ARC FUNDS LIMITED — Management Reports 2015

Feb 3, 2015

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Chairman’s Letter to Shareholders

Dear Fellow Shareholders,

Welcome to my first letter as Chairman of Australian Rural Capital, which I will refer to as ARC. The presentation to shareholders at the AGM in September 2014 (which is available on the ASX platform) identified the path forward for ARC with a number of initiatives and I will now update on those initiatives and our progress to date.

However, firstly I will comment on the half year results, the loss of $245,846 reflects our ongoing operating costs of the listed entity (circa $ 275,000 per annum) and the valuation of our Namoi Cotton Cooperative Capital Units at 32 cents per unit and the unwinding of some previously held investments. I recognise this is unsatisfactory in an absolute sense, however not unexpected and well within budget as the business is in start-up. The company remains in a solid financial position with low cash operating costs, no debt, and $750,000 in cash and our stake in Namoi Cotton Cooperative Capital Units. Now the initiatives identified...

Appointment of new directors relevant to the strategy

We continue discussions with a candidate at present, and currently plan that he will replace Paul Young prior to the end of this financial year as Paul takes the opportunity to retire after 11 years on the board.

Seek to create value in the Namoi Cotton investment

We have completed acquiring our initial stake of Namoi Units, we now own just over 11m units which is 10% of the issued capital units. Our average cost is 32.5 cents. The 2014 season which will be reported in the year to February 2015 results was a good year for Namoi with solid ginning volumes and a positive marketing contribution. We believe that the full year result has upside potential to the company guidance of a NPAT of $6.0m-$7.5m. We did receive a small interim dividend of $55,000 and now await the final result and dividend.

However, looking forward to the 2015 season, the shortage of available irrigation water and lack of any real rainfall particularly in North West NSW, has significantly reduced the total hectares planted to cotton. We estimate this smaller crop will impact Namoi‘s ginning volumes negatively by approximately 50% and marketing volumes will also contract. This will result in a cash breakeven year for Namoi to the year ended February 2016 and a reported loss. This is obviously based on a same business base model, with debt levels stable or reduced .

Fortunately, in a cash-flow sense, the depreciation charges are significantly greater than “stay in business“ capital expenditure (we estimate the difference here to be approximately $7m pa) and Namoi does not pay income tax (as they have large tax losses). So these two charges materially depress the reported net profits after tax. This gives us some comfort that in a difficult year the investment should be able to maintain capital unit value.

Australian Rural Capital Limited ABN 52 001 746 710 Suite 7.06, 2-14 Kings Cross Road, POTTS POINT NSW 2011 GPO Box 4870 SYDNEY NSW 2001

phone: (02) 9380 9001 admin@ruralcapital.com.au

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We continue to believe the current capital structure does not serve as the most appropriate or efficient capital structure for Namoi Cotton to capture the significant growth and consolidation opportunities in the Cotton Industry. These opportunities could be beneficial to all industry stakeholders and capital unit holders. We have communicated this theme in greater detail directly with Namoi representatives and have suggested what we believe would be constructive changes to the terms of the capital units along the lines of our September presentation.

Generate sufficient cash-flow in ARC to cover operating costs

Our models suggest that in a normal year Namoi Cotton should be able to produce dividends annually on average of 3 cents per unit. Historically this has been the case and we see no reason why this would not be the case in the future. Our current holding of 11 m units would on average generate about $330,000 in dividends or pure cash-flow which more than covers our existing operations costs.

However, the old saying of “not having all your eggs in one basket” was in fact a phrase coined in the farmyard and for good reason. Seasons and price cycles play havoc with averages and to counter this we will be seeking further opportunities to supplement our income as we develop our business with more investments in more regions and products and more recurring streams of income, which is covered in more depth in the next section.

Structure and determine in-house fund management opportunity and funding partners

As we progress our business, we continue to field numerous enquiries for capital and at the same time we have received strong interest from parties wishing to invest in this asset class and potentially alongside ARC.

To capitalise on this opportunity, we have acquired an entity which holds an Australian Financial Services License. This provides us with the structure to establish a fund to raise and manage funds on behalf of third party professional investors.

We are renaming this entity “Australian Rural Capital Management Pty Ltd” and intend to establish a fund which ARC will manage. We propose that this fund will invest alongside ARC in agribusiness and “agristructure” assets. This initiative, when implemented, will create income for ARC in the form of management fees.

Progress other identified investment options

We continue to evaluate and examine a number of opportunities, to further this process we have created a document outlining our approach and how we screen and select investments. Please find this attached to this letter and also on the ASX platform.

Placement Capability

If required we can raise further capital in an efficient and cost effective manner and we have received numerous enquiries.

Australian Rural Capital Limited ABN 52 001 746 710 Suite 7.06, 2-14 Kings Cross Road, POTTS POINT NSW 2011 GPO Box 4870 SYDNEY NSW 2001

phone: (02) 9380 9001 admin@ruralcapital.com.au

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Seek to pay an annual dividend (subject to distributable profits )

We will commence paying dividends on an annual basis once we have distributable profits and this will be a function of the performance of our investments and the growth of our income streams from our proposed funds management business.

The Landscape

Global macro financial turbulence now seems part of day to day life in capital markets. Asset classes, currencies, equities, bonds, commodities and sectors continually boom and crash. The reality here is that short term trading, extreme speculation and momentum based capital flows creates this volatility and the valuation equation clearly states that more volatility means more risk.

We tend to ignore this noise and apart from the observation of the larger deeper cycles, which have always been present in soft commodities, we rather focus our attention on long term investment in real assets in real businesses with real products (in our case food and fibre). We believe that this focus and a value investment approach works to mitigate these risks and instead of being a victim of these cycles we seek to capitalise on the opportunities they present.

We do believe that more food and fibre will be required if the population of the world continues to increase, which does seem rather logical, unless everyone goes on a diet and becomes a nudist! However this does not distract us from our processes, screens and our value based investment approach. We also believe the Chinese middle class is a huge opportunity to supply protein, just as China has been a dominant force in the iron ore market. However, we remain mindful of the control that is vested with such customers, whose ultimate logical interest is lower prices, a clear conflict to our interests.

This brings me to an interesting topic in Australian Agribusiness, and that is the relationship between growers/farmers and the Agri Supply Chain also called the Value Chain . We believe that the greater alignment of the economic interests of all participants in the supply chain is the best model to perpetuate and grow the economic sustainability of the supply chain including the interest of growers. We seek to invest in assets and businesses in the supply chain that rely on supply from growers /farmers. Therefore creating the correct incentives and alignment to the suppliers is critical to sustaining and growing volumes and also introducing new products and technologies.

Obviously, this alignment can be achieved simply by operating a wholly owned fully vertically integrated supply chain, and the overall margin captured is not subject to inter-segmental price negotiation. However, due to the fragmented nature of supply, chain capacity and capital required down the supply chain this is not always possible. Therefore, we believe the correct alignment of the economic outcomes of both suppliers and the supply chain and mutual co-operation will send the correct market signals and foster constructive behaviours which in turn will ultimately create value for all participants. The perfection of this model is the “holy grail” in Agribusiness.

Australian Rural Capital Limited ABN 52 001 746 710 Suite 7.06, 2-14 Kings Cross Road, POTTS POINT NSW 2011 GPO Box 4870 SYDNEY NSW 2001

phone: (02) 9380 9001 admin@ruralcapital.com.au

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Summary

ARC is in a solid financial position, we continue to progress our initiatives to grow the business with vigour. Opportunities continue to be presented on both sides of the equation, as investments and sources of capital. We remain patient, prudent, and consistent to our process and approach. We believe this will overtime deliver shareholder value in capital growth and dividends for shareholders of ARC. I look forward to serving you and reporting our journey.

Yours Sincerely,

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James A Jackson

Executive Chairman 4 February 2015

Mobile:0402 435 762 Email: jamesjac@linknet.net.au

Australian Rural Capital Limited ABN 52 001 746 710 Suite 7.06, 2-14 Kings Cross Road, POTTS POINT NSW 2011 GPO Box 4870 SYDNEY NSW 2001

phone: (02) 9380 9001 admin@ruralcapital.com.au

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INVESTMENT APPROACH AND PROCESS

James Jackson, Executive Chairman

February 2015

Disclaimer

This presentation is for general information purposes, it does not purport to provide recommendations or advice or opinions in relation to specific investments or securities. The presentation (in whole or part) is being supplied for information purposes only and not for any other purpose. The presentation and information contained in it do not constitute a prospectus and do not form part of any offer of, or invitation to apply for securities in any jurisdiction.

The information contained in this presentation is current as at 4 February 2015 or such other dates which are stipulated herein. All statements are based on Australian Rural Capital Limited’s ( ARC, the Company ) best information as at 4 February 2015. This presentation includes forward-looking statements regarding future events. All forward-looking statements are based on the beliefs of ARC management, and reflect their current views with respect to future events. These views are subject to various risks, uncertainties and assumptions which may or may not eventuate.

ARC makes no representation nor gives any assurance that these statements will prove to be accurate as future circumstances or events may differ from those which have been anticipated by the Company.

This presentation should not be relied upon as a representation of any matter that a potential investor should consider in evaluating ARC. Neither ARC, its affiliates or any of their Directors, agents, officers or employees make any representation or warranty, express or implied, as to or endorsement of the accuracy or completeness of any information, statements, representation or forecasts contained in this presentation and they do not accept liability for any statement made or omitted from this summary.

ARC and its related companies, their officers, employees, representatives and agents expressly advise that they shall not be liable in any way whatsoever for loss or damage, whether direct, indirect, consequential or otherwise arising out of or in connection with the contents of an/or any omissions from this report except where a liability is made non-excludable by legislation.

Potential investors should not rely solely on the information contained herein prior to making any investment decision. Investors should seek independent advice from a properly qualified advisor, giving due regard to their own personal circumstances, prior to forming any investment decision.

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How we seek out opportunities

• Identify economically sustainable production and regions, low cost producers or product with a point of difference - high growth, product in demand

• Assess strategic infrastructure (we call them Agristructure assets), processing, packing, storage and handling, distribution, ports, terminals and Intellectual Property

• • Acquire, partner or inject capital to promote greater efficiency and volume growth

• Seek out complex and inefficient capital structures

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The Investment Themes

• Ownership of strategic hard assets at discount to replacement costs

• Sector ownership fragmentation creates consolidation opportunities both vertically and horizontally

• Increasing capacity utilisation drives value uplift

• Recognition of pronounced cyclical nature of soft commodities and weather patterns

• Identify investment partners with aligned goals including supplier and grower owned organisations

• Unlock value from and within complex capital structures

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Expected Returns from these Assets

• Agristructure/processing assets should provide income of 10-12% per annum and cash flow (after stay –in business capex) of 8% per annum.

• Generally low growth in nature, however the investments will be selected based on the opportunity to:

• boost growth or utilisation

• improve efficiencies

• create value from the trade or marketing stage of the commodity/product output

• unlock discounted asset values

• Individually these assets contain specific high risk, given historic earnings volatility, however this is mitigated with a spread of investments across commodities and regions

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Basic Investment Screens

1. Quality and nature of the assets and/or business model must be strategic and sustainable both economically and environmentally

2. A strategy and path to create and/or unlock value and enable growth

3. Low levels of debt within the investment or business, unless a recapitalisation is part of the investment proposition

4. Capable aligned operational management

5. History of dividend or distribution payments and/or capability 6. Attractive valuation at point of entry-especially for agristructure and processing assets

6. The Opportunity for a leveraged investment position for ARC as a result of its knowledge or position

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Investment Types

• Equity or quasi-equity in listed public companies and cooperatives

• Equity or shares in unlisted public companies and cooperatives

• Equity in private companies with public company governance standards

• Convertible Bonds (particularly in private companies)

• Direct asset ownership

• Small number of Significant Investments to be held

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“Investors in Agribusiness and Agristructure”