Methanex Corp T.MX

TD

[retiredcf]

Their target is US$59.00. GLTA

Methanex Corp.

(MEOH-Q, MX-T) US$44.81 | C$55.33

Q3/21 EBITDA Miss; China Coal Supply may Take Time to Improve Event

Methanex reported Q3/21 adjusted EBITDA of $264mm, a miss vs. the Street/TDSI at $278mm/$287mm. The share-price reaction to the miss and China's decision to cap coal prices was mitigated by the company's November contract postings, Q4/21 guidance, and comments regarding energy prices/supply in China.

Impact: MIXED

• Q3/21 Results and Q4/21 Outlook: Adjusted EBITDA of $264mm was roughly flat vs. $262mm in Q2/21, as a 4% increase in the average realized price was offset by lower sales of internally produced methanol. Methanex expects Q4/21 EBITDA to be considerably higher vs. Q3/21, on a significantly higher average realized price and higher production.

• Methanol Prices: Methanol prices are at multi-year highs, largely driven by supply-side dynamics. The Atlantic Basin is still experiencing some planned/ unplanned outages, but it seems to be approaching better balance; however, China has been the recent focus, as record coal prices/tight coal supply have put upward pressure on the high-end of the cost curve and forced as much as 8mm-11mm tonnes of methanol capacity to shut down. Although China's decision to cap coal prices has prompted a recent sharp decline in China spot methanol prices, prices remain at high levels (~$375/tonne), and it will likely take time for China's domestic coal supply to ramp up, particularly as winter approaches, which typically results in some diversion of methanol feedstock (coal and also natural gas) to residential heating requirements.

• Strong Financial Position: Methanex has over $900mm of cash, and once the cash balance reaches ~$1.1bln, it will have sufficient cash to complete Geismar 3 ($800mm-$900mm) and run the business ($200mm-$300mm), whereby any additional cash can be returned to shareholders, which suggests upside to the 5% NCIB announced in mid-September, particularly if high methanol prices are sustained.

  TD Investment Conclusion

  Methanex is the methanol market leader and has a cost structure that supports very attractive free-cash-flow across the methanol price-cycle. Although methanol prices are at a cyclically high level, we would argue that Methanex's share-price is already discounting much lower prices, as the stock is trading at a free-cash-flow yield of ~12-14% at a mid-cycle price of $350/tonne, which we see as attractive.