Methanex Still in Red

Methanex Corp. (MEOH - Analyst Report) reported a second-quarter net loss of $5.7 million, or 6 cents per share, hurt by reduced sales volumes and lower methanol prices. This was marginally above our expectation of 9 cents and slightly below the consensus estimate of 5 cents. On a year-over-year basis, net losses were down significantly by about 85% from $38.4 million, or $0.40 per share.

Revenues more than halved to $245.5 million from $600 million in the same quarter of the previous year. About 80% of all methanol output is used in the production of formaldehyde, acetic acid and a variety of other chemicals, demand for which is influenced by the levels of global economic activity. These chemical derivatives are used in the manufacture of a wide range of products including plywood, particleboard, foams, resins and plastics. The remainder of the demand for methanol largely stems from the energy sector for the production of methyl tertiary-butyl ether (MTBE), a gasoline component and a direct fuel for motor vehicles.

The global economic slowdown led to a significant reduction in methanol demand and an increase in inventories across the world. This resulted in a decrease in contract methanol pricing during the fourth quarter of 2008 and into 2009.

Sales volumes totaled 1.4 million tons, down 12.5% year over year from 1.6 million tons. The non-discounted posted methanol price for the second quarter of 2009 was $211 per ton compared with $489 per ton for the second quarter of 2008 and $216 per ton for the first quarter of 2009. The average realized price for the second quarter of 2009 was $192 per ton compared with $412 per ton for the second quarter of 2008 and $199 per ton for the first quarter of 2009.

Cost Control

Despite lower prices and volumes, Methanex managed to curtail losses by checking costs. Total cash costs for the second quarter of 2009 were $20 million lower compared with the first quarter. Methanex closed many high costs facilities especially in China, where the company aims to shut down about 6 million tons of high-cost methanol capacity by 2009. The company is also hoping for further cost reduction with the upcoming low cost 1.3 million ton methanol plant in Damietta, Egypt. The plant is expected to start operations in 2010.

We rate the stock a Hold with a six-month target price of $17.50.