FEASIBILITY STUDY REPORT ON ESTABLISHMENT OF A QUARRY MINE | A BUSINESS PLAN

1.0     INTRODUCTION:

The quarry business being proposed in this brief study is about the establishment of a quarry site where large deposits of stone/granites will be blasted and crushed into 'chippings' of varying sizes/Stone/granites deposits have been identified.

The identified site will support the production of chippings for quite a long period of time. The Reserve Deposit is estimated to last for 50 years at a yearly production of 500,000 tons/year.

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Chippings are basic inputs in road construction works, buildings, landscaping, construction of bridges and a host of other civil engineering works. Activities in these areas by governments, corporate entities and individuals are presently at their peak. The situation is given a boost by the infrastructural development policies/programmes of the three tiers of government, especially at the State level. The market for chippings is so large that saturation in the ne *r future is out of the question. If anything, the quantum and tempo of infrastructural development activities is of the magnitude that is capable of constraining supply and creating a seller's market in which big players in the quarry business will continue to call the shots for a long time.

Company Limited is aware of this business opportunity and intends to exploit it.

Basic Assumptions

This investment proposal/study, apart from the prevailing spate of infrastructural development activities, can further be anchored on the following critical assumptions:

1.       Some macro-economic indicators like the domestic price level and exchange rate will remain stable, at least, in the medium term.

2.       Democracy will continue to thrive thereby engendering political stability necessary for socio-economic growth and development.

3.       The basic raw material for the quarry business (deposits of stone) is freely available and other necessary inputs like explosives, gas and lubricants can easily be obtained locally.

4.       The cost of the inputs is low vis-à^-vis the value of output and will remain unchanged, other things being equal, in the medium term.

5.       The quarry site will enjoy a secure tenure as the land will be acquired in a manner satisfactory to landowners/stakeholders from the community.

6.       Trained and/or trainable stone blasting/crushing operatives will be available and will be recruited under conditions that will keep them in employment, at least, in the medium term.

7.       The producer goods, mainly plant and equipment, are easily serviceable and will function optimally for the first 3 years of their life, a time long enough to generate revenues for their eventual replacement in the ordinary course of business.

The present macro-economic indicators, economy-wide trends, development policies and the conditions peculiar to the quarry business provide reasonable assurance that the assumptions are realistic and will hold. Therefore one is assured that some of the necessary conditions for the unhindered operations of the quarry can be guaranteed.

Technical Process

The technical processes involved in the production of chippings are fairly straight forward. They include:

a)     Clearing and setting up the site

b)     Blasting the boulders using explosives

c)       Excavation of boulders (big stones), using a bulldozer and excavator

d)      Crushing & Grading into appropriate sizes

e)       Loading and tipping

Operational Structure (Staffing of the Proposed Quarry Plant)

The Management of the Quarry Plant rests with the Chairman/Managing Director of the company and the Directors, who constitute the Board. This board has the key role of taking policy decisions on issues affecting the operation of the company on a routine basis. It is proposed that the plant operations be handled by three basic departments or units, namely:

§  Production/Technical Operations to be headed by a Production manager

§  Administrate to be headed by an Administration Manager

§  Accounting/sales to be headed by a qualified Accountant

Up to 40-45 workers will be recruited as the plant becomes fully operational. Most of the employees will be drivers and operators of the various equipment/tools. Personnel emoluments are covered under recurrent/operating costs. The technical operatives will be given sufficient training to enable them deliver effective and efficient service which is in the overall interest of the company and its clients.

2.0     FINANCIAL ANALYSIS

The financial analysis of the proposed quarrying plant shall appraise the financial projections; determine the economic production levels with a view to justifying the financial feasibility of the proposed plant.

2.1 ASSUMPTIONS

The financial projection and viability analysis are predicted on the following assumptions:

i.        An installed capacity of 250 tonnes of mixed chippings per hour and assumed production capacity of 220 tonnes.

ii.       Two shifts of eight hours per shift translating to 16 No. hours per day.

iii.      250 working days per year.

Full production capacity of 80,000 tonnes of mixed chippings per year (derived from i-iii) above

iv.      Plant operating capacities are 60%, 65% and 70% in the first, second and third year, respectively.

v.       Constant prices for other raw materials (explosives, rue! and lubricants) within the projected period.   The major raw material, the deposits are free.

vi.      Fringe benefits such as rent allowance, transport allowance, health and insurance are included in the salaries and wages. Wages and salaries remain fixed within the projected period.

vii.     Depreciation: Fixed assets to be depreciated on a straight line basis as follows:

S/N	Description	Life (years)	Percentage
i.	Buildings	10	10
ii	Infrastructure	5	20
iii	Plant, Machinery and Equipment	4	25
iv	Vehicles	4	25
v	Furniture and office equipment	4	25

viii.    Estimate for construction were obtained from priced bill of quantities and random rates were checked with present rates.

ix.      A Contingency provision of 10% of project cost.

(5% as physical contingency, 5% as price contingency)

x.       Most of the equipment costs were obtained directly from market surveys conducted internally and overseas. Adequate provision was made in the cost to cover fluctuations in the cost at time of purchase.

xi.      Cost of the installation of plants and equipment and training of personnel to handle those plants are put 7% of the cost of equipment.

xii.     Cost of explosives is Nl00/tonne of chippings blasted while gas and lubricant is at N250/tonne of production

xiii.    Maintenance expenses for plants and equipment are estimated at 20% of capital cost of equipment in the first year of commercial operation and will increase annually by 10%.

xiv.    FINANCE CHARGES

Interest on Term Loan             -        15% p.a.

Interest on Bank Overdraft     -        18%p.a.

Repayment Programme           -        2¼ years (9 quarters)

Moratorium period                  -        12 months

Total life of term loan              -        3¼ years

xv.     Associated revenue computations were put at very moderate values which compares favorably with those obtained in similar quarries. Hence weighted average price of output (mixed chippings) as at today is N2,700 per ton, ex-factory price: is put at N2,400 per ton.

xvi.    Cost of licensing and permits have been included in the pre-operational expenses.

xvii.   Raw material cost is inclusive of transportation and handling charges as well as 20% wastages.

xviii.  Prevailing tax rate of 45% is to be used.

2.2     PROJECT CAPITAL STRUCTURE    

          The proposal for the realization of the required capital for the execution of the proposed Quarrying Plant is a stated below: 

Table 1

S/N	SOURCE	AMOUNT N’000	% CONTRIBUTION
1.	Equity contribution and promoters	100,195	25
2.	Bank Term Loan	300,00	7514.96
TOTAL (INVESTMENT COST)		400,195	100.0

 Note:

i.        Bank Term Loan Repayment -        2¼ years (i.e. 9 quarters)

ii.       Moratorium Period                           -        12 months

iii.      Total life of the loan                          -        3¼ years

iv.      Debt/ equity ratio                              -        2.66.:1

v.       The N10:195m upward adjustment of equip contribution arose from increase in the cost of plant and equipment 

vi.      This pushed up the investment cost of N300.195m

2.3     REVENUE ESTIMATES

          The revenue estimate is as presented in the accompanying table:

Table 2

Year	Capacity Utilization (%)	Output ‘000 tons	Price Per ton (N)	Revenue N ‘000
1.	60	528	2,400	1,267
2.	65	572	2,400	1,372
3.	70	616	2,400	1,478
4.	75	660	2,400	1,584
5.	75	660	2,400	1,584

Notes

i.        Installed Plant capacity                     =       250 tons/ hour

ii.       Assumed production Capacity                   =       220 tons/hour

iii.      2 No Shifts of 8 hours each                        =       16 No. hours per day

iv.      250 working days in the year is assumed

v.       From the above, full production capacity =     220x16x250 = 880,000

vi.      Ex-factory Price                                          =       N2,700 per ton

vii.     Factory Price                                              =       N2,400 per ton

Table 3: Investment Cost Estimates

Item No.	Description	Cost N’000
(A)	Capital Cost
1.	Preoperational expenses	10,000
2.	Land acquisition & Community Issues	15,000
3.	Construction, Road and Building	25,000
4.	Plant and equipment including installation and training	300,195
	Sub Total A (Capital Cost)	N350,195
(B)	Recurrent Cost/ Working Capital	Initial Cost N’000
1.	Administrative expenses	5,000
2.	Raw Materials	25,000
3.	Maintenance	15,000
4.	Professional Fees	5,000
	Sub- Total B ( Working Capital)	N50,000
	Total capitalization (A+B)	N400,195

Note: Contingency provision 10% of project cost was accommodated in the Cost of construction.

2.4     INITIAL WORKING CAPITAL REQUIREMENTS

          The initial Working Capital requirement of the proposed project is projected as follows:

S/N	ITEM	N’000
1.	One month stock of raw materials	25,000
2.	Three months of maintenance expenses	15,000
3.	Three months of administrative expenses	5,000
4.	Three months of professional fees	5,000
	Total	N50,000

Table 4: annual depreciation provision using the Straight Line Method

S/No	Fixed Asset	Cost N’000	Expected Life (yes)	Rate (%)	Amount N’000
1.	Land	15,000	Perpetual	-	-
2.	Buildings	10,000	10	10	1,000
3.	Infrastructure	25,000	5	20	5,000
4.	Plant, Machinery & Equipment	300,195	4	25	75,000
5.	Furniture & Office Equipment	10,000	4	25	2,500
	Total				N83,500

Note: Land is on lease for 7 years.

Annual Depreciation Provision       =       N83.5

Table 5: Loan amortization Schedule N’000

Year/Quarter	Opening Balance of Principal	Interest Payment	Principal Repayment	Total Repayment	Closing Balance of Principal
Year 1	300,000	45,000	-	45,000	300,000
Year 2
1st Qts	300,000	11,25	33,330	44,580	266,670
2nd Qtr	266,67	10,00	35,330	43,330	233.290
3rd Qtr	233,49	8,74	33,330	42,070	19,960
4th Qtr	199,96	1,49	33,330	40,320	166,630
Year 3
1st Qtr.	166,63	6,24	33,330	39,570	133,330
2nd Qtr	133,33	4,99	33,330	38,320	100,000
3rd Qtr	100,00	3,75	33,330	37,080	62,920
4th Qtr	62,92	2,35	33,330	35,680	27,240
Year 4
1st Qtr	27.24	1,020	33,350	34,350	6.1/0

Assumption:

Loan Amount                =       N300,000,000

Interest Rate                  =       15% p.a.

Repayment Period         =       2 ¼ Years (i.e. Nine quarters)

Grace Period                  =       12 months

1^st Year:                         =       June 2008- May 31, 2009

Note: summary of Interest deductions on long term loan.

1^st Year                          =       N37.5m

2^nd Year                          =       N17.3m

3^rd Year:                         =       N1.02m

Table 7: Capital Allowance Schedule

S/No	Items	Year 1	Year 2	Year 3	Year 4
1	BUILDINGS	N’000	N’000	N’000	N’000
	Cost/Written Down Value	10,000	7,500	6,750	6,075
	Less (a) Initial Allowance 15%	1,500	-	-	-
	(b) Annual Allowance 10%	30,008	22,500	20,200	18,200
	Written Down Value	7,500	6,750	6,075	5,468
2	Plant Machinery and Equipment
	Cost/Written Down Value	300,000	225,000	202,500	182,300
	Less (a) Initial Allowance 15%	45,000	-	-	-
	(b) Annual Allowance 10%	30,008	22,500	20,200	18,200
	Written Down Value	225,600	202,500	182,300	164,100
3.	Infrastructure
	Cost/ Written Down Value	25,000	18,750	16,880	15,200
	Less (a) Initial Allowance 15%	3,750	-	-	-
	(b) Annual Allowance 10%	2,500	1,8700	1,680	1,520
	Written Down Value	18,750	16,880	15,200	13.68
4.	Furniture and Office Equipment	10,000	7,5000	6,750	6,075
	Cost/ Written Down Value		-	-	-
	Less (a) Initial Allowance 15%	1,500	-	-	-
	(b) Annual Allowance 10%	1,000	750	675	607
	Written Down Value	7,500	6,750	6,075	5,468
	CAPITAL ALLOWANCE (1-5 ABOVE)	86,250	25,870	23,230	20,934

TABLE 8: PROJECTED PROFIT AND LOSS STATEMENT

Year	1	2	3	4
Capacity Utilization (%)	60	65	70	75
Output (‘000tons Price Per ton (N)	528	572	616	660
Gross Sales (N‘m)	1,267,200	1,372,860	1,478,900	1,584,000
Less sales expresses (1%)	12,610	13.700	14,900	15,800
Less Excise Duty (5%)	63,300	68,60	73,90	79,20
Less Direct Expenses (Labour, raw material & maintenance)	218,740	301,840	325,160	348,480
Overhead (20% of Administrative expenses)
Depreciation	83,300	83,300	83,300	83,300
Principal on Loan	-	133,300	153,300	27,400
Additional Capital Cost	-	-	-	-
Profit before Interest & Tax	839,260	773,320	825,140	1,029,800
(PBIT)
Profit before tax (PBT)	839,260	773,320	825,140	1,029,800
Add back depreciation	83,300	83,300	85,300	83,300
Less capital Allowance	86,250	25,870	23,230	20,934
Taxable Income	836,31	830,750	885,210	1,092,166
Less 45% Corporation tax	376,33	373,830	398,344	491,474
Profit after Tax	459,977	456,920	487,406	538,326

2.6     Recurrent Cost Items:

Recurrent Costs are made up of raw materials, maintenance expenses, Administrative and Overhead Costs and Professional fees. 

Administrative Expenses

Administrative expenses here include:

(a)              Staff Salaries

(b)             Rents and rates

(c)              Traveling

(d)             Licenses and Permits

(e)              Advertisement and entertainment 

Professional Fees: Consist of the following:

(a)              Legal and Professional fees

(b)             Audit fees

(c)              Management fees

(d)             Director’s remuneration (transport inclusive) 

ECONOMIC VIABILITY ANALYSIS

The principal indicators used in determining the viability of projects are the payback period (PBP), the internal rate of return (IRR), the Net present Value (NPV) and Cost- Benefit ratio (CBR) for the proposed project, we are constrained to use the payback period only. 

By way of definition, the payback period represents the time period it takes a plant (i.e proposed period) to recoup its original capital outlay. In table 7, the profit and loss statement indicates that a total sum of N354.9million will accrue as profit after tax from the project within two years of operation. Since the initial capital investment is N300.20million, it implies that the proposed project could payback itself before the expiration of two years. This goes to show the high profitability of the proposed plant.

Continuing, 45% corporate tax has been applied, not only as a matter of convention, but also in a bid to exercise all necessary precautions in the absence of which there would be a tendency to overestimate the profit accruing to the investor(s). the possibility also exists that the plant might benefit from a one-year tax moratorium being incentive the government normally gives to SMEs. If the latter situation applies, the original Capital outlay could be recouped in about sixteen months. 

APPENDIX 1

PLANT AND EQUIPMENT

S/N	ITEM	NO REQUIRED		UNIT COST	TOTAL COST
		INITIAL		FINAL	INITIAL N’000	FINAL N‘000
1.	150 tons crusher	1	1	120,000	120,000	120,000
2.	650 KVA generator	1	2	16,000	16,000	32,000
3.	CAT excavator (320,325)	1	2	16,000	16,000	32,000
4.	CAT D8K Bulldozer	1	1	18,000	18,000	18,000
5.	CAT 966 Wheel Loader	1	2	12,000	12,000	24,000
6.	CAT 980 Wheel Loader	1	2	14,000	14,000	28,000
7.	Drill Wagon	1	2	5,000	5,000	10,000
8.	Compressor 750	1	1	1200	1,260	1,200
9.	Jack Hammer	1	2	100	100	200
10.	60 ton Weighbridge	1	1	4,000	4,000	4,000
11.	CAT Dumper Trucks	2	3	6,000	12,000	18,000
12.	100 KVA Generator	1	1	4,000	4,000	4,000
13.	Oxy-Acetylene Set	1	1	150	150	150
14.	Arc welding set	1	2	800	800	1,600
15.	Tools	1	2	200	200	400
16.	Maul Trucks	5	10	10,000	50,000	100,000
17.	Toyota Pick-up	2	3	2,000	4,000	6,000
	Staff Bus 508	1	2	2,000	2,000	4,000
	Add 7% for installation				20,745	403,550
	Base Total				300,195	431,798

Source:       Available BOQ by some operators in the industry                        and market surveys & Research

Note:   Additional Capital cost = N431.798 less N309,195m = N131,603

APPENDIX II

(A) DETAILED ESTIMATE OF SOME CAPITAL COST 

S/N	ITEMS
	A (LAND)	TOTAL COST
	INITIAL N‘000	FINIAL N‘000
i.	Land Acquisition/ community Issues	9,000	13,000
ii.	Compensation	2,500	2,500
iii.	Survey and documentation	2,500	4,500
iv.	Relocation	7,000	5,000
	Sub-Total (A)	15m	25,000m

(B) BUILDING

	ITEM	INITIAL COST N‘000
	Workshop	6,000
	Administrative Building	6,000
	Gate, Gate House and part fencing	4,000
	Magazines (store house for explosives	5,000
	Fuel Dump, Pump and Tank	4,000
	Sub-Total (B)	25m
	(C) PRE-OPERATIONAL EXPENSES	INITIAL COST N’000
	Office Accommodation and furniture and temporary workers quarters	2,000
	Project vehicles	4,000
	Licensing and Permits	2,000
	Consultancy	2,000
	Sub-Total (C)	10m
	(D) INFRASTRUCTURE	INITIAL COST N’000
(i)	(a) Access Roads and Drains
	Preliminaries	2,000
	Earthworks	4,000
	Surfacing	2,000
	Drains and culverts	3,500
	SUB-TOTAL	12,000
(ii)	(b) Water Supply
	Water Source	500,000
	Water Tank	1,000,000
	Distribution	300,000
	Miscellaneous	200,000
	SUB- TOTAL	2,000,000
	(c) Electricity Supply
	(d) Telecommunications:
	Mobile Handsets	200,000
	Radio Main Equipment	800,000
	SUB- TOTAL	1,000
	Total (A+B+C+D)	5,000,000

APPENDIX III

Explanatory note:

Estimation of labour, raw materials and maintenance expenses

Assumption:        Cost of explosives                   =       N1000 per ton

                             Cost of lubricants                    =       N250 per ton

Total cost of raw materials per ton                      =       N350

For maintenance expenses see xiii para. 2 1 p.6

Note that the 1^st year provision = output multiplied by cost of raw materials (explosives and lubricants) per ton plus provision for maintenance expenses and personnel cost. 

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