Mara Diamond Trading (Pty) Ltd

Proposal for set-up of diamond cutting, polishing and trading platform

JUNE 2015

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table of contents
chapter page

01 Introduction 3

02 General Contact & Verification Information 5

03 Executive Summary 6

04 South Africa in the global diamond mining context 9

05 Cutting and polishing industry 12

06 Business Case 14

07 Developing industry skills 16

08 Economic outlook and forecast 18

09 Financial, Legal and Institutional 20

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01
INTRODUCTION

“Diamonds are forever” –James Bond

This business plan outlines the business case for investing in Mara Diamond Trading
which entails the setting up of a small scale cutting and polishing works as well as a
registered platform for buying and selling certified cut diamonds. The first phase of this
business operation will cost in the order of R1m which will entail set-up costs for a basic
business operation, overheads and stock-in-trade.

South Africa is one of the few countries (along with Russia, Australia and Canada) with
activity in all aspects of the diamond pipeline, from extraction through to diamond retail.
However, South Africa’s prominence in diamond mining has declined over the years, as
many of the large-scale known South African diamond deposits reach the likely end of
their life cycles, together with the emergence of new large-scale producing countries,
e.g. Botswana and Canada.

This proposal looks at the South African diamond cutting and polishing industry within a
global context. It then consider the MDT business case and motivates for its viability,
sustainability and long-term profitability. The proposal then considers the importance of
making a training intervention to ensure the appropriate skills sets are in place to ensure
the transition of the business from a small scale enterprise through the various growth
curves to maturity.

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This proposal supports the basic premise that margins of 15% to 50% is not only
possible but can be maintained for the foreseeable future. This bodes well for MDT and
its aspiration for sustainable development and future growth.

_______________________

Reyad Malick
Chief Executive Officer and MD

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02
GENERAL CONTACT AND VERIFICATION INFORMATION

Company Name: Mara Diamond Trading (Pty) Ltd

Trading Name: Mara Diamonds.

Reg. No: 2013/234773/07

VAT Reg. No: awaiting finalization of registration

B-BBEE: 100 percent black-owned

Directors: Mr Reyad Malick– Executive Director

Executive: Mr. Reyad Malick – Chief Executive Officer

Web: www.maradiamonds.co.za

E-mail: info@maradiamonds.co.za

Tel no: +27 (0) 82 837 6463

Fax no:

Offices: No. 30

Highgate Street

Maitland

Cape Town

7945

The Republic of South Africa

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03
EXECUTIVE SUMMARY

Introduction

M.D.T is a newly registered company that wants to get into the polished certified
diamond industry, supplying the trade as well as the general public, both locally and
abroad.

Background

The company is the brainchild of Mr Reyad Malick and seeks to leverage its established
network of reliable sources of rough and finished diamond product, primarily from South
Africa. Mr Reyad Malick is a reputable and well respected individual in his community as
well as the business fraternity.

Motivation

Although the small-scale diamond trading and cut and polish industry has been in
decline for a number of years, there are still a number of lucrative niche markets that
are highly profitable and provide excellent Return on Investment (ROI).

The opportunity

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Buying polished certified diamonds at between 45% to 60% below Rappaport. Re-
selling these to the trade at 25% to 30% below rap, and the general public at the
Rappaport rate. Projected profit margin is on average from 15% to 50% profit on these
stones.

MDT will have to invest in skills training in the medium to long term in order to enhance
sustainability, viability and profitability. This could be accessed through various public
and private sector initiatives that could strategically enhance the business.

This business will require an initial capital investment of R1 million which comprises a
basic start-up capital for a dealing and cutting works, This is estimated to cost no more
than R97 000.00 which fits in with the industry norm of a ratio of 90% of cost towards
acquisition of stock.

In a small operation like MDT it is likely that it could initially be a single one man
operation in the inception phases until the business can absorb the additional costs of
specialized human resources. This could absorb as much as 43% of costs in the growth
phase of the business but will unlock a significantly greater return on investment

The diamond industry is a capital-intensive and dollar denominated business. This leads
to cash flow constraints and high levels of uncertainty around costs and revenues. This
creates barriers to entry, limited attractiveness to new entrants, in particular small and
BEE enterprises. The practice of buyers (in both the domestic and international market)
of buying on “appro” or consignment creates significant pressure on cash flow as rough
is currently supplied only on a cash basis. This is particularly problematic for smaller
players. Financial costs e.g. VAT payments, debt financing, transaction costs, managing
foreign exchange risk, are another significant cost item. South Africa is not competitive
in this area with other cutting centres.

There is also inadequate access to finance for the industry in South Africa. Very few
banks understand the diamond industry and will provide finance to the industry e.g.
ABN-Amro Bank (a mining and mineral specialist). Other banks feel the industry is too
high risk and insufficiently transparent.

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MDT must consequently secure private funding in the knowledge that positive returns
are not only possible but in fact highly probable and has the potential through re-
investment of capital to grow substantially and quantum leap over a short timeframe.
There is no question that MDT offers a highly lucrative opportunity for investment.

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04
SOUTH AFRICA IN THE GLOBAL DIAMOND MINING CONTEXT

New opportunities in small-scale mining in South Africa still exist. South Africa’s cutting
and polishing industry is estimated to be the 5th largest by value, after India, Israel, the
US and China. The majority of global cutting and polishing has shifted over the past
decade to lower cost cutting centres such as India and China. South Africa has not
declined as rapidly as the Belgian and Israeli cutting centres, which now outsource the
majority of their cutting to lower cost centres. While initially these lower cost cutting
centres were only competitive in processing smaller stones, where quality of cut was
less critical, capabilities have extended to larger stones as skills have improved. This
has even extended in some cases to relocating entire factories to China or India.

Even the most successful cutting centres are experiencing low margins and high debt
levels, in particular during the period of high rough cost relative to polished prices. De
Beers records indicate that 92% of local production by volume and 49% by value is
defined as Category 3, and therefore not economically ‘cuttable’ in South Africa.
Sightholders in South Africa have been demanding a higher size and grade of stone
than is available from local production. The equivalent of 162% of locally mined
production value in Category 1 (10.8 and larger) and 152% of high grade Category 2
are provided to South African sightholders. In contrast, the equivalent of 69% of local
production value of medium grade Category 2 and 2% of Category 3 are supplied to
South Africa, through the London Mix.

In the secondary market, however, indications are that polishers have difficulty affording
the large, high quality stones produced by alluvial mines. As a result, it is estimated that
the majority of these stones are exported as rough. The successful trading hubs are

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heavily reliant on inclusion into established diamond demand networks, low duty or duty
free import and export of diamonds, highly incentivised environments (including tax
concessions or exemptions and limited or no exchange control) and specialised
financial services. In some cases, these concessions are now being questioned (e.g.
Belgium is under pressure to conform with EU norms with Reasons for limited focus on
other areas:

Why not smaller stones?

The current industry structure is too small scale, and has inadequate use of technology
to compete with scale and technology intensive competitors, contributing to a
processing cost per carat that is much too high. This is an area where price is much
more important than quality, and many other producers can produce far more efficiently
than South Africa.

Why not industrial diamond processing?

Industrial diamond processing is not attractive to South Africa for numerous reasons.
Industrial diamond processing is increasingly dominated by synthetic diamond inputs
(over 90% synthetics, with this number increasing). Even more than the processing of
smaller stones, the need for scale and low factor costs restricts competitiveness and
differentiation opportunities for a relatively high cost location such as South Africa, the
fundamental economics of South African production would need to be changed in order
to create widespread opportunities in industrial diamond processing.

Final processing tends to be located close to major processing and industrial hubs. For
example, the largest market for industrial diamonds, the USA ,has significant production
capacity of its own and major domestic synthetic supply which is expected to increase.

Why not an extensive trading focus in the long-term (with the potential exception of the
SADC/African trading hub)?

The trend of increased vertical integration is likely to result in less trade in the open
market in the long term. South Africa also has an uncompetitive operating environment
that is unlikely to be able to match the proximity to markets and incentivised

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environment of major trading hubs such as Antwerp, Israel and New York; and
emerging hubs such as Dubai and Shanghai (including tax concessions and
deferments, financing and infrastructure). These trading hubs are also better located as
centres with a long trading heritage and reputations for trading various commodities to
major consuming markets.

Addressing these inadequacies would require massive government interventions and

special concessions for the diamond industry that are not available to other dollar based
commodities or capital-intensive production processes.

Why not mass production ?

This is a highly price sensitive part of the market, less scope for differentiation. SA is
unlikely to be a sufficient scale player to service this market. In addition, this market
segment provides limited opportunities for value addition and margins, and is highly
capital intensive with limited employment generated per ton of gold or platinum worked.

Realising the identified opportunities is not a foregone conclusion, given the highly
competitive nature of the international industry and the domestic challenges facing the
industry. Depending on constituency agreement on interventions and subsequent
effectiveness of rollout, each of these potential opportunities will become more or less
feasible.

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IMPROVED PRODUCTIVITY OF CUTTING AND POLISHING AND GEMSTONE INDUSTRY – LABOUR,
MANAGEMENT, PRODUCTION PROCESS, TECHNOLOGY

The South African industry, like most established diamond industry locations
internationally (as opposed to recently emerging hubs), has grown out of family
businesses. As a result, formal business training and cross-pollination of business
principles has been limited. The industry has also traditionally been secretive, leading to
limited collaboration around production, distribution and marketing. Together, these
factors have inhibited economies of scale and the competitiveness of production
processes.

South Africa is therefore currently not globally competitive in terms of the rate of cutting
and polishing, nor the volumes of output, which competitive countries are able to
achieve because of, amongst other factors, efficient production processes, scale and
advanced technology employed. When compared to lower cost cutting centres, the
technology take-up rate in South African cutting operations is considered by some role
players to be lagging behind, in particular in smaller cutting operations.

The stringent finance environment inhibits the access to capital for the purchase of high-
technology equipment. Most small cutters have limited financial resources to invest in
technology and infrastructure improvements. This poses a problem to the SA diamond
industry as it stagnates development

The quality of the manufactured in South Africa is not perceived as a whole to be

competitive with other countries, leading to many foreign buyers purchasing diamonds
from SA to set into elsewhere. This minimises revenue on the value addition of the

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diamond as it is not set in for purchase in South Africa. The usage of better equipment
could lead to an increase in the quality of diamond goods produced in SA.

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06
BUSINESS CASE

Mara Diamond Trading will be sourcing and buying polished certified diamonds at 45%
to 60% below Rappaport. It will then be re-selling these to the trade at 25% to 30%
below rap, and the general public at the Rappaport rate. MDT could make anything from
15% to 50% profit on these stones.

Until MDT finalizes its own licensing processes it will be buying rough diamonds through
a licensed entity from a licensed entity and having them cut, polished and certified, and
selling them as stated above. These prices could vary between $450 to $2500 per
carat, depending on size, color, clarity and shape.

We are in the process of applying for a rough diamond dealers licensed in the name of
M.D.T.

Given that the tourism market remains a lucrative and long-term potential option there is
great value to creating a dedicated M.D.T website and sell online as well.

It is MDTs stated objective to becoming a recognized name in the diamond industry,

and to exceed customers’ expectations.

A thorough evaluation of the rough diamonds must be in order to negotiate a fair price.
The field on a rough stone is approximately 45%.

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Business process

I. Cutting and polished costs between R 700 and R 1000 per CT.
II. Certification costs are R 400 per CT.
III. Example: 3,5Ct rough stone color J.
IV. Once cut and polished you get a 1,8CT round brilliant color J S1.
V. You paid $ 1500 per CT for the rough.
VI. $ 1500 x 3, 5 = $ 5250 = R 63 000 cost of rough
VII. Cutting cost R 900 P. CT = R 3150
VIII. Certification R 400 P. CT = R 720
IX. Total cost of stone = R 66 870
X. Current rap price of stone 1,8CT J S1, $ 6400 Per CT.
XI. 1,8Ct x $ 6400 = $ 11 520 = R 138 240
XII. Rap price of the stone is R 138 240
XIII. If we sell it all 30% below rap we will sell it at R 96 768
XIV. At 30% below we make a profit of R 96 768 – R 66 870 = R 29 898.
XV. At full rap we make a profit of R 138 240 – R 66 870 = R 71 370.

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ACCELERATED DEVELOPMENT OF ADVANCED CUTTING, SETTING AND MANUFACTURING SKILLS

MDT will have to develop the requisite skills base to ensure long-term sustainability.
There appears to be a skills mismatch within the South African diamond sector. There is
a surplus of skills diamond cutters in the market, largely due to some decline in the size
of the industry over the past 20 years. At the same time, current training is considered
by some to be inadequate to develop the skills required to cut mid- to large stones, and
to be sufficiently efficient in cutting to be competitive. Some players argue that the truly
well skilled cutters are aging and are not being replaced.

The Harry Oppenheimer School is one of the primary training service providers for the
industry. The Mining Qualifications Authority is in the process of finalising unit
standards. Learnership programmes will place a large proportion of learning in the
workplace. The role of training institutions is likely to shift in this context. The
Department of Labour has a learnership incentive to encourage enterprises to take in
learners. The Skills Support Programme administered by the dti aims to encourage
greater investment in training and the introduction of new, advanced skills by companies
utilising the SMEDP. Companies are reimbursed with up to 50% of training costs.

The benchmarking indicates that the skills in many cutting and polishing and
manufacturing centres have long histories of development, primarily through family-run
operations. These skills have then been built upon, modernised and improved through
technology use. In later developing manufacturing centres, there has often been a
reliance on bringing in skills and trainers from established hubs to transfer skills. For
example, skills employed by Indian manufacturers have been passed on for many
generations within families, in particular in the State of Gujarat, and are generally mixed

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with technical, current CAD applications, cutting edge technology laser machines,
computerised yield planning machines, advanced bruting lathes, and diamond
impregnated scaives. A variety of training institutes ranging from high skill levels of
design to low skill level vocational skills have been set up to increase the pace of
development of skilled workers. There are also incentives, including training subsidies
to get unskilled people to enter the industry and incentivise companies to improve skill
levels of their employees.

The Gem and Export Promotion Council offers unique Certificate and Advanced
Courses in Designing and Manufacturing at The Indian Institute of Gems and (IIGJ).
The IIGJ provides courses that would help students develop proficiency and expertise
that would meet International standards where the focus is on designing, technology
and manufacturing in the industry.

The IIGJ offers five types of courses: A three month basic course in Design An
advanced course in Jewelry Design comprising of thirty sessions A Computer Aided
Design and Manufacturing course consisting of sixty sessions across a three month
period An Introduction to Gemology - a fifteen week course An Introduction to Basic
Making, consisting of eighty sessions As an example of a “late developer”, Dubai works
with international companies to offer world-class training to its members. This includes
diamond grading courses with the International Gemological Institute (IGI) and the HRD
(Antwerp High Diamond Council),

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08
MARA DIAMOND TRADING ECONOMIC OUTLOOK

Annual Year to Date Turnover and GP

Mara Diamond Trading (Pty) Ltd

3000000

2500000

2000000
ZAR

1500000

1000000

500000

0
30-Jun-15 30-Dec-15
Turn Over 1000000 2000000
GP 1862149 2624282
EBIT 186594 945484

6 month Outlook

Mara Diamond Trading is a relatively new kid on the block though it is a repository of many years
of experience and expert knowledge in its field. As wholly owned black enterprise it is positioned
to benefit from the many industry programmes supporting the emergence of new enterprises in
the industry. The projected financial performance of MDT for the second half of 2015 fiscal year
has clearly established the following:

 Strong potential for Year on Year Growth.

 Increase of Gross Profit Year on Year through strict fiscal policies and financial discipline.
 The EBIT (Earning Before Interest and Tax) also projected to increase positively through
the companies financial policies.

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The future earnings of Mara Diamond Trading are geared by excellent business prospects.

Mara Diamond Trading (Pty) Ltd

70
60
In Millions ZAR

50
40
30
20
10
0
Income
Column1
2015 2.2
2016 4.4
2017 8.8
2018 19.6
2019 29.2
2020 58.4

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FINANCIAL, INSTITUTIONAL & LEGAL

Auditing

Institutional

First National Bank

Legal

Corporate Consultants

Zaid Nordien Consulting

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