REX American Resources: Profitability, Projects, and Policy in the Ethanol Landscape ($REX) - REX Stock Research Report

## Executive Summary / Key Takeaways * REX American Resources ($REX) maintains a position as a highly profitable and resilient operator in the volatile ethanol and by-products industry, demonstrating 19 consecutive profitable quarters driven by operational efficiency, strategic locations, and disciplined management of commodity price risk. * The company is leveraging its strong, debt-free balance sheet ($315.9 million in cash and short-term investments as of April 30, 2025) to fund significant organic growth initiatives, including a capacity expansion and carbon capture and sequestration (CCS) project at its One Earth facility, budgeted at $220 million to $230 million total. * These growth projects aim to enhance future profitability by increasing production volume and reducing the carbon intensity (CI) score of ethanol, positioning REX to potentially capitalize on federal tax credits (45Q and 45Z) and future markets like sustainable aviation fuel. * Execution of the growth strategy faces significant regulatory hurdles and timeline uncertainties, particularly concerning EPA Class VI injection well permits, state-level CO2 pipeline regulations, and the finalization of federal tax credit rules (45Z). * REX actively returns capital to shareholders through a share repurchase program, acquiring 822,000 shares for $32.7 million in Q1 2025, reflecting management's view of the stock's value relative to its underlying assets and future prospects. ## A Disciplined Operator in a Volatile Market REX American Resources Corporation, tracing its roots back to 1980 and evolving from a retail business to a focused player in the ethanol and by-products sector, has carved out a distinct identity in a commodity-driven industry known for its boom-and-bust cycles. Unlike many peers, REX has consistently demonstrated a remarkable ability to generate profits, marking its 19th consecutive profitable quarter in Q1 fiscal year 2025. This track record is not merely a function of favorable market winds but a testament to a disciplined operational approach, strategic asset positioning, and astute management of complex commodity dynamics. The company's core business revolves around producing ethanol and valuable co-products – dried distillers grains (DDGs), modified distillers grains (MDGs), and distillers corn oil – primarily from corn. REX holds majority ownership in two consolidated ethanol facilities, NuGen Energy in South Dakota and One Earth Energy in Illinois, alongside an equity method investment in Big River Resources. Success in this segment hinges on managing the "crush spread," the difference between the price of ethanol and co-products and the cost of corn and natural gas inputs. This spread is notoriously volatile, influenced by factors ranging from crop conditions and weather to global trade policies and energy markets. \ REX's operational excellence is rooted in its efficient plants located in prime Corn Belt regions and a management team, led by CEO Zafar Rizvi, known for its granular attention to market movements and cost control. While the underlying dry-mill ethanol production process is standard across the industry, REX's differentiation lies in optimizing every aspect of the operation – from corn procurement and energy usage to product marketing and logistics. This focus on efficiency and cost management allows REX to maintain profitability even when market-wide crush spreads are thin. In the first quarter of fiscal year 2025, REX reported consolidated net sales and revenue of $158.34 million, a slight decrease from $161.23 million in the prior-year quarter. Gross profit saw a marginal dip from $14.45 million to $14.34 million. This performance reflects mixed commodity price movements: ethanol selling prices increased by 10%, partially offsetting a 5% decrease in sales volume, while DDG prices fell sharply by 22%, coupled with a 6% volume decrease. The decline in DDG revenue was partially mitigated by a significant 52% increase in modified DDG sales volume, although at a lower average price. Cost of sales decreased by 2%, primarily driven by lower corn costs, which accounted for approximately 74% of the cost of sales in Q1 2025. Selling, general, and administrative expenses decreased slightly, benefiting from lower bonus and stock compensation expenses, though partially offset by higher rail car lease costs. Interest and other income decreased, mainly due to lower interest earned on cash balances and reduced patronage income from a cooperative investment. Despite these fluctuations, the company delivered net income attributable to REX common shareholders of $8.68 million, or $0.51 per diluted share.

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\ This ability to remain profitable despite commodity price headwinds, particularly the significant drop in DDG prices, underscores REX's operational resilience and management's capacity to adapt to changing market conditions. ## Strategic Growth and Technological Evolution REX is not content to simply weather market cycles; it is actively investing in organic growth initiatives designed to enhance its long-term profitability and competitive positioning. The cornerstone of this strategy is centered at the One Earth Energy facility in Illinois, where the company is pursuing a significant capacity expansion and a transformative carbon capture and sequestration (CCS) project. The One Earth plant is undergoing an expansion to increase its ethanol production capacity from 150 million gallons per year to 175 million gallons per year, with plans to seek further permitting to reach 200 million gallons per year. This expansion, which involves a technical review of key components to enhance long-term operational efficiencies, is now expected to be complete by the middle of 2025, a revised timeline due to delays in equipment delivery. Once operational, the increased capacity is expected to provide additional earnings power from a highly efficient facility. Concurrently, REX is developing a carbon sequestration project at One Earth, aiming to capture CO2 emissions from the ethanol production process and inject them underground. While the core ethanol production is a mature technology, the integration of CCS represents a significant technological advancement for REX, positioning it at the forefront of efforts to decarbonize the biofuel industry. The capture and compression facility construction is substantially complete. The strategic intent is clear: by reducing the carbon intensity (CI) score of its ethanol, REX aims to qualify for federal tax credits established by the Inflation Reduction Act (IRA), specifically Section 45Q for carbon sequestration ($85 per metric ton sequestered) and Section 45Z, the Clean Fuel Production Credit ($0.02 per ethanol gallon per CI point reduction below a 50 CI score threshold, available 2025-2027). The company is actively working to identify ways to further reduce its CI score, including through the plant expansion construction itself, to maximize these potential credits. As of April 30, 2025, REX had invested $122.7 million into the One Earth expansion and CCS projects combined, against a total budgeted amount of $220 million to $230 million. The company plans to spend an additional $60 million to $80 million on these projects during the remainder of fiscal year 2025, funding all expenditures from its available cash. This significant investment underscores the company's commitment to these initiatives and its confidence in their long-term value proposition.

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\ Beyond One Earth, REX's 99.7% owned NuGen facility in South Dakota has signed an agreement to potentially participate in Summit Carbon Solutions' CCS pipeline project. This highlights REX's broader strategic interest in carbon capture across its portfolio, although the NuGen project's success is contingent on Summit obtaining necessary permits, a process complicated by a recent South Dakota law banning eminent domain for CO2 pipelines.

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\ The company also sees potential future growth avenues in sustainable aviation fuel (SAF) and providing third-party carbon sequestration services, leveraging the infrastructure and expertise developed through the One Earth project. ## Competitive Landscape and Positioning REX operates within a competitive U.S. ethanol market alongside larger, more diversified players like Archer-Daniels-Midland (TICKER:ADM) and Valero Energy (TICKER:VLO), and other focused ethanol producers like Green Plains (TICKER:GPRE). While precise market share figures for all competitors are not always readily comparable across different reporting structures, REX is generally considered a mid-sized producer, holding around 3% of the market. Compared to giants like ADM and VLO, REX lacks their scale, extensive infrastructure (refineries, broader agricultural/energy supply chains), and diversification. ADM benefits from an integrated supply chain and a wide range of agricultural products, while VLO leverages its refining network for blending and distribution. These larger players can sometimes achieve higher throughput and potentially exert pricing pressure. However, REX differentiates itself through superior operational efficiency and a consistent focus on profitability, which has allowed it to avoid losses over the past decade, a feat not consistently matched by all peers, including GPRE, which has experienced volatility and occasional losses. REX's financial metrics, particularly its profitability margins, appear competitive, and in some periods, superior to those of its peers. TTM data shows ADM, VLO, and GPRE with lower gross, operating, and net margins than REX's TTM figures (14.24% Gross, 10.00% Operating, 9.05% Net for REX TTM), this comparison should be viewed with caution due to potential differences in fiscal year ends and reporting segment details. However, REX's consistently stated focus on profitability and its track record of profitable quarters lend credence to its claim of operational outperformance within its niche. A key competitive advantage for REX moving forward is its proactive investment in carbon capture and CI reduction technologies. While other players are also pursuing these initiatives, REX's One Earth project is relatively advanced, with the capture and compression facility substantially complete. If successful in obtaining permits and qualifying for 45Q and 45Z credits, REX could gain a significant cost advantage and potentially command a premium for its low-carbon ethanol, differentiating it from producers with higher CI scores. This technological edge, coupled with its strong balance sheet (zero bank debt compared to moderate debt levels for ADM, VLO, and GPRE), provides REX with strategic flexibility and resilience. However, REX's smaller scale makes it more susceptible to commodity price swings than diversified players. Its reliance on corn as a primary feedstock exposes it to agricultural market volatility, and its dependence on export markets for ethanol and DDGs makes it vulnerable to international trade policies and tariffs. The competitive landscape is also evolving with the rise of alternative fuels and technologies like electric vehicles, which could impact long-term demand for ethanol. ## Outlook and Regulatory Headwinds REX's outlook is cautiously optimistic, underpinned by expectations of continued profitability in its core business and the potential upside from its growth projects. Management expects stable performance in Q2 2025 and another profitable result, citing favorable market conditions, including strong ethanol exports (up nearly 19% through March 2025 compared to the prior year) and expectations for a robust corn harvest leading to favorable input pricing. The key drivers for future growth and enhanced profitability lie in the successful execution and regulatory approval of the One Earth expansion and CCS projects. The expansion to 175 million gallons per year is on track for mid-2025 completion, with the potential to reach 200 million gallons per year thereafter. The CCS project, however, faces significant timeline uncertainties primarily due to the lengthy and complex permitting process for Class VI injection wells by the EPA. The EPA's projected timeline for a final permit decision has shifted multiple times, most recently extended to April 2026 according to the latest 10-Q, though management mentioned a January 2026 projection in the Q1 2025 call, highlighting the fluid nature of the process. State-level regulations, such as the Illinois moratorium on CO2 pipeline construction and the South Dakota eminent domain law, also add layers of complexity and potential delay. The potential benefits from 45Q and 45Z tax credits are substantial but contingent on regulatory clarity. The U.S. Department of the Treasury has not yet issued final rules for 45Z qualification, and proposed amendments to the IRA in Congress could impact these provisions. The USDA's interim rule on Climate-Smart Agriculture practices for 45Z feedstock is also subject to final resolution. While 45Q is legislatively set at $85/ton and offers direct pay options, the ability to utilize it depends on the CCS facility becoming operational. The uncertainty surrounding 45Z rules and its limited availability period (2025-2027) adds risk to the projected benefits. Management is closely monitoring these policy developments, acknowledging that many outcomes are outside their control but emphasizing their preparedness to respond. They view recent Illinois legislation regarding the Mahomet Sole Source Aquifer as positive, as their proposed injection wells are located outside the defined restricted area. Financially, REX remains in a strong position to fund its planned capital expenditures for the One Earth projects ($60 million to $80 million remaining in FY2025) from its substantial cash reserves. The company's commitment to returning value to shareholders is evident in its active share repurchase program, with 1.18 million shares remaining authorized for buyback as of April 30, 2025. ## Risks to the Investment Thesis Despite its strengths and growth initiatives, REX faces several material risks. The most significant include: * Commodity Price Volatility: Fluctuations in the prices of corn, natural gas, ethanol, and by-products directly impact profitability. While REX has demonstrated resilience, prolonged unfavorable crush spreads could pressure margins. * Regulatory Uncertainty and Delays: The timelines and ultimate success of the One Earth CCS project are heavily dependent on obtaining necessary permits (EPA Class VI, state pipeline) and the finalization of federal tax credit rules (45Q, 45Z). Delays or unfavorable rule changes could significantly impact the project's economics and timeline. State-level legislative actions also pose risks. * Project Execution Risk: While construction of the capture and compression facility is substantially complete, the successful integration and operation of the full CCS system, along with the plant expansion, involves execution risks. * Market Demand Shifts: Changes in RFS II mandates, the outcome of SRE petitions, the adoption of E15, and the long-term impact of electric vehicles and alternative fuels could affect demand for ethanol. * Trade Policy: Tariffs imposed by the U.S. or counter-tariffs by export markets could negatively impact demand and pricing for ethanol and DDGs. * IRS Audit: The ongoing IRS audit related to refined coal tax credits ($58.2 million) represents a potential financial exposure. ## Conclusion REX American Resources presents a compelling investment narrative centered on a highly profitable and financially robust core ethanol business that serves as a platform for strategic, high-potential organic growth. The company's consistent profitability in a volatile industry, coupled with a debt-free balance sheet, distinguishes it from many peers. The ambitious One Earth expansion and carbon capture projects represent a significant step towards enhancing future earnings power and capitalizing on the decarbonization trend in biofuels, potentially unlocking substantial value through tax credits and new market opportunities like SAF. However, the path forward is not without considerable risk, particularly the complex and uncertain regulatory environment surrounding carbon capture permits and tax credit rules. Investors should closely monitor the progress of the EPA Class VI permit application, state legislative developments, and the finalization of 45Z guidance. While project delays are a reality, REX's strong financial position provides the flexibility to navigate these challenges and continue investing in its future. The company's commitment to disciplined capital allocation, including share buybacks when the stock is deemed undervalued, further enhances shareholder value. REX's story is one of a focused operator leveraging its foundational strengths to build for the future, making it a noteworthy consideration for investors seeking exposure to the evolving biofuels landscape with a company demonstrating a proven track record of profitability.