDA at a mid-cycle average realized price of $350/tonne, which implies an EV/EBITDA multiple of 4.5x-4.9x.
Capacity to Fund without Incremental Debt: Based on its Q1/21 cash balance and the MOL inflow, Methanex expects to fund the completion of Geismar 3 with cash-on-hand and future free-cash-flow at an average realized price of $275/tonne+, which is below the normal pricing band of $300-$400/tonne. At a sustained average realized price of $325/tonne+, the company anticipates that it will have the capacity to further deleverage and increase shareholder distributions during the Geismar 3 construction period.
TD Investment Conclusion
We are attracted to Methanex's methanol market leadership and its unique position as the only methanol supplier with well-established production and sales in all major regions. We estimate that the stock is trading at an ~16% free-cash-flow yield at a mid-cycle price of $350/tonne based on Methanex's current production capability, with Geismar 3 expected to increase the company's free-cash-flow generation capability at $350/tonne by ~50% when it is operational in late-2023/early-2024.