Rio Alto International RXI CN
December 14, 2002 - 5:39pm EST by
2002 2003
Price: 0.64 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 54 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Rio Alto International (RXI CN or RXI) is a spin off merger security. In mid 2002, Rio Alto Exploration (RAX) merged with Canadian Natural (CNQ) in a C$1.5 billion merger. In the merger, RXI was spun off to shareholders.
Rio Alto Resources International Inc. is a new independent Canadian oil and natural gas company based in Calgary, Alberta. The Company is engaged in the exploration, development, production and acquisition of crude oil and natural gas reserves, primarily in the South American countries of Ecuador and Argentina. The company's operations are currently comprised of holdings in the Oriente Basin of Ecuador and the San Jorge Basin of Argentina. At present, 100 percent of the production stream is crude oil.

In Ecuador, the company is actively involved in completing a contractual work program consisting of four directional oil wells, and facility and well optimization projects through early 2003 on the producing Tiguino Block. The Company is currently investigating the technical and economic viability of the northern Charapa Block, and is assessing additional acquisition and participation opportunities in this prolific oil basin.

In the San Jorge Basin, the company has implemented a large waterflood project across the Bella Vista Oeste oil pool and is integrating well and 3-D seismic data over the rest of the concession to high grade the additional exploration and development potential on the block.

As of 9/30/02, the company has $6.7 million in cash and no debt. The market cap is C$54 million. In the most recent quarter, the company generated C$9.5 million of cash flow from ops. For the second half of 2002, Rio Alto International is targeting average crude oil production of 7,500 - 8,000 barrels per day and cash flow of C$15 - 20 million (cap ex of $20-25 million). RXI has 84.233 million shares outstanding. Book value for the company is C$134 million. So here we have a company trading at a very large discount to book and approximately 2x cash flow. Note: all the prior numbers are in Canadian dollars.

The price is depressed due to the lack of coverage and the selling pressure from the arbs who received this stock in the C$1.5 billion merger. Also, because of the company's operations in Ecuador and Argentina, there is currently a lack of interest.

However, what shareholders are overlooking is the following:
1) The Company has recently started exploring opportunities in the Western Canada. The Board has extensive relationships (all are formerly from Rio Alto Exploration) and in the most recent 10q the company announced it had initiating a farm in arrangement in western Canada. The Company is likely to develop additional opportunities in Canada.
2) Management has options for 7.72 million shares at C$.65 per share. These options have a 3 year term & vest after 3 years. Management is very experienced and professional. Ian Towers is the President & CEO. Previously he was a VP at Rio Alto Exploration. The Board features Rick Cones and Bob Shaunessey, the two leaders who build Rio Alto Exploration into a C$1.5 billion company.
3) Prior to the spin off, 8.3 million shares were issued to Canadian Natural at C$1.90 per share.
4) According to Rider Scott who does valuations on oil and gas assets, the net asset value of the company's proved reserves at a 10% discount rate is C$1.48 per share or C$125 million. At a 20% discount rate the proved reserves are valued at C$1.24 per share or C$105 million.
5) The company has a normal course issuer bid for 9.9% of the outstanding shares. As of 9/30, no shares had been repurchased.


In my view, this stock will trade up as the company develops additional opportunities in Canada or finds additional oil in the existing wells in South America. Downside is protected by the Net Asset Value of $1.25-$1.48, as these assets are readily saleable (at some modest discount to NAV) to other multinational firms also operating in Argentina/Ecuador.
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