Methanex is on the cusp of achieving a major milestone. Its G3 methanol plant in Louisiana is finally coming online, promising increased production capacity and a huge boost to cash flow. But a deeper dive into the Q1 2024 earnings call transcript reveals a potential ticking time bomb: a cryptic accounting maneuver that could mask a surge in operating costs and send shockwaves through Methanex’s financial performance.

The issue revolves around the “tailwind” on Methanex’s cost structure experienced in Q1, directly tied to the $25 price per tonne surge in methanol prices. Rich Sumner, President and CEO, attributes the tailwind to the lower cost of produced and purchased inventory carried over from the previous quarter, Q4 2023. Essentially, the cost of goods sold in Q1 was based on lower methanol prices from the prior period, resulting in a temporary cost advantage.

While this explanation seems logical at first glance, the sheer magnitude of this “tailwind” raises red flags. Sumner estimates the positive impact on Q1 EBITDA to be a staggering $10 million to $20 million. This implies that Methanex is holding an unusually large amount of produced and purchased inventory, enough to significantly impact its cost structure for an entire quarter.

This raises a series of critical questions. Why is Methanex carrying such a large inventory buffer? Is it related to the G3 startup and the need to ensure a smooth supply chain transition? Or does it point to a deeper issue, perhaps weaker-than-expected demand or a deliberate attempt to manipulate costs ahead of the G3 launch?

Here’s where things get even more intriguing. In the Q4 2023 call, Methanex confidently stated their plan to have the G3 plant operating at full rates by the end of February 2024. Now, in the Q1 2024 call, they are still building produced inventory as G3 ramps up, with Q2 being touted as a more representative quarter for “run rate production and cash flow capability.”

This delay, coupled with the massive inventory write-up in Q1, paints a concerning picture. It's possible that Methanex is encountering unforeseen operational issues with G3, leading to a slower-than-expected ramp-up and the need to accumulate inventory. This would explain the need for the large inventory buffer and the delay in achieving full production.

The financial implications of this hypothesis are significant. If G3 is experiencing operational hiccups, it could lead to higher-than-expected startup costs, ongoing inefficiencies, and a prolonged period of lower profitability. This could derail Methanex's plans for debt repayment and shareholder returns, potentially impacting their share price and investor confidence.

Furthermore, the lack of transparency regarding the inventory situation raises questions about Methanex's accounting practices. While the tailwind explanation is technically valid, it could be seen as a way to mask underlying cost pressures and present a more favorable financial picture than reality. This lack of transparency could erode investor trust and create uncertainty about the company's true financial performance.

Projected vs. Actual Equity Production (Tonnes)

The below graph shows the discrepancy between Methanex's projected equity production and the actual production figures based on earnings call transcripts.

Methanex investors should pay close attention to the inventory situation and the G3 ramp-up progress in the coming quarters. The $10 million to $20 million tailwind in Q1 could be a one-time anomaly. However, if it persists or is accompanied by further delays in G3 reaching full production, it could signal a serious cost issue that could have a significant impact on Methanex's financial performance and its ability to deliver on its promises to shareholders.

"Fun Fact: Did you know that Methanex owns a majority stake in Waterfront Shipping, a company with a fleet of specialized methanol carriers? These ships play a crucial role in Methanex’s global supply chain, efficiently transporting methanol to customers worldwide."