Raw Image Consulting LLC

Aaron KatzmanAndrea Keo

Bridget StokesJackie Ling

Jenna BoroozadPhilip Lee

ImageConsulting

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Key Issues New Trade Regulations in Chile & Political

Instability in Egypt Plant capacity set idle (2.9 M tons in 2012)

Majority of Plants are Producing Under Maximum Capacity Producing at 43% capacity in 2012

Growing Health Concerns of Formaldehyde & MTBE Account for 45% of global methanol demand

Not Diversified Could not hedge costs associated with idle plants

~$1.3 billion dollars in lost revenues 2

SWOT Analysis

• World’s largest producer of Methanol • Cost-Leadership / Focused Strategy• Owns distribution channels • Owns storage facilities• Low labor costs• Globally diversified• Long-term contracts with Natural

Gas Suppliers

Internal

Positive

Negative

External

STRENGTHS S W WEAKNESSES

OPPORTUNITIESO T THREATS

• Growing demand for alternative fuel• Increase in environmentalism• New findings for uses of methanol

• Production facilities not utilized• No product diversification• High operating expenses• High Supplier power

• Political instability• Inconsistent natural gas

prices/supply• Global recession • Revised trade regulation in

Chile• Growing concern on health

effects of Formaldehyde

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Methanol Production & Distribution Value Chain

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Alternative Strategy #1

Advantages: Decrease reliance on suppliers Decrease operating expenses

Disadvantages Highly competitive industry Requires large initial capital investment Requires high level of expertise

Move into Natural Gas Industry

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Alternative Strategy #2

Advantages: Growing demand for these alternatives Diversification could counteract periods of instability

in current industry

Disadvantages Does not currently possess the know-how in these

fields Requires large initial capital investment Risk associated with entering new markets

Diversify into high growth potential markets:

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Fuel Blending, dimethyl-ether (DME), & Methanol to Olefin (MTO)

Proposed Strategy

Step 1: Expand Into China & Asia-Pacific Step 2: Relocate Chilean facilities to United

States Step 3: Produce at maximum capacity

Expand into Emerging Markets & Strengthen Cost-leadership Structure

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Sim

ulta

neo

us

Step 1: Expand Into China & Asia-Pacific

Global Demand by 2016:Asia: >70%N. America: <20%Latin America: <10%Europe: <20%

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Step 1: Expand Into China & Asia-Pacific

Methanol

Dimethyl Ether (DME)

Olefins

Gasoline/Fuel

[Shift in Global Demand 2007

2016]

3% to 10%

0% to 10%

14% to 19%

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Step 1: Expand Into China & Asia-Pacific

Expand Into China & Asia-Pacific[Demand in 2007] [Demand in 2016]

Dimethyl Ether (DME)Dimethyl Ether (DME)

Gasoline/Fuel Gasoline/Fuel

Olefins

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Step 1: Expand Into China & Asia-Pacific

Establish long-term contracts with Chinese companies that are involved in Methanol to Olefins (MTO) process

Practice equity sharing with MTO & DME companies in China

Methanol Olefins

0% to 10%

[Shift in Global Demand 2007 2016]

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Step 1: Expand Into China & Asia-Pacific

Number of MTO Plants Under Construction: 5

Number of MTO Plants Running: 1

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Step 2: Relocate Chilean Facilities to U.S

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Annual Capacity of Chile I, II, III, IV: 3.8 Million Tons 2012 Current Production: 313,000 Tons = 8% capacity See “slide 31” for potential buyers

Global Demand of Methanol: Latin America: ~4% Asia: ~59%

Keep Office and Storage Facilities Continue to supply Latin America through Trinidad plants

Step 2: Relocate Chilean Facilities to U.S

Impact of Shale Gas:

56% increase in total gas production from 2012 to 2040

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Step 2: Relocate Chilean Facilities to U.S

2012 2040

Natural gas production growth: 1.6%/yr

Consumption growth: 0.8%/yr

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Step 2: Relocate Chilean Facilities to U.S

[Natural Gas Prices]

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US: Price

GermanyUK

Japan

U.S. Site Locations:

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U.S. Site Locations: 3 on the west coast

For distribution to China (~6000 mi)

1 on the east coast For distribution to

Europe (~4000 mi)

Step 3: Produce at Maximum Capacity

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2012 financial info:

Production Output = 66%

Max Production : Increase revenue ~$855 Million

5660 3758

Annual Report (2012)

Step 3: Produce at Maximum Capacity

Set up Long-Term Non-Equity Contracts with Natural Gas Suppliers Easy to initiate/ terminate

Locate Suppliers in Proximity to Existing Plants New Zealand: Australian pipeline Trinidad: purchase more from current suppliers Canada: U.S suppliers Egypt: continue negotiations with government

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Qualitative Reasoning for Proposed Strategy

This Strategy is Imperative Because:

Current disruption in distribution will hurt customer loyalty

The inflexible business structure will result in lost opportunities

Losing the position as the cost-leader will cause Methanex to forfeit its ability to influence short-term prices of methanol

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Cost / Benefit Analysis

Cost Could lose money in sale of facilities High transportation costs for relocation Switching costs for new suppliers in U.S.

Benefit Increase sales volume due to new facilities & producing at

max capacity $1.8B + $855 M= Total of $2.66 Billion in additional

revenue

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Financing the Project

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Relocation:

Cost to Relocate: ~$500M per production facility (Methanex estimate)

Plan of Action: Export all useable production equipment to U.S. plants Use proceeds from the sale of land and buildings in Chile

to help expand our operations in North America and Asia.

Financing the Project

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NPV of the Relocation Project (10-year time horizon): ~$2.1 billion – See Capital Budgeting Analysis: “Slides 30-

31”

North American Plants Will Produce at Maximum Capacity: Revenues increased to $450 million per plant Cash savings from operational efficiencies plant

Financing the Project

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Relocation Project Issue $500 million in 10yr corporate unsecured debt at a

rate of 5.25%. Utilize the $750 million in excess cash

Effect on Financials: Increasing long-term debt balance to $1.745 billion Increasing Debt/Capitalization ratio to 64%. Increasing Debt/Equity ratio to .58%

Implementation Plan / Timeline

• Relocate two Chilean plants to west coast

• Negotiate an equity sharing strategy with MTO & DME plants in China

• Establish Long Term contracts with natural gas suppliers

• End Construction of last two plants

• New and current plants producing at maximum capacity

• Pay down debt utilized for relocation

Year 1-2 Year 3-4 Year 5-7 Year 8-10

• Relocate one

more facility to west coast and last facility to east coast

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Limitation / Contingencies of Proposed Strategy

Expand Into China & Asia-Pacific Unexpected changes in regulations Risks involved with cultural differences

Relocate Production Facilities to N. America Highly specialized facility and equipment may be a

sunk-cost High costs associated with new region

Produce at Maximum Capacity Difficulty in establishing trust with new suppliers

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Questions?

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Capital Budgeting Analysis

Capital Budgeting Analysis cont..

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Other Financing information:

Current Ratio – measures the ability to pay short term obligations Current ratio = current assets/current liabilities = 3.30

Quick Ratio – measures a company’s ability to meet its short-term obligations with its most liquid assets. Quick ratio = cash + accounts receivable/current liabilities = 2.67

Interest Coverage Ratio - a measure of a company's ability to meet its interest payments. ICR = EBIT/interest expense = 3.62

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Who will Purchase Facilities in Chile?

MGC (Mitsubishi Gas Chemical) owns methanol joint venture in Venezuela

MSK- Holds methanol equity positions in Venezuela Petrobras- Brazilian oil & natural gas exploration &

production ENAP- exploration & production activities for natural

gas (Santiago, Chile)

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References

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Ciravegna, L., Fitzgerald, R., & Kundu, S. (2014). Operating in Emerging Markets: A Guide to Management and Strategy in the New. New Jersey: FT Press.Damodaran, Answath. "Implied Equity Risk Premiums for US Market." Implied Premiums. NYU Stern School of Business, n.d. Web. 14 Apr. 2015. Hongqing, T. (2005). The Evaluation of Shell Coal Gasification Process and Its Ways of Improvement [J]. Coal Chemical Industry, 6, 003.International Methanol Producers and Consumers Association. (2015). About Methanol. Retrieved from impca:http://www.impca.du/en/about_methanol/ Gurney, Judith. "Review: BP Statistical Review of World Energy." Journal of Policy Analysis and Management 4.2 (1985): 283. Web.Lee, S. K., Mogi, G., & Kim, J. W. (2009). Energy technology roadmap for the next 10 years:  The case of Korea. Energy Policy, 37(2), 588-596.Mandaraka-Sheppard, A. (2007). Modern Maritime Law and Risk Management. New York: Routledge-Cavendish.Methanex. (n.d.). About Us. Retrieved from methanex: https://www.methanex.com/about-us Olesen, M. H., Wied, M., & Andersen, P. D. (2006). A study on complementarities and gaps between national H 2 &FC RD&D programmes and analysis of new opportunities (SWOT analysis). Sixth Framework Programme priority E RA-NET. Co-ordination action to establish a hydrogen and fuel cell ERA-Net, hydrogenco-ordination. [sn].U.S. Energy Information Administration - EIA - Independent Statistics and Analysis." U.S. Energy Information Administration (EIA). US Department of Energy, 7 May 2013. Web. 01 Apr. 2015. http://www.eia.gov/forecasts/aeo/mt_naturalgas.cfm.Finch, N. (2015). Emerging Markets and Sovereign Risk. New York: Palgrave Macmillan.U.S. Now World's Leading Natural Gas Producer." Desert Sun. N.p., n.d. Web. 01 Apr. 2015. <http://www.desertsun.com/story/money/industries/morrisbeschlosseconomics/2014/09/02/u-s-now-worlds-leading-natural-gas-producer/14976767/Zacks Equity Branch. (2015, February 2). Methanex's (MEOH) Q4 Earnings Beat Estimates, Sales Miss - Analyst Blog. Retrieved from Yahoo :https://finance.yahoo.com/news/methanexs-meoh-q4-earnings-beat-145002618.html Zacks.com (2014, February 03). Methanex Swings to Profit in Q4, SHares Up-Analsyst Blog. Retrieved from nasdaq: http://www.nasdaq.com/article/methanex-swings-to-profit-in-q4-shares-up-analyst-blog-cm323001http://www.worldvisioncapacitacion.cl/wp-content/uploads/2011/03/Logos-Methanex-Azul.jpghttp://www.michaelnichols.org/wp-content/uploads/2013/07/work-for-team-or-family.jpghttp://ggdub.com/wp-content/uploads/2012/05/raw.gifhttp://wolberts.com/wp-content/uploads/2014/12/ask-the-right-questions.jpghttp://forefront-resources.com/wp-content/uploads/2012/02/consulting.jpg