AVG Russian Crop Production

AVG Russian Crop Production Fund and Land Bank

May 23, 2012

AVG RUSSIAN CROP PRODUCTION FUND

2 ©2012 AVG Capital Partners

2

All photos are of existing AVG operations



3

1. Executive summary

2. Strategy and execution

3. Business environment

4. Fund and management company information

5. Financial information

Wheat 2011 Harvest: 310,000 tons

Hectares planted: 103,000 ha

Average yield: 3 tons / ha

Estimated sale price: $US 160 / ton

Estimated value: $US 49 million

The Kshensky elevator complex, an AVG asset



The opportunity:

4

Co-invest with one of Russia’s leading agri-businesses

≈ 20% project IRRs

over first 5 years

Existing operations

Not a start-up. Existing assets and management

Access Highly profitable investment opportunities

Security of having the Russian government as co-investor and partner

Proven team 19 year farming track record

Specialize in high-margin grain, sugar-beet, and oilseed production

People Focus on top-quality farm management talent, Russian and international

Government partnership

Leading government companies as equity investors

Yield improvements

20 – 40 % is realistic within 1-3 years

Value acquisitions at steep discount to cash flow value

Grain storage Essential to achieve good crop prices

Strategy:



Key value drivers

5

Micro:

Expertise in land purchase Inexpensive asset acquisition Strong management

Macro:

Strong ag commodity fundamentals Strong Russian economic growth (5%) Government subsidies Large scale public and private sector

investment in ag sector and infrastructure



Strengths

6

Financial Operational Risk Management

Proven fund management team Existing operations and assets Federal govt support

Access to inexpensive debt Synergies with existing investor-controlled operations

Excellent local govt relations

40% equity IRRs for 5 years Large, quick, and realistic productivity and yield gains

Geographic diversification

High-value acquisition opportunities

High-margin business segments

Strong fundamentals for ag commodities

Strong farm management team

Forward contracts on sugar-beets and grains

Grain storage available

$50 million already under management

Sugar beets at Razgulay’s Lgov sugar plant, Kursk








Sugar Beet 2011 Harvest: 1.7 million tons





The Tikhoretsky sugar-beet processing plant, an AVG asset



Geographic diversity

8

A hedge against weather risk

Allows for more efficient use of machinery

Region

≈ Currently controlled by AVG. Could

be contributed.

≈ Expan-

sion ≈ Total

Central Black Earth

40,000 100,000 140,000

Southern 20,000 50,000 70,000

Urals 20,000 100,000 120,000

≈ Total 80,000 250,000 330,000

Expansion plans

Razgulay combines in Krasnodar



Land

Proven ability and expertise:

9

Fair real value estimate for Black Earth Russian farmland: $4000 - $5000 / ha

Expertise in sourcing, performing due

diligence on, and acquiring land

19 years experience and relationships

Partnership with federal government

Razgulay founded in 1992. One of the first

large Russian agri-businesses

Strong local government relationships



Current farm management at Razgulay

Farm Director

Head Engineer

Head Agronomist

Farm workers

Head of Farming Moscow

10

Farm Director

Head Engineer

Head Agronomist

Farm workers

Farm Director

Head Engineer

Head Agronomist

Farm workers

Financial control

Legal Technology

(GPS)

Personnel Supply

purchase Field

equipment

Security Produce

sales Land

acquisition

Average farm size: 12,000 ha

Average worker salary: $400 / month

Average # of workers per 1000 ha: 10

The Razgulay Group is in the process of implementing GPS and related precision-agriculture techniques on its farms.



Future farm management

CEO and top management based in agricultural regions, not in Moscow

Recruit top-quality international farming team

Work with leading global farm management consultants to improve technique and source talent

Focus on achieving high quality management, and intensive farming per 3000 ha block.

Major strategic focus on retaining top talent

Embrace new technologies (i.e. GPS control systems) to improve yield and productivity

11



Yield improvements

Crop Current Yield

Attainable yield within 3 years

% Improvement

Wheat (Black Earth 3.4 5-6 ≈ 60%

Sugar Beet (Black Earth)

31 36 ≈ 16%

Soy (Southern region) 1.8 2.5 ≈ 40%

12

Improved technique New machinery

GPS technologies No-till technique

Precision agriculture Better seeds

Better fertilizer use Herbicides and pesticides



Synergies with Razgulay Group

Management expertise | Personnel recruitment | Co-investment | Forward crop contracts

Market intelligence | Investment / acquisition opportunities | Relationships

13

Grain Storage and processing Sugar Manufacturing Crop cultivation

• 22 operating units:

• 12 elevators 2.4 mm tons capacity

• Largest in Russia - 3 grain processing plants

• 7 flour mills

• Processed 543,000 tons in 2010


• 10 processing plants

• 1 milk bottling plant

• Annual capacity: 4 mm tons sugar beet and 1.4 mm tons sugar in bulk.

• 2010 sales: 475,000 tons (14% of Russian market)


• Total land: 460,000 ha. Cultivating 332,000 ha.

• 2010 harvest figures:

• Sugar beet: 926,000 tons

• Grain and oil seeds: 400,000 tons

• Bulk rice - 130,000 tons

% of sales

33%

44%

23%



Storage

14

A key strategic requirement

Access to Razgulay’s network

of elevators

Extensive use of bagging

Important to achieving maximal

grain prices in Russia

A major operational and

financial advantage

All photos are of existing AVG operations



Exit strategy

15

IPO, sale, or further round financing

Eligible for IPO in 3 years

Convincing precedent for FSU ag IPOs in London, Warsaw, Frankfurt, Stockholm, Moscow

As Russian farming becomes more productive, and more fully invested, possible selective asset sales at steep premium to acquisition cost

AVG will be proactive in maximizing shareholder valuation in future years



16






Sunflower 2011 Harvest: 38,000 tons


Average yield: 1.6 tons / ha

Estimated sale price: $US350 / ton




Soil • climate • crops • yields

17

Wheat

Barley

Sugar-beet

Sunflower

Soy

Rapeseed

Rice

Potatoes

Buckwheat

Flax

Carrots

The richest topsoil in the world. Called “Black Earth”, or “Chernozem” it is unusually fertile, a true natural phenomenon. It contains a very high percentage of humus (10% to 15%), and high percentages of phophoric acids, phosphorus, and ammonia, requiring less fertilizer and delivering excellent yields. Most topsoil in the US and Europe has a depth of 6 -12 inches (15 – 30 cm). In this region of Russia, the topsoil averages 40 inches (1 meter) in depth, and sometimes reaches 80 inchest (2 meters)!

Climate The climate in this region is similar to the northern American Midwest (North Dakota), but delivers better yields due to the richer soil.

Yields Without fertilizer, Chernozem yields an average of 3 metric tons of wheat per hectare, and with fertilizer, reliable yields are as high as 6 tons.

The soil is so rich it is actually black,

like potting soil from a garden shop.

Hence its name, “Black Earth”



Infrastructure: Good local roads and rail links

18

Local roads connecting farms in a typical Central Black Earth region. Small circles are usually farms 3 – 4 km distant from each other.

A typical local road in the central black earth region: well-maintained and not crowded.

Compare to Brazil: almost no rail and far fewer roads which are badly over-crowded.

The black sea port of Novorossisk. It, and other Russian ports are being rapidly expanded.

It is a common misperception that Russia has poor infrastructure.

In fact, in the agricultural regions, it is quite well developed, and not over-burdened, as in Brazil.

The government is investing heavily in modernization, particularly of ports and transportation.

Highway construction in the black earth region in European Russia.



Major government sector support (1/2)

19

Agriculture is a top government priority. It’s viewed as vital element of national security, a key contributing factor to national export earnings, and a key area of sustainable long-term competitiveness

Tax benefits (0% profit tax, 20.2% payroll tax, 10% VAT)

Subsidized agricultural credits

Subsidized lease terms

Fertilizer and energy cost reimbursement

Quotas for domestic food production

Government grain purchase to support prices

Import tariffs

Financial support Favorable industry regulation

Share of domestic production

Source: Russian Ministry of Agriculture

95%

80% 80%85%

90%95%

100%

56%

92%

75%83%

99%

Grain Sugar Vegetables Meat and meat

products

Milk and milk

products

Potatoes

Minimum shares accorging to Doctrine

Actual shares, 2009

Subsidies

11 10 9 9 928 37 45 48 488 11 11 12 137

19 25 30 31

19

1825 22 2383

99108

121 132

35 5 4 6

159

199

228246

262

0

50

100

150

200

250

300

2008 2009 2010 2011E 2012E

Animal breeding subsidies Interest rate subsidies

Subsidies on fertilizers Plant grow ing subsidies

Construction capex Other from federal budget

Subsidies from regional budgets

Source: Russian Ministry of Agriculture

RUR bn



Government agricultural support as % of gross farm receipts 2008-2012 Federal Program for Agriculture Development

Source: Federal Program for Agriculture Development and Regulation of Agricultural Markets for 2008-2012;

2008-2010 GDP data - Rosstat, 2011-2012 GDP - Federal Law for Federal budget

Note: Total government spending includes plant growing subsidies, interest subsidies, animal breeding subsidies,

land fertilities subsidies, construction capex, etc.

% of

GDP

Government support of the industry

Program for Development of sugar beet complex in Russia for over USD 2 bn of government spending in 2010 – 2012

Floating import tariff on raw sugar and prohibitive tariff on white sugar allow for stable domestic sugar price and profitability of domestic producers

Access to long-term loans at subsidized interest rates

0% income tax for agricultural producers until 2013

Despite Russia’s strong intentions of entering WTO in 2011, the government is planning to continue general industry support, i.e.:

− Ministry of Agriculture insists on maintaining overall government agricultural spending at the current level until 2017

− Ongoing negotiations with WTO members on keeping meat import quotas and raw sugar tariffs at the previously agreed level

Producer Support Estimate (PSE) as % of gross farm receipts,

last 3 years average

Source: OECD, PSE database, 2009 and 2010

(1) PSE is an indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural

producers, arising from policy measure. It measures support arising from policies targeted to agriculture relative to a

situation without such policies

(2) 2007-09 average for Japan, EU27, OECD, Turkey, Canada and United States (latest available).

2005-07 average for Russia, China and Brazil (latest available)

(3) 2009 data for Japan, EU27, OECD, Turkey, Canada and United States (latest available).

2007 data for Russia, China and Brazil (latest available)

2

1

6%

9%

9%

14%

17%

22%

23%

34%

47%

Brazil

China

United States

Russia

Canada

OECD

EU27

Turkey

Japan

PSE as % of GDP 3

0.9%

3.7%

0.7%

0.6%

0.6%

0.6%

0.2%

1.4%

0.4%

Russia Worldwide

7.6 8.2 8.7

6.6 5.3

2008 2009 2010 2011 2012

Total government spending, USD bn

0.39% 0.51% 0.51% 0.49% 0.47%

Major government sector support (2/2)



Strong partnerships with authorities and state banks AVG works closely with VEB in managing and developing Razgulay and related investment projects. A government owned

bank, VEB, the 3rd largest bank in Russia, holds 80% of the outstanding debt of Razgulay.

AVG also closely cooperates with regional governors and administrations in subsidies, land purchasing and investment projects sourcing matters.

Russian government debt financing ≈ 70% of investment need, at preliminary agreed near 2% real interest rate, dramatically increases equity returns .

21

Support from VEB, federal and local authorities Collaboration with major lenders in agriculture



Russian agriculture is highly attractive

A top 5 world agro economy

#2 in arable land. Large arable land expansion possibilities

Relatively inexpensive land resources ($300-400/Ha vs approx. $4000 for global comps)

Projected investment of $17 to $20 billion per year in 2011-2015

Government subsidies and incentives

Large and growing export and domestic markets.

Import substitution.

22

173

123

94

67

59

38

33

0 50 100 150 200

USA

Russia

Europe

Brazil

Other LA countries

Indonesia

Ukraine

Arable land

Source: FAOSTAT Source: Conab, Indonesian Ministry of Agriculture, USDA, FAO, Credit Suisse

ha mm

Country rank in the world by products

#1

#2

#3

#4

Oats, sunflower seed,

barley, rye, buckwheat

Sugar beets

Potatoes

Wheat



Robust markets

23

Fastest growing export markets

Import substitution

Expanding economy fueling domestic consumption

Pork Poultry Dairy Food Processing



Strong government support Comments Large and fast growing food market in Russia

Food consumption in Russia has strong growth potential (CAGR of 13.3% in 2011E-2014E)

Obsolete and inefficient production infrastructure

Highly fragmented and unconsolidated market

Consolidation opportunities for efficient players

124140

167193

160185

211

240

272

306

2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E

Food consumption, US$ bn Food consumption per capita, US$

863 982 1,178 1,361 1,125 1,307 1,492 1,708 1,940 2,191

Source: Russian Ministry of Agriculture, Business Monitor International Ltd

CAGR 2005-09 6.6%

CAGR 2010-14 13.3%

Fast sector growth



25






Rice: 2011 Harvest: 112,000 tons





The Poltavsky rice processing plant in Krasnodar, an AVG asset

Rice paddies in Krasnodar



Controlling shareholder in one of Russia’s largest agro-holdings

Razgulay Group is one of the largest players in the Russian agricultural market:

‒ 460 ha land bank under management

‒ # 1 in rice cultivation (over 30% of Russian market)

‒ A leading sugar manufacturer (14% of the Russian market)

‒ One of largest elevator operators in Russia

26

Wheat production

Wheat and sugar production

One of top 5 land banks

Source: Ministry of Agriculture, IKAR

Financial Indicators

RUR bn

Source: Razgulay Group

30.2

25.9

0

10

20

30

40

2009 2010П

3.1 4.1

2009 2010П

10%

16%

0%

5%

10%

15%

20%

2009 2010П

Sales EBITDA EBITDA margin

thousand ha 570

500460 460 450

0

100

200

300

400

500

600

Prodimex Иволга-

холдинг

Разгуляй НАПКО Золотой

Колос

Ivolga-

Holding

Razgulay

NAPKO Zolotoy

Kolos



Staff consists of 18 employees, based in Moscow

Rustem Mirgalimov

Since 2010 and March 2011: Chairman of the Board (also CEO of the Razgulay from 2010 till March 2011)

Since 2007 and currently: Managing Partner of AVG Capital Partners

2006-2008: Member of Supervisory Board of the Russian National Association of Securities Markets Participants

Prior to AVG, Senior Executive and from 2004 Deputy Chairman of AK BARS Bank, a Top-20 Russian universal bank

Prior to AK BARS Bank, Mr. Mirgalimov was the CEO of Art-Finance, an investment company

MBA 2005 Chicago Business School

Degree in finance from Kazan State Financial and Economic Institute (1995) and in law from Kazan State University (1997)

Dmitry Steinsapir

From 2010 and currently: Board member of Razgulay Group

Since 2009 and currently: Managing Partner at AVG Capital Partners

2006-2008: Member of Supervisory Board of the Russian National Association of Securities Markets Participants

2005 -2007: Member of the board of RTS, the leading Russian securities exchange.

Prior to AVG, led the investment division of AK BARS Bank, and was CEO of AK BARS Finance.

Prior to AK BARS, CEO of the Prospekt Brokerage, one of Russia’s first brokerages

Prior to Prospekt, senior management positions at Russian branches of ING Barings and ABN Amro

MBA 2005 Chicago Business School

MBA 1996 Moscow International Business School

Registered CPA (2006)

Bios of AVG Team (1/2)



Staff consists of 18 employees, based in Moscow

Eldar Nazmutdinov

Since 2010: Partner at AVG Capital Partners

Prior to AVG, co-head of legal department of New Russia Growth, a Russian growth strategy private equity fund

Prior to NRG, head of legal at Sputnik Group, a leading Russian private equity fund

Prior to Sputnik, Deputy CEO at the Prospekt Brokerage, one of Russia’s first brokerages

Extensive experience in M&A in financial services, IT, telecoms, and retail

2002 Degree in international law from MGIMO, Russia’s leading university of international relations.

Certified tax consultant

Alexander Sabirov

Managing Director of AVG Capital Partners since 2011

Since 2010 and currently: Chairman of the Board of MC Vegetable Factory and Board member of LLP Novgorod Greenhouses

2010-2011: Deputy CEO and Board member of Avangard Asset Management

2006-2010: Mr. Sabirov held the positions of the Leading Specialist to the Managing Director at VTB Group

Degree from Financial University under the Government of the Russian Federation

Bios of AVG Team (2/2)



Risk management

29

Political country risk 1 Partnership with federal government

Legal conflict resolution risk 2 Partnership with federal government

Land title risk 3 Expert experience in land acquisition, title due diligence.

Partnership with federal government

Government corruption risk 4 Partnership with federal government

Weather risk 5 Crop insurance. Crop diversity. Geographic diversity.

Government regulation risk (export restrictions)

6 Unlikely over long term

Commodity price risk 7 Strong forward fundamentals

Crop risk 8 Crop insurance. Crop diversity. Geographic diversity.

Decrease in asset prices 9 Already deeply undervalued. Nowhere to go but up.

Risk factor Response








3

0

Soy 2011 Harvest: 37,000 tons


Average yield: 1.6 tons / ha



Harvesting soy on a Razgulay farm in Krasnodar



Investment Program

31

Item Amount Comments

Land acquisition $125 mil ≈ 250,000 ha @$500 / ha

Equipment purchase / lease, upgrades

$165 mil ≈ $500 per ha for 330,000 ha

Working capital $165 mil ≈ $500 per ha for 330,000 ha

Senior management $3 mil For first three years @ $1 million per year.

Total ≈ $458 mil Over ≈ 3 years

Razgulay combines in Volgograd, 2009

Sugar Beet: $102 million Wheat: $49 million Rice: $43 million Soy: $20 million Flax: $16 million Sunflower: $13 million Barley: $12 million Other: $1 million Total: $264 million

Razgulay’s estimated 2011 crop value:



100

150

200

250

300

350

400

450

500

550

11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21

USD

pe

r to

n

Wheat (OECD forecast) Raw sugar (OECD forecast)

32

Crop prices – past and future Historical sugar beet and wheat prices in Kursk region, Russia (Black Earth region)

-

20

40

60

80

100

120

140

160

180

2003 2004 2005 2006 2007 2008 2009 2010

USD

pe

r to

n (n

et

of V

AT)

Average sugar beet price in Kursk region, Russia (producer price by Rosstat)Average wheat price in Kursk region, Russia (producer price by Rosstat)

Wheat and sugar price forecasts by OECD for next ten years

Forecast to remain historically high, (200% of historical)

Note: These OECD forecasts

are conservatively low. There are compelling arguments that prices can go much higher. For the most authoritative presentation of these arguments, follow this link.

http://bit.ly/rym1TR



Contact info

33

Charles Bausman

Director for Investor Relations

AVG Capital Partners

[email protected]

www.avgfund.com

Disclaimer THIS DOCUMENT IS CONFIDENTIAL AND IS AVAILABLE ONLY TO POTENTIAL INVESTORS WHO ARE ADDRESSEES OUTSIDE OF THE UNITED STATES, AUSTRALIA, CANADA OR

JAPAN.

IMPORTANT: In accessing the document, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from us as a

result of such access. The document has been prepared solely in connection with the information purposes for certain institutional and professional investors of the securities described herein.

This document is not being made available to the public.

This document serves exclusively as background material introducing the AVG CIS Agricultural Opportunities Fund (the “Fund”).

Any potential investor should be aware that the value of the investment is subject to a variety of risks and may fall, as well as rise, and investors may not get back the amount invested.

This document is neither an offer to sell, nor a solicitation of any offer to buy shares in the Fund or interests in AVG Capital Partners in any jurisdiction.

NOTHING IN THIS DOCUMENT CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES THAT MAY BE

DESCRIBED HEREIN HAVE NOT BEEN, AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE‘‘SECURITIES ACT’’), OR THE SECURITIES

LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN

REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS

OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. THIS DOCUMENT IS NOT AN ADVERTISEMENT AND IT MAY NOT BE FORWARDED OR

DISTRIBUTED TO ANY PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT

IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF

OTHER JURISDICTIONS

Moscow office

109428, Moscow, Ryazansky prospect, 61/4

Phone: +7 (495) 232 5543

Mobile: +7 (985) 920 3076

Cayman office

P/o box 1344

20 Genesis Close

Grand Cayman KY1-1108, Cayman Islands

Date post:	27-Oct-2014
Category:	Documents
Upload:	charles-bausman
View:	138 times
Download:	1 times

AVG Russian Crop Production

Documents