REX American Resources Corporation
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Greetings, and welcome to the REX American Resources’ Fiscal 2020 Fourth Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

[Doug Bruggeman:]

Good morning, and thank you for joining REX American Resources’ fiscal 2020 fourth quarter conference call. We’ll get to our presentation and comments momentarily as well as your question-and-answer session. But first, I’ll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today’s conference call contains forward-looking statements that involve risk and uncertainties within the meanings of the Private Securities Litigation Reform Act of 1995.

[Stuart Rose:]

Thank you, Doug. Going forward, ethanol now is currently profitable, and we’re up against a period last – COVID-related closure period last year. In terms of corn and ethanol prices, they are both up as virtually all commodities are up, and crush spreads remained challenging. DDG is up with the price of corn. The new Biden administration appears to have appointees that are favorable to the ethanol industry. RIN pricing is still – RIN pricing, although up right now, we are still waiting to see how they will treat RIN pricing.

[Zafar Rizvi:]

Thank you, Stuart. As I mentioned in the last three calls, 2020 started in a challenging environment due to the COVID-19 pandemic. We temporarily shut down our plants during the first and part of the second quarter and we struggled to find corn for our NuGen facility. We saw a decrease in the fuel demand and that negatively impacted the ethanol industry. During the third quarter, condition improved. We received a steady flow of corn at both of our majority-owned as well as a minority-owned location. This resulted in improved crush margin and a very profitable third quarter. These improved conditions continued through the beginning of the fourth quarter. Later we began to see a decline in the crush margin in addition to the price of ethanol failed to keep up with increase in corn price. Farmers lost interest in selling their corn because they were receiving a direct payment from the federal government under the CARES Act. When China stepped up its corn price – stepped up its corn purchases, that led to the higher corn prices. Behind these factors, we experienced political uncertainty and trade disputes. In addition, the EPA continue to consider and grant small refinery exemption from RFS compliance year. We expect the crush margin in the near future to continue to be under pressure, but we also expect it to improve once the threat of COVID-19 declines with the progress in vaccination and people began to drive more again. March 9, report of the USDA showed that carry-out stayed at 1.5 billion bushels with export at 2.6 billion bushels. The estimated corn yield is 172 bushels per acre and ethanol plants are expected to consume approximately 5 billion bushels in 2021 crop year. Export of the distiller grain in 2020 was approximately 10.96 million tons compared to 10.8 million in 2019. We saw considerable improvements in export during the last quarter of the year. January 2021, Mexico, South Korea and Indonesia were the top three importers in January 2021.

[Stuart Rose:]

Thank you, Zafar. In conclusion, the economy is starting to open up. We have great plans, great people, great locations. We have high hopes that when the economy does open up that our business will improve as demand improves. Most importantly and the biggest thing that we have going forward is our people. They’ve stuck with us through thick and thin. And they are what we feel makes a difference and what separates us from the rest of the industry and who will continue to allow us to outperform the industry.

[Operator:]

Thank you. Our first question comes from the line of Jordan Levy with Truist Securities. Please go ahead.

[Jordan Levy:]

Good morning, all, and nice quarter against a pretty challenging backdrop on the macro front. Maybe if we could just start on the carbon capture side, you kind of – you guys provided an update on the Illinois program. Maybe could you just talk to the potential you see, we’ve seen some private companies and whatnot announced projects around large scale carbon capture pipelines and sequestration facilities. Could you just talk to how you’re viewing that market potential outside of the University of Illinois project and that’s something that’s of interest?

[Stuart Rose:]

Zafar?

[Zafar Rizvi:]

Yes. I think, as you know, that there is some going something also is happening in North Dakota, Wyoming and some other area, but we are working with the University almost over a year. And we have the land and we know exactly where we will be drilling, and we are evaluating all those things. So we seem to be ahead of most of other people who are at the stage. It takes approximately two – from start to end, it takes about two to three years before you really able to drill your – before you drill your first well with this characterization well. Then you test it to make sure how much it can handle the CO2 in that area. And then you have to get the permit, which is V6 permit, and then you have to have before you start injecting. So it certainly is a long process. I can certainly see some of those, as you mentioned, pipelines are building. But I think – we think we have to have a storage first. And if we don’t have a storage, that pipeline can bring the CO2 and where exactly we are going to store that. So our thinking is, we should have a storage well and then we’ll take the next step about the pipeline. So that’s the direction we are going compared to other people who are really discussing the pipeline only.

[Jordan Levy:]

Sure.

[Stuart Rose:]

As Zafar stated, we think people are going backwards on this. They’re doing the pipeline, which – that’s nice to have a pipeline, but you could always struck CO2 in if you don’t have a hole to put it in, which we think is the most important thing. It doesn’t really mean anything. So we are working on the hole first. And assuming we can get that done, then we’ll work on the pipeline and deal with that and deal with the delivery. But if you don’t have a hole, in our opinion, you really – if you don’t have a place to store the product, you’re really not even a ground – you’re not even in the ballgame in our opinion.

[Jordan Levy:]

Yes.

[Zafar Rizvi:]

Because the permitting process alone from EPA while after you drill that and you really realize that this is the proper location and from characterization well then injection well then you – first you get the permission from the state and then need to take a permission from EPA, U.S. EPA, that takes about six months to 12 – six to 12 months. So I think that’s why it is important to start the well first so that way by the time we have well ready, the pipeline can come and bring it that too. And as I’ve mentioned previously that we have some non-binding agreement with some of the ethanol facilities in Illinois who are willing to also supply the carbon to us. So we are looking at that way to make sure we have storage facility first before we go to the pipeline side.

[Jordan Levy:]

No, I think that makes a lot of sense. Stuart, maybe a question for you and Zafar as well. I talked about – as you know, as is natural, you guys are always kind of looking at the potential ethanol plants that you could expand to and depending on the quality of the plant and that sort of thing. Could you just discuss how you see that market today versus maybe a year ago? And historically, we’ve seen some deals go across recently, some sales, some purchases on the ethanol facility side. But just curious, how you’re viewing that market?

[Stuart Rose:]

There are plants for sale right now. A lot of our competitors seem to be emphasizing other products. So there are definitely plants for sale. For us to buy one, we’d have to find something that fits our mode of operation, which is they have the best plants, good locations, good corn supply. I mean, those are fewer to find, but they potentially are out there. We’ll see what happens. It’s an interesting time because we’re probably the company that most seriously takes – that takes the ethanol industry most seriously. And we think the ethanol industry, especially if it can become close toward zero carbon industry has a huge future ahead of it. And that’s our opinion other people in the industry seem to be backing away. So we’re pretty excited about possibilities there, but you never know what will happen.

[Jordan Levy:]

And maybe just one more, Zafar, maybe for you. You talked about the crop yields and how they’re shaping up this year now that lot more corn planted this year than last year with the increase in demand. Can you just talk to the specific regions you all supply from and how you’re seeing that shape out? I know it’s early days and I’m not sure if you can get a sense of that yet, but just curious if that’s something you can comment on?

[Zafar Rizvi:]

Yes. I think, as you know, the plant is the – the corn last year was planted about 90 million acres, I think they are – I just saw the report actually from future average that were sold that it’s going to be – probably going to be flat, close to 93.6 million corn acres will be planted, that’s about 3.1% more than last year. As you know, the insurance value is close to I think $4.65 approximately somewhere. So I think we will see that certainly due to insurance value and also corn prices staying above $5 at this time and will be more acres will be planted this year even compared to last year. But certainly, we have also seen farmers’ has enough money and they are really keeping that in the storage and not bringing out there in selling. So we have seen the both things. And if you remember, last year this time also was very difficult to find the corn and then suddenly after the COVID, after planting season started, the corn was available everywhere and we can buy very cheap. So I think there is suddenly we see farmers are selling not as we like to see, but we see that this year it will be more acreage will be planted than last year, and hopefully depending on weather will be a good crop.

[Jordan Levy:]

Great. Thanks so much for the details, guys.

[Stuart Rose:]

Thank you, Jordan.

[Operator:]

Our next question comes from the line of Chris Sakai with Singular Research. Please go ahead.

[Chris Sakai:]

Hi, everyone. Good morning. Just I had a question on any – if you guys had any sort of weather-related production delays this last quarter? And if so, for how long?

[Zafar Rizvi:]

There were some delays in area, I think it was slow down as some of those plants are all around actually in South Dakota, North Dakota and somewhere in Iowa also, but that was for about maybe three to four days were slowdown. But it was not more than – because that was the supply – due to the supply of natural gas. But overall, it was not any delay.

[Chris Sakai:]

Okay, great. And as the economies reopen globally, where do you see the – I guess, the biggest country?

[Zafar Rizvi:]

Biggest country of ethanol export you mean?

[Chris Sakai:]

Yes, yes.

[Zafar Rizvi:]

I think as you can see recently, as I mentioned in prepared remarks, India will suddenly almost in January is 53.2 million gallon India jumped in. And we see always before Brazil and Canada, India was even last year in January was only 13.3 million gallons. So you can see from 33 million to 53 million. I think we see a lot of potential in India. And we have seen in China lately. China in January alone 22.7 million gallons they purchased. And we also see Canada, our neighbor. I think as you can see, they are pushing their carbon credit and even the Supreme Court just stayed the order that what Canadian government is doing to charge the carbon tax, and that will stay. So I think that all of these things we’re going to see that certainly Canada, China, India and Brazil, Brazil is slowdown because due to some of those tariffs. Hopefully Biden administration work with Brazil and remove those tariffs. I think we’ll certainly see that growing in those area.

[Chris Sakai:]

Okay.

[Zafar Rizvi:]

Even some of the Arab oil producing companies are buying it to make sure – due to the environmental reason.

[Chris Sakai:]

Okay. All right, great. Thanks.

[Stuart Rose:]

Thank you.

[Operator:]

There are no further questions at this time. I’ll now turn the call back over to the presenters for closing remarks.

[Stuart Rose:]

We thank everyone for listening to our call and we look forward to talking to you after the end of next quarter. Thank you very much.

[Zafar Rizvi:]

Bye.

[Doug Bruggeman:]

Thanks. Bye.

[Operator:]

Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.