Pre-Feasibility Study

GEMSTONE LAPIDARY

Small and Medium Enterprise Development Authority

Government of Pakistan
www.smeda.org.pk
HEAD OFFICE 6 Floor, LDA Plaza, Egerton Road, Lahore Tel: (042) 111-111-456 Fax: (042) 6304926, 6304927 helpdesk@smeda.org.pk
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REGIONAL OFFICE PUNJAB 8th Floor, LDA Plaza, Egerton Road, Lahore Tel: (042) 111-111-456 Fax: (042) 6304926, 6304927 Helpdesk-puj@smeda.org.pk

REGIONAL OFFICE SINDH 5TH Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) 111-111-456 Fax: (021) 5610572 helpdesk-khi@smeda.org.pk

REGIONAL OFFICE NWFP Ground Floor State Life Building The Mall, Peshawar. Tel: (091) 9213046-47 Fax: (091) 286908 helpdesk-pew@smeda.org.pk

REGIONAL OFFICE BALOCHISTAN Bungalow No. 15-A Chaman Housing Scheme Airport Road, Quetta. Tel: (081) 831623, 831702 Fax: (081) 831922 helpdesk-qta@smeda.org.pk

Jan, 2007 Updated

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DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject matter and provide a general idea and information on the said area. All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. Although, due care and diligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA does not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. Therefore, the content of this memorandum should not be relied upon for making any decision, investment or otherwise. The prospective user of this memorandum is encouraged to carry out his/her own due diligence and gather any information he/she considers necessary for making an informed decision. The content of the information memorandum does not bind SMEDA in any legal or other form.

DOCUMENT CONTROL
Document No. Revision Prepared by Approved by Issue Date Issued by PREF-32 1 SMEDA-Punjab GM Punjab March 200 Library Officer

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1
1.1

INTRODUCTION
Project Brief

Gems and jewelry is an emerging sector of Pakistan with an immense export potential. In Pakistan the current level of trade, including the vast informal sector is expected to be more than $50 million annually. Most of the exports are in form of rough stones, mainly because of lack of sophisticated processing industry in the country. The proposed project aims at filling this gap of value adding facilities in the gems industry. Financial analysis shows the unit making profit from the very first year. An enormous export market for the Pakistani gemstones exists in West Europe, USA and East Asia. It is of important significance that the gem industry and the Government of Pakistan are recognizing the potential in the local value addition and consequently import duty on lapidary equipment has been waived off. This proposed unit with modern processing machines is an addition to a gems processing industry where dozens of small players are involved in cutting and polishing by simple and unsophisticated tools which are not preferred by many trader/exporters of gems 1.2 Opportunity Rationale

Pakistan is fortunate enough to be strategically located close to some of the major markets such as Thailand and Sri Lanka. Besides, it has one of the largest deposits of gemstone variety, including some highly priced and demanded gemstones like Emerald and Ruby. There is also availability of low cost labor compared to those in other countries. There is no doubt that Pakistan has an enormous potential to increase its exports manifolds, and could become one of the major players in the $ 40.7 billion world market. There is a large variety in gemstone deposits of Pakistan including Emeralds of Mingora, Gujar Killi and Shamozai, Pink and Golden Topaz of Mardan and Aquamarine of Chitral and Neelam Valley and Peridot of Dassu, which are well known for their color and clarity. Pakistans Pink Topaz and Kashmir Ruby, are unique items all over the world, especially the Pink Topaz was considered as one of the second highest valued mineral, that was being smuggled to India in raw form, and then sold in the international market as a refined high cost item by India. Establishment of lapidary for cutting and polishing of gemstone, Topaz other precious minerals could alone increase yields from current $12 million to over $1billion. Most precious stones, which were previously being exported from Kabul, are now believed to be going through Peshawar. Pakistan has a potential yield of 800 thousand carats of Ruby, 875 thousand carats of Emerald and 5 million carats of Peridot, which lay unutilized.
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Table 1-1 Gemstone Reserves of Pakistan Stone Emerald Country Pakistan Mines Mingora Gujar Killi Shamazoi Afghanistan Ruby Kashmir Afghanistan Peridot 1.3 Pakistan Pansher Nangimali Jagdalak Dassu Carats in millions 20-30 20-30 20-30 30-60 100-200 100-200 75-100

Proposed Capacity

The feasibility study suggests an annual production 3300 units1/year. 1.4 Total Project Cost

The total project cost of this lapidary unit is Rs. 1.65 million. Out of which capital cost of the project is Rs 1.37 million and the rest is used to meet the working capital requirement. 1.5 Process Flow Delivery to Customers Grading Cutting Polishing Sale to Market

Raw Stones of customers

Purchase of Raw Stones

The process of Lapidary includes grading, cutting and polishing of gemstones. Raw stones are either purchased from the market or collected from the customers. Individual stone is then examined (graded) and cut into smaller stones along its major line of fracture and inclusions. The smaller pieces are then mounted on cutting tools, which are then faceted on faceting machines. The final operation involves polishing of the faceted stones. Polished stones are then delivered to the customers or sold to the market.

Includes Beads Making, Assortments, Gems Cutting & Polishing 4

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2
2.1

CURRENT INDUSTRY STRUCTURE

Existing Split of Industry

Main cluster of gemstone processors is in the Namak Mandi market in Peshawar. Moreover, Karachi also houses a large gem and gold jewelry making industry, catering to local as well as export markets. Lahore is another emerging market of gems and jewelry trade.

3
3.1

MARKETING
Export Market

Pakistan has emerged as the fifth largest country for the occurrence of gemstones on the world map. The total global gemstone exports for the year 2004 are $57954 million, $48363 million in 2003 and in 2002 $ 46369 million.. Details of year wise Gems and Jewelry export from Pakistan are given below in the table: Value in million US$ July June July June July June Product July June 2005 - 2006 2004 - 2005 2003 - 2004 2002 - 2003 Gems Jewelry Total 2.173 22.601 24.774 3.693 24.489 28.182 3.430 16.727 20.157 4.612 16.142 20.754

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Figure 3-1 World Vs Pakistan Gemstone Exports

57,954,241 60,000,000 50,000,000
$ million

47,213,771

43,763,110

46,369,815

48,363,606

40,000,000 30,000,000 20,000,000 10,000,000 0 2000 2001 Pakistan 2002 World 2003 2004 2,871 1,636 2,057 3,678 3,614

Figure 3-2 Major Buyers of Pakistani Gemstone

UAE France 4% 4% U.K 5% Germany 20% Source: Export Promotion Bureau Hong Kong 25% India Thailand Others 2% 3% 4%

USA 33%

Pakistans official export of rough gemstones for the year 2005-06 was $4.350 million, with major markets being USA, Hong Kong, Germany and the United Kingdom having 33%, 25% and 5% market shares respectively.

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In the global trade of gemstones around $57.95 billion per annum, Pakistans exports of gemstones are shown in Table 3-1: Table 3-1: -Pakistans Exports of Gemstones (Value in $ 000) Countries Australia Austria Canada China Dubai France Germany Hong Kong India Italy Japan Netherlands Thailand USA UK Others Total 2002 03 6 22 5 27 55 46 317 832 175 18 11 9 123 330 55 7 2173 2003 04 15 14 3 10 38 108 417 1611 824 53 23 14 188 417 50 58 3696 2004 05 12 57 8 9 20 338 871 190 89 22 329 334 597 388 114 3601 2005 - 06 43 47 57 70 52 557 869 307 39 60 44 366 1067 141 55 4350

Source EPB & APCEA The above table shows a significant increase in gems export from Pakistan during the last four years. Major buyers of precious and semi precious stones were Germany, Hong Kong, India, USA, Thailand, Netherlands and France etc. 3.2 Total market size and growth

While gemstone exports from Pakistan are increasing, the growth is insignificant compared to the large potential in the country. There is a need to increase not only the quantity of gemstones exported but also the quality. This can be achieved by developing a cutting industry in Pakistan to add value to the rough stones that are being exported.

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HUMAN RESOURCE REQUIREMENTS

For a gemstone lapidary unit of 3300 units per year, the human resource requirement is given in Table 4-1: Table 4-1: - Human Resource Requirement Positions Manager Supervisor Junior Cutter/Assistants Accounts/Administration Incharge Marketing Officer Assistants/Peons Security Services Fees Total Number 1 1 8 1 1 2 1 15 Salary/ month 20,000 10,000 3,500 8,000 10,000 3,000 6,000 Salary/ annum 240,000 120,000 336,000 96,000 120,000 72,000 72,000 1,040,000

MACHINERY DETAILS

Following combination of machinery is required for cutting and polishing of 3300 units per year. Approximate prices for machinery of different origins are given below: Table 5-1: - Machinery Requirement Machinery Trim Saw Facetor Calibrating machines with wheels Dual Edge Grinding Machine Buffing, Sanding & Polishing Sets Gem Pack Faceting Table Total Required 2 2 2 Make Pakistan Pakistan Japan Cost/ Machine Total Cost 50,000 100,000 40,000 80,000 150,000 300,000 100,000 100,000 100,000 20,000 100,000 100,000 300,000 20,000 1,000,000

1 Japan 1 Pakistan 3 China/ Thai 1 Pakistan 12

RAW MATERIAL

Basic raw material required for grinding semi-precious stones that are used for beads making is Carborendum Powder, which comes in three sizes of 220, 400 and 600 mesh. Raw material required for grinding and polishing of precious stones includes Diamond Powder, Aluminum Oxide, Tin Oxide, and Cirium Oxide and Crome Oxide.

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Table 6-1: Raw Material Required for Grinding and Polishing Raw Material Carborendum Powder 220 mesh 400 mesh 600 mesh Diamond Powder 1 micron 15 micron Aluminum Oxide (Raybrit) Tin Oxide Cirium Oxide Crome Oxide Grinding Laps Precision Drill Total Consumption 100 Kg 100 Kg 50 Kg 500 Carats 300 Carats 5 lbs. 5 lbs. 5 lbs. 10 Kg 12 12 Price $35/10 lbs. $37/10 lbs. $39/10 lbs. $70/100 carats $100/100 carats $75/lbs $25/lbs $15/lbs Rs 500/kg Rs 8000 Rs 4000 Rs. 1,76,780

LAND & BUILDING REQUIRMENT

Total land required for a project of this size is 1000 Square Feet. Table 7-1: - Space Requirement Description Cutting & Polishing Room Strong Room2 Offices Total Area Required Sq ft 500 250 250 1000

Almost all of the rented area of 1000 square feet would be utilized for cutting and polishing hall and offices/strong room. 7.1 Recommended mode for acquiring Land

The project should be started in a rented building. In this way, the initial capital cost of the project will be far less. 7.2 Suitable Location

The most appropriate location for setting up a gem lapidary would be Peshawar, since major trade/export is taking place in this city. Within Peshawar, Namak Mandi area is preferable as large gem cluster exists here. Similarly, Karachi, with its large gold and gem studded jewelry making industry, is another suitable location. Lahore can be another alternative for establishing this unit. 7.3
2

Infrastructure Requirement Electricity

Vault for security purpose 9

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Water Road

PROJECT ECONOMICS

Table 8-1 Total Project Cost Project cost Plant and Machinery Furniture/ Fixture & Equipment Pre-operational Expenses3 Total Fixed Cost Raw Material Inventory Upfront Building Rent Working Capital Total Project Cost Table 8-2 Project Returns IRR NPV (Rs) Payback Period (yrs) Table 8-3 Financing Plan Financing Equity Debt Ratio 50% 50% Rs 1,058,390 1,058,390 Project 69.10% 2,958,643 2.37 Total Cost 1,000,000 150,000 50,000 1,200,000 176,780 240,000 500,000 2,116,780

Includes legal and registration charges 10

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KEY SUCCESS FACTORS

The commercial viability of this Gemstone Lapidary depends primarily on the regular orders from the customers. Following are some other points that have to be ensured to make the business successful: Availability of raw material (gemstones). Reliability and contacts with the traders. Proximity to the Gem cluster.

10 THREATS FOR THE BUSINESS

The main reason why Pakistan has not been able to boost its exports is due to lack of value addition. Small units of cutting and polishing are established in all cities of Pakistan, but their quality is not according to the international standards. We do not have experienced cutters to use imported machinery and this is the reason that our cutting and polishing of precious stones are poor. Thus lack of adequate technical know-how is one of the major threats for this business. The problem of irregular supply from the mines is also a major problem, which hinders the smooth operation of cutting and polishing units. The present world is demanding calibrated sizes of different shapes of oval, rounds, princess cut, etc. The local market is also highly developed, and on per capita basis, it is one of the strongest in terms of revenue generation in view of the importance given to jewelry in Pakistan. For a business like a lapidary unit safety and security also acts as a major threat

11 REGULATIONS
The Government has decided to declare lapidary as cottage industry and to achieve $1 billion mineral export target by 2006 the government plans to spend $50,000 per annum for cutting, polishing and marketing of Gems, Topaz and other precious stones and metals. The amount of $50,000 would be spent for hiring expatriates and lapidary experts to impart training to local people to set up Gem Trade Centers in the private sector. Under the present export policy, Government has allowed duty free imports of all the equipment, which are used in finishing process of gems and jewelry. This will definitely boost the exports of these two items.

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12.
Sales

Project Financials
12.1 Projected Income Statement
Year 1 2,719,200 500,000 313,798 456,000 45,375 96,735 36,000 40,000 1,487,908 1,231,292 480,000 120,000 12,974 43,000 5,000 660,974 570,318 Year 2 3,568,950 525,000 329,488 501,600 47,644 106,409 39,600 42,000 1,591,740 1,977,210 528,000 132,000 14,271 48,672 5,000 115,000 842,943 1,134,266 Year 3 3,747,398 551,250 345,962 551,760 50,026 117,049 43,560 44,100 1,703,708 2,043,690 580,800 145,200 15,699 51,106 5,000 115,000 912,804 1,130,886 Year 4 3,934,767 578,813 363,260 606,936 52,527 128,754 47,916 46,305 1,824,511 2,110,256 638,880 159,720 17,268 53,661 5,000 115,000 989,529 1,120,727 Year 5 4,131,506 607,753 381,423 667,630 55,154 141,630 52,708 48,620 1,954,917 2,176,588 702,768 175,692 18,995 56,344 5,000 115,000 1,073,799 1,102,789 Year 6 4,338,081 638,141 400,495 734,393 57,911 155,793 57,978 51,051 2,095,762 2,242,320 773,045 193,261 20,895 59,161 5,000 115,000 1,166,362 1,075,958 Year 7 4,554,985 670,048 420,519 807,832 60,807 171,372 63,776 53,604 2,247,958 2,307,027 850,349 212,587 22,984 62,119 5,000 115,000 1,268,040 1,038,987 Year 8 4,782,734 703,550 441,545 888,615 63,847 188,509 70,154 56,284 2,412,505 2,370,230 935,384 233,846 25,283 65,225 5,000 115,000 1,379,738 990,492 Year 9 5,021,871 738,728 463,623 977,476 67,040 207,360 77,169 59,098 2,590,494 2,431,377 1,028,923 257,231 27,811 68,486 5,000 115,000 1,502,451 928,927 Year 10 5,272,965 775,664 486,804 1,075,224 70,392 228,096 84,886 62,053 2,783,119 2,489,846 1,131,815 282,954 30,592 71,911 5,000 115,000 1,637,271 852,574

Cost of goods sold Rough Gems Consuables Payroll (production Staff) machine Maintenance Direct Electricity POL Stationery Total Gross Profit Operating expenses Payroll (Admin) Payroll (Marketing and Sales) Fixed electricity Administrative Overheads Amortization Depreciation Total Operating Profit Non-operating expenses Financial Charges on Long-term Loan Financial Charges on Running Finance Building Rent Total Profit Before Tax Tax Profit After Tax Retained Earnings beginning of year Retained Earnings end of year

77,152 180,000 257,152 313,166 7,729 305,437 305,437

66,367 189,000 255,367 878,899 149,043 729,856 305,437 1,035,293

53,642 198,450 252,092 878,794 172,542 706,252 1,035,293 1,741,545

38,626 208,373 246,999 873,728 176,977 696,751 1,741,545 2,438,296

20,908 218,791 239,699 863,091 180,430 682,661 2,438,296 3,120,957

229,731 229,731 846,227 182,801 663,426 3,120,957 3,784,383 241,217 241,217 797,770 173,042 624,728 3,784,383 4,409,111 253,278 253,278 737,214 160,040 577,174 4,409,111 4,986,284 265,942 265,942 662,985 143,358 519,627 4,986,284 5,505,911 279,239 279,239 573,335 122,508 450,827 5,505,911 5,956,738

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Year 0 Current Assets Cash Stocks and Inventory Receivable Pre-paid Building Rent Total Gross Fixed Assets Less: Accumulated Depreciation Net Fixed Assets Intangible Assets Pre-operational Expenses Total Total Assets Current Liabilities Running Finance Accounts Payable Total Long term Liabilities Long term Loan Total Equity Paid-up Capital Retained Earnings Total Total Liabilities and Equity 771,380 771,380 1,542,760 771,380 243,741 1,015,121 1,766,839 771,380 921,643 1,693,023 2,093,574 771,380 1,627,895 2,399,275 2,721,530 428,620 428,620 368,708 368,708 298,012 298,012 214,590 214,590 342,760 342,760 288,630 94,380 383,010 102,539 102,539 107,665 107,665 162,760 180,000 342,760 1,150,000 1,150,000 170,898 271,920 189,000 631,818 1,150,000 115,000 1,035,000 179,443 356,895 198,450 734,788 1,150,000 230,000 920,000 188,415 374,740 208,373 771,527 1,150,000 345,000 805,000 Year 1 Year 2 Year 3

Gemstone Lapidary

12.2 Projected Balance Sheet

Year 4 197,836 393,477 218,791 810,104 1,150,000 460,000 690,000 Year 5 207,728 413,151 229,731 850,609 1,150,000 575,000 575,000 Year 6 218,114 433,808 241,217 893,139 1,150,000 690,000 460,000 Year 7 229,020 455,499 253,278 937,796 1,150,000 805,000 345,000 Year 8 240,471 478,273 265,942 984,686 1,150,000 920,000 230,000 Year 9 252,494 502,187 279,239 1,033,920 1,150,000 1,035,000 115,000 Year 10 527,296 293,201 820,497 1,150,000 1,150,000 -

50,000 50,000 1,542,760

45,000 45,000 1,711,818

40,000 40,000 1,694,788

35,000 35,000 1,611,527

30,000 30,000 1,530,104 113,049 113,049 116,153 116,153 771,380 2,324,646 3,096,026 3,325,228

25,000 25,000 1,450,609 118,701 118,701 (0) (0) 771,380 3,007,306 3,778,686 3,897,387

20,000 20,000 1,373,139 124,636 124,636 771,380 3,670,732 4,442,112 4,566,748

15,000 15,000 1,297,796 130,868 130,868 771,380 4,295,460 5,066,840 5,197,708

10,000 10,000 1,224,686 137,411 137,411 771,380 4,872,634 5,644,014 5,781,425

5,000 5,000 1,153,920 144,282 144,282 771,380 5,392,261 6,163,641 6,307,923

820,497 151,496 151,496 771,380 5,843,088

6,614,468 6,765,964

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Year 0 Year 1 243,741 5,000 115,000 (271,920) (162,760) (8,139) 94,380 (162,760) 178,062 Year 2 677,903 5,000 115,000 (84,975) (8,545) 8,159 712,542

Gemstone Lapidary

12.3 Projected Cash Flow Statement

Year 3 706,252 5,000 115,000 (17,845) (8,972) 5,126 804,561 Year 4 696,751 5,000 115,000 (18,737) (9,421) 5,384 793,977 Year 5 682,661 5,000 115,000 (19,674) (9,892) 5,652 778,747 Year 6 663,426 5,000 115,000 (20,658) (10,386) 5,935 758,317 Year 7 624,728 5,000 115,000 (21,690) (10,906) 6,232 718,364 Year 8 577,174 5,000 115,000 (22,775) (11,451) 6,543 669,491 Year 9 519,627 5,000 115,000 (23,914) (12,024) 6,871 610,560 Year 10 450,827 5,000 115,000 (25,109) 252,494 7,214 805,426

Operating activities Net profit Amortization (Pre-operational Expenses) Depreciation Accounts receivable Stocks-RM Accounts Payble Cash provided by operations Financing activities Long term debt principal repayment Add: Building Rent Expense Building Rent Payment Addition to long term debt Running Finance Repayment Issuance of share Cash provided by (used for) financing activites Total Investing activities Capical Expenditure Cash provided/used by investing activities Net Cash Cash balance brought forward Cash balance brought forward

(59,912) 180,000 (180,000) 428,620 (342,760) 771,380 1,020,000 857,240 (411,672) (233,610) (189,000)

(70,696) 189,000 (198,450) (288,630)

(83,421) 198,450 (208,373)

(98,437) 208,373 (218,791)

(116,153) 218,791 (229,731) 229,731 (241,217) 241,217 (253,278) 253,278 (265,942) 265,942 (279,239) 279,239 (293,201)

(368,776) 343,766

(93,344) 711,217

(108,856) 685,121

(127,093) 651,654

(11,487) 746,831

(12,061) 706,303

(12,664) 656,827

(13,297) 597,263

(13,962) 791,464

(1,200,000) (1,200,000) (342,760) (342,760) (233,609) (233,609) 343,766 55,021 398,786 711,217 398,786 1,110,003 685,121 1,110,003 1,795,124 651,654 1,795,124 2,446,779 746,831 2,446,779 3,193,609 706,303 3,193,609 3,899,912 656,827 3,899,912 4,556,739 597,263 4,556,739 5,154,002 791,464 5,154,002 5,945,466

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13 KEY ASSUMPTIONS
Table 13-1 Machinery Assumptions Number of Machines Installed Year 1 Capacity Utilization Maximum Capacity Utilization Total Production of the unit per day(stones) Total Production of the unit per month Total Production of the unit per year Table 13-2 Operating Assumptions Annual Production capacity Days operational per month Days operational per year Table 13-3 Economy Related Assumptions Electricity growth rate Wage growth rate Petrol, Oil and Lubrication (POL)price growth rate Stationery price growth rate Table 13-4 Cash Flow Assumptions Accounts Receivable cycle (in days) Accounts payable cycle (in days) Raw material inventory Table 13-5 Product mix Bead making Table ware & decoration Gems cutting and polishing 45.4% 27.3% 27.3% 30 30 60 10% 10% 10% 5% 3,300 25 300 12 80% 100% 11 275 3,300

4 Bead

making and Table ware & Decoration is done by procuring raw material while Gems cutting and polishing is the service provided by the Lapidary Unit. Pre-Feasibility Study Gemstone Lapidary 16

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Table 13-6: -Revenue Assumptions Production capacity of the unit Bead making Table ware & decoration Gems cutting and polishing Sale price growth rate Domestic Sales Table 13-7: -Expense Assumptions Machine maintenance (% of total machinery cost) Machine maintenance growth rate Pre-paid building rent (months) Rough stones cost per year (according to the given composition) Raw material cost growth rate Spare part inventory growth rate Rent growth rate Table 13-8: -Financial Assumptions Project life (Years) Debt Equity Interest rate on long-term debt Interest rate on short term debt Debt tenure (Years) Debt payments per year Discount rate (weighted Avg. cost of capital for NPV) 3.75% 5% 12 500,000 5% 10% 5% 3,300 500 800 1,800 5% 100%

10 50% 50% 18% 18% 5 1 20%

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