From grass to milk

TABLE OF CONTENTS
1. Who is Cruzdelsur......................4 2. Investing in Chile and why.........9 3. Chilterra....................................10 4. Summary...................................28

ruzdelsur is the story of six entrepreneurial farmers and farming professionals who came together to utilise their expertise, developed through the New Zealand dairy farming system. This booklet outlines the amazing journey these individuals have been through in developing a New Zealand based farming system within Chile. Within this booklet you will gain an in-depth understanding of who Cruzdelsur is, the benefits of investing in Chile, and a detailed understanding of the future of Chilterra as a leading company. This overseas journey aligns with Fonterras refreshment strategy. Fonterras strategy forecasts that the global volume demand will grow to at least 100 billion litres by 2020. Those that can adopt the New Zealand based grass production system are best positioned to capitalize on this demand, Cruzdelsur through Chilterra is one such entity.

2006

Our story...
Cruzdelsur was first established in 2006 by six New Zealand famers and farming professionals. Mike and Margaret McBeath Gary and Denise Stokes Arthur and Vicki Jones Herb and Deedee Smith Douglas and Petronella Paul Elwyn and Sharmain Firth The purchase of El Huite brought in nine shareholders. Peter and Karen West Edward Bain and Eileen McQuade Donald and Angelique Riddell Mark and Janet Bourne Waibury Chile Limited Partnership Eric Spencer Stuart and Lynette Chapman Te Kumu Estates Limited Thomas and Barbara Newlove additional

2007

2008

With El Huite under development and the purchase of La-Montana, a sub investment category Fortuna was establishment. Fortuna Shareholders: Paul and Patricia Jones Paul, Andre, and Janine Hickson Walter and Janet Tye William and Marianne Tye

2011

Fortuna merged with Cruzdelsur creating an entity with 19 shareholders.

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Directors of Cruzdelsur Ltd

Arthur Jones, Chairman
Arthur has developed his family dairy farming business since he left school and has now transformed it into a thousand cow operation over two properties at Ngatea. Arthur is a board member of a Kiwifruit operation near Te Puke and was one of the initial members of Chilterra. He is one of the founders of Cruzdelsur where he currently acts as chairman. He has an active role in the running of Cruzdelsur and makes regular visits to Chile.

Gary Stokes, Technical Adviser, Director

Gary spent the first eight years of his working life as an electrician both in New Zealand and England. Upon returning to New Zealand in 1991 Gary pursued a career in dairy farming. That career choice has taken him through a number of positions in the dairy industry including dairy farm leasing, sharemilking and farm ownership. Gary currently has a 440 cow sharemilking position near Hamilton and is involved in the day to day running of Cruzdelsur, both from his office in New Zealand and on regular visits to Chile. Garys input into Chilterra ranges from farm management to financial reporting and analysis. Gary has been involved with the development and trialing of farm automation and software.

Andre Hickson, Director

Andre actively manages his family trust investments in dairy farming and kiwifruit at Pongakawa, east of Te Puke. He attended Lincoln College and graduated in economics, marketing and horticulture science. He lasted a year behind a desk in Wellington before he became a farmer and is now also a director of Trevelyans Growers Limited.

Craig Nevatt, Director

Craig is the Financial Controller for Sredle New Zealand Limited, the largest New Zealand investor in Chilterra. Craig is a Chartered Accountant who joined Sredle in November 2005 after spending 11 years working for PricewaterhouseCoopers in both Palmerston North and Auckland in a variety of roles, including 18 months as a Manager in the Business Advisory Services Team in Auckland. During his time with Sredle Craig has been heavily involved in the governance and financial management of Sredles 1200 cow dairy farm located in Dargaville, New Zealand. Through this role Craig has developed a significant understanding of the on farm drivers of a financially successful dairy farm.

Glenn Holmes, Director

Glenn is Chairman of the Board of Waibury Farms Group, a large syndicate of dairy farms which are situated predominantly in North Canterbury, New Zealand. He has been an investor in Waibury since its inception in 2000. His role is predominantly that of governance, but he does have involvement in project work for the Group. His previous work experience was as a rural banker for 20 years in the Waikato, and prior to that as a farmer. Glenn is a director of several farm companies and recently completed an extended course in governance training through Fonterra Co-operative Group. Furthermore Glenn is Chairman of the Board of a charitable foundation in Hamilton, NZ, and serves as trustee of several private trusts.

Mark Holland, Director

Mark is Managing Director of Waibury Farms Group, a large syndicate of dairy farms situated predominantly in North Canterbury, New Zealand. Waibury is a stakeholder in Cruzdelsur Ltd. As the founder of Waibury, Mark has also been an investor in the Waibury Farms Group since it began in 2000. His role is predominantly managing farm operations, finance and guiding the equity managers on each of eight dairy farms. Waibury currently milks 7800 cows and produces 3.36 million KgMS. Marks work experience prior to Waibury was dairy farming on larger scale properties in the Waikato. The formation of Waibury Farms Group enabled Mark to develop and grow a farming enterprise through dairy conversion and growth in milk production from good management practices.

Company Structure
Cruzdelsur 47% Cruzdelsur

Chilean 3 Chileans 53% Partners

Chiwi Chiwi
Cruzdelsur ownes Chiwi which holds the shares in Chilterra

Key Drivers of Dairy Demand

Total world production of milk is approximately 657 million tonnes of which 7%, or 46 million tonnes is traded internationally. International demand for dairy products is expected to grow by 13 million tonnes of milk on average a year. A significant portion of this is expected to be met by the export market. Key drivers of dairy demand are: - Rising income per capita in non-OECD countries - Urbanisation and the associated changes in diets and tastes in Asia - Increasing presence of western retail chains in Asian countries - Population growth expanding the consumption base - Dissemination of belief in the health benefits of dairy based products - Increased oil revenues in Middle Eastern and South American countries

Investing in Chile and why

New Zealand
Over the last 18 years significant productivity gains have been experienced within the New Zealand dairy industry. Some of the key benefits of the New Zealand farming system which have driven these productivity gains are: Key benefits of New Zealand farming system: - Seasonal milk production - High genetic worth plants and animals - Good soil fertility - Temperate climate favours pasture growth - Intensive pasture management and animal nutrition - Paddock subdivision and water reticulation - High stocking rates - Large scale, sophisticated operations - Good information systems - Ability to produce grass The opportunity to invest further in the New Zealand dairy industry is becoming limited due to increasing land prices, high levels of utilization of land resources. There is however, a significant opportunity to utilize New Zealand farming expertise overseas to increase productivity in other countries with similar climates.

Chile

In comparison to New Zealand dairy farming Chile has its own unique benefits to offer. Key benefits of investing in Chile: - Comparatively low land prices - Seasonal milk production - Climate similar to New Zealand which is optimal for pasture growth - Low cost of labour - Ability to increase production with the implementation of New Zealand farming practices

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Chilterra History
2006 Chilterra S.A. (Chilterra) was formed in January 2006 when Ricardo Pohl Rios decided to pursue his vision of owning a large scale dairy operation in the Valdivia / Osorno region in the south of Chile. The Rios family had been involved in the dairy farming industry on a small scale for 15 years operating a 209 Ha farm called Santa Laura near Paillaco. During this period Ricardo had become interested in New Zealand dairy farming systems which he considered far superior to the traditional Chilean dairy farming systems. Initially the Rios family purchased a second established 200 Ha dairy farm, San Jose which was also located near Paillaco and began to implement a New Zealand dairy farming system. Realising that for his vision to become a reality Ricardo needed joint venture partners with New Zealand dairy farming experience he set about attempting to attract New Zealand dairy farming investors who believed in his vision. Ricardo made contact with Mike McBeath a New Zealand based farm consultant who was regularly visiting southern Chile as the farm consultant for the Soprole dairy farms in the region seeking New Zealand investors. Mike joined forces with a Waikato, New Zealand based dairy farmer Gary Stokes, who had an interest in investing in dairy farming offshore. Mike and Gary formed a New Zealand based joint venture along with three other investors, including Soprole farm manager Herb Smith. The New Zealand joint venture called Cruzdelsur then invested with Ricardo and his family forming Chilterra S.A. The Chilean / New Zealander joint venture commenced in January 2006 when Chilterra purchased 385 Ha of undeveloped land near Osorno, which was to become known as Los Radales 2007 With development underway at Los Radales the next purchase was a 2,700 Ha block of undeveloped land near Los Largos in early 2007, called El Huite. With the purchase of El Huite Chilterra brought in two more Chilean share holders and nine more New Zealand shareholders through Cruzdelsur. 2008 - 2010 2008 saw the purchase of La Montana. 2011-2012 The number of operational dairy farms now totals six, operating on 1,590 effective Ha. In the 2011 / 2012 season Chilterra milked approximately 4,000 cows, at an average stocking rate of 2.5 cows per Ha, with a target of producing 13.3m litres of milk.

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Competitive Advantage of Chilterra

The unique combination of Chilterra shareholders offers a wide range of benefits Key benefits of Chilterra: Knowledge of the Chilean Culture Ability to negotiate with Chileans Experience to work with Chileans Network of Contacts in Chile Knowledge of best practice dairy farming systems Capital (Banks, others) Network of Contacts in New Zealand

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Santa Laura/ Santa Genova

Santa Laura was the first farm purchased by Ricardo in his quest to establish a large scale dairy farming company specialising in New Zealand dairy farming systems. When the property was purchased in 2005 it was a 225 Ha property with 150 effective Ha milking through a 24 aside herring-bone dairy shed. Ricardo purchased an adjacent 185 Ha which was slowly brought into the Santa Laura platform. Upon the commencement of Chilterra Santa Laura was sold into the joint venture by Ricardo and continued to operate under the New Zealand dairy farming model previously implemented by him. In late 2007 an opportunity arose to purchase a further 30 Ha adjacent to the existing property. This purchase increased the size of Santa Laura to a point where it was possible to divide the farm into two units of approximately 220 Ha each. All of the irrigation system remained part of the Santa Laura property. The irrigation and higher stocking rate allows Santa Laura to carry up to 620 Cows or 2.9 Cows per Ha in the 2011/2012 season. Development of the new unit, named Santa Genova commenced soon after the decision was made to split Santa Laura into two units. A new 36 aside herring bone was constructed along with a feedpad, calf shed, and implement / hay sheds. The property was re-raced and the fencing upgraded to cater for the higher stocking rates Chilterra are aiming to implement. Santa Genova became operational in October 2009 and completed the 2009 / 2010 season milking 380 cows. The stocking rate for the 2011/2012 season has since risen to 450 cows.

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San Jose
San Jose located at Paillaco is the former 225 Ha family dairy farm of Ricardo Rios and his father. The Rios family originally purchased the property in the early 1990s and operated it utilising Chilean dairy farm systems. At present 175 Ha is leased from Ricardos father Richard and 50 Ha is owned by Chilterra. San Jose was converted to a New Zealand based dairy farming system immediately upon the establishment of Chilterra in 2006, and in the winter of 2008 a significant upgrade was undertaken. The existing dairy shed was re-furbished and extended to become a 36 aside Herring-bone and a new calf shed was constructed. The re-furbished dairy shed was opened in early October 2008 and milked 370 cows for the remainder of the season. The stocking rate has since risen to 450 cows.

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Los Radales
The first acquisition by Chilterra occurred in January 2006 when 385 Ha of undeveloped land was purchased near Osorno. This farm became known as Los Radales. The development of Los Radales was the first major undertaking for Chilterra with significant work being required to mulch the scrub covering the land, sow pastures, fence, and construct a 54 bail rotary dairy shed along with accompanying facilities, houses, and roading / races. The development process was completed during 2008 with Los Radales commissioned and becoming operational in time for the 2008 / 2009 season. It milked 700 cows at the peak of the first season. At the end of the 2009 / 2010 season the property was attacked by grass grub. 100 Ha of pasture was resown in the Spring of 2010 to eradicate the grass grub. Accordingly the milking herd for the 2010 / 2011 season was reduced to 500 cows. The 2011/2012 season saw 750 cows being milked at Los Radales.

March 2006 March 2006 March 2006

March 2008 March 2008 March 2007

March 2007 March March 2007 2008

March 2009 March 2011 March 2011

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El Huite
In early 2007 Chilterras largest land purchase took place with the acquisition of a 2,700 Ha block of undeveloped land near Los Largos, called El Huite. Three subsequent purchases of land surrounding the existing block have now lifted the total land at Huite to 3,146 Ha. The initial land was mostly covered in scrub, and development commenced immediately. The first goal was to remove the scrub through mulching as soon as possible to convert the land into productive pastures. A good portion of the mulching was completed by the winter of 2008 and a total of 500 Ha was planted in pasture. El Huite served as a winter grazing unit in 2008, wintering 3,000 cows and heifers. A lack of sub-division and quality cattle yards presented unique challenges and created a substantial amount of additional work for everyone involved throughout the winter. Mulching continued throughout the summer of 2008/2009 clearing approximately 1900 Ha of land, of which now 1400 Ha is in pasture. Construction of roads and a drainage system throughout the property is on going with the material extracted to create the drains being utilised as materials in the construction of the roads. The boundary of the entire property has been fenced and the only access is via locked gates at both ends of the property. Individual farm boundaries have been fenced where mulching and grassing has been completed but the sub-division of the farms will occur as each individual unit is finished and becomes productive. El Huite is going to be divided into eight dairy units of approximately 300 Ha each and one grazing / support block. The construction of a 48 aside Herring-bone dairy shed on El Huite One commenced during the summer of 2008 / 2009. Along with internal races, paddock sub-division, water supply and housing the construction of the cowshed was finished in time for El Huite One to milk 600 cows in the 2010 / 2011 season. In 2011 / 2012 El Huite One utilised the surrounding land on El Huite Two and El Huite Three to milk 1000 cows, whilst the second dairy shed on El Huite Two was constructed ready for operation in the 2012 / 2013 season. The remainder of the land in pasture will be utilised for the grazing of young stock, winter grazing for cows, and cut for silage for supplementary feeding until such time as each farm is completed ready for operation as a milking platform. The speed of development will be controlled in the main by the speed at which the total Chilterra milking herd can be increased in size via natural growth.

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La Montana
In late 2007, Chilterra agreed to assist another group of New Zealanders called Fortuna to enter the Chilean dairy farming industry through the purchase of La Montana a 206 Ha productive dairy farm situated near Los Largos. It was agreed that Chilterra would receive a minority shareholding in La Montana and would be engaged to manage the development and day to day operations of the farm. The first course of action was to construct a 36 aside Herring-bone dairy shed to replace the 9 aside Herring-bone which would not be suitable for milking the 50 plus cows planned for the property. Whilst the construction of the new dairy shed was taking place the existing races, water supply, and fencing were upgraded to cope with the increased stock rate. A new concrete feedpad was also constructed. The new dairy shed was opened in late September 2008 to the relief of the staff who had been milking 300+ cows through a 9 aside Herring-bone twice-a-day for the first three months of the season. La Montana milked 390 cows for the remainder of the 2008 / 2009 season. The stocking rate has since risen to 500 cows for the 2011/2012 season. It was agreed in early 2009 that La Montana would be purchased by Chilterra and the shareholders of La Montana would become minority shareholders in Chilterra and have subsequently become part of Cruzdelsur.

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Farm location maps

Temuco

Valdivia

Los Lagos Paillaco

Osorno

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La Montana

Santa Laura/ Santa Genova

El Huite

Los Radales

San Jose

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Economics of Dairy Farm Development

Chilean dairy farming is underdeveloped by New Zealand standards Small herds average 80 cows (NZ 324) Grass based with supplements at shed Little or no reticulated water Cows milked all year round - Farms can be acquired and developed for less than half of the cost of New Zealand dairy farms - Productivity comparable to New Zealand is likely to be achieved - Chilean milk payout at $6.20 /kg of milk solids is similar to New Zealand $6.70 /kg of milk solids forecast for 2012.

900 kg/ha 4500 lt 4.042 lt 3.574 lt 2.907 lt 397 kg/ha 862 kg/ha

207 kg/ha

Solids/ha Milk/cow

Solids/ha Milk/cow

Solids/ha Milk/cow

Solids/ha

Milk/cow

Chile

Prolesur Proveedores

Chilterra

NZ

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Figure one: Indicators of production- Chile Vs New Zealand

Investment Case
Soft commodity theme Land value arbitrage
- Chilean milk price increased from 120 pesos to 200 pesos per litre between Dec 2006 and May 2012 - Record prices are due to changes in underlying demand and supply constraints - Prices may ease over a short time frame but a fundamental change is apparent in the supply/demand balance long term

- Significant land price differential between New Zealand and Chile - Chile is land highly responsive to New Zealand farming practices - Increase dairy yield and efficiency per hectare will result in land value appreciation

Proven concept

- Groundwork since 2006 to establish track record - 4500 hectares acquired, 3800 re-grassed, 3800 milking cows and six cowsheds - Original model evolving as assumptions are proven

Highly scaleable

- Solid platform for expansion has been laid - Multiple options for extending the business model - No significant constraints on land and development labour

Management expertise

- Long term commitment from the management team - Proven track record of the management team by achieving a budget or above for the last three years 2009,2010,2011

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Production graph for the last 5 years

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The Future
In the short term the New Zealand and Chile based
shareholders of Chilterra intend to continue to develop the unproductive land owned by Chilterra into productive dairy units. In addition they will seek to implement improvements to the dairy farming systems employed by Chilterra based on the lessons learned in prior seasons to improve productivity on all farms. Achieving these goals will increase both the cash and capital returns for all shareholders. It is intended that during this period of further development and fine tuning that the shareholding of Chilterra should remain relatively closed with the costs of development to be funded by cash flows from existing farms, bank debt or further shareholder investment.

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Directors of Chilterra
Ricardo Pohl Rios, General Manager, Director
Ricardo is a Civil Engineer by trade who has spent 20 years working as a Computer Engineer. Since 1992, Ricardo has been a part owner in a dairy farm in the South of Chile. During this period Ricardo has been involved part time in the development of the farm and has spent considering time studying New Zealand dairy farming systems. Since the formation of Chilterra, Ricardo has ceased working as a Computer Engineer and has moved from Santiago to Valdivia to manage Chilterras day to day operations on a full time basis.

Michael McBeath, Operations Manager, Director

Mike has been in involved with the rural sector in New Zealand since completing a Diploma of Sheep Farming at Massey University in 1968. His employment experience ranges from being a Farm Lending Appraiser with State Advances Corporation in the early 1970, to being a Senior Lecturer in Farm Management at Waikato Institute of Technology throughout the 1980s. Since 1990 Mike has been self employed as a full time Farm Consultant and Valuer servicing clients throughout the Waikato, specialising in milk production management systems that optimize profitability through grass based feeding systems. Since 1996 Mike has also be a regular visitor to Chile, including up to six visits per annum since 2001 providing Farm Consultancy services to 25 Chilean farmers. Mike has been involved with Chilterra since August 2005, and more recently has been appointed Operations Manager. Mike continues to regularly visit Chile for periods of four six weeks at a time as well as providing input into the day to day farm management of Chilterra from his office in New Zealand.

Gary Stokes, Technical Adviser, Director

Gary spent the first eight years of his working life as an electrician both in New Zealand and England. Upon returning to New Zealand in 1991 Gary pursued a career in dairy farming. That career choice has taken him through a number of positions in the dairy industry including dairy farm leasing, sharemilking and farm ownership. Gary currently has a 440 cow sharemilking position near Hamilton and is involved in the day to day running of Cruzdelsur, both from his office in New Zealand and on regular visits to Chile. Garys input into Chilterra ranges from farm management to financial reporting and analysis. Gary has been involved with the development and trialing of farm automation and software.

Eduardo Puga, Director

Eduardo has a Civil Engineering Degree and has been involved in the Construction industry in Chile for the last 20 years. Eduardo is currently the Chief Executive Officer of his construction company Constructora Altius S.A.

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Roberto Santamaria, Financial Manager, Director

Roberto holds an Electrical Engineering Degree and a MBA from the Graduate School of Business, Columbia University, New York. Roberto is currently the Managing Partner of PLUS Consult, a Chilean business process consulting company and is a past chairman of PLUS Online Services. In addition to being a Director of Chilterra, Roberto oversees the financial operations of Chilterra and is responsible for setting up financing packages and financial reporting systems. He also provides invaluable input in the design and implementation of business processes and back office systems required to run Chilterra successfully. Roberto is closely involved in the development of Business Processes that will allow Chilterras organization to scale past current operation levels and achieve and maintain high levels of productivity and quality on the production unit level as well as on the corporate front.

Mark Holland, Director

Mark is Managing Director of Waibury Farms Group, a large syndicate of dairy farms situated predominantly in North Canterbury, New Zealand. Waibury is a stakeholder in Cruzdelsur Ltd. As the founder of Waibury, Mark has also been an investor in the Waibury Farms Group since it began in 2000. His role is predominantly managing farm operations, finance and guiding the equity managers on each of eight dairy farms. Waibury currently milks 7800 cows and produces 3.36 million KgMS. Marks work experience prior to Waibury was dairy farming on larger scale properties in the Waikato. The formation of Waibury Farms Group enabled Mark to develop and grow a farming enterprise through dairy conversion and growth in milk production from good management practices.

Craig Nevatt, Director

Craig is the Financial Controller for Sredle New Zealand Limited, the largest New Zealand investor in Chilterra. Craig is a Chartered Accountant who joined Sredle in November 2005 after spending 11 years working for PricewaterhouseCoopers in both Palmerston North and Auckland in a variety of roles, including 18 months as a Manager in the Business Advisory Services Team in Auckland. During his time with Sredle Craig has been heavily involved in the governance and financial management of Sredles 1200 cow dairy farm located in Dargaville, New Zealand. Through this role Craig has developed a significant understanding of the on farm drivers of a financially successfully dairy farm.

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Summary
In summary, investing in Crusdelsur means that: You will be investing into an already established farming business. You will be investing into a grass based dairy system well positioned to reap the rewards of the growing global demand. You have the ability to be involved with future development possibilities in Chile You have the opportunity to invest with knowledgeable individuals with key industry experience For more information contact: Gary Stokes - g.stokes@xtra.co.nz Craig Nevatt craig@nzdi.co.nz Or visit our facebook page Cruzdelsur

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