6.

PROFILE ON THE PRODUCTION OF

MINERAL LICKS
 6-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 6-3

II. PRODUCT DESCRIPTION & APPLICATION 6-3

III. MARKET STUDY AND PLANT CAPACITY 6-4

A. MARKET STUDY 6-4
B. PLANT CAPACITY & PRODUCTION PROGRAM 6-6

IV. MATERIALS AND INPUTS 6-7

A. RAW MATERIALS 6-7
B. UTILITIES 6-8

V. TECHNOLOGY & ENGINEERING 6-9

A. TECHNOLOGY 6-9
B. ENGINEERING 6-10

VI. MANPOWER & TRAINING REQUIREMENT 6-13

A. MANPOWER REQUIREMENT 6-13
B. TRAINING REQUIREMENT 6-14

VII. FINANCIAL ANLYSIS 6-14

A. TOTAL INITIAL INVESTMENT COST 6-15
B. PRODUCTION COST 6-16
C. FINANCIAL EVALUATION 6-17
D. ECONOMIC BENEFITS 6-19
I. SUMMARY

This profile envisages the establishment of a plant for the production of mineral licks
with a capacity of 616 tons per annum. Mineral licks are supplementary animal feed
components prepared in a cylindrical shaped blocks, which contain different minerals for
healthy growth of animals.

The major raw materials required for the production of mineral licks are first, second or
third grade salt, milled bone, molasses, lime, copper sulfate, zinc sulfate, magnesium
 6-3

sulfate and cobalt sulfate. Except copper, zinc, magnesium and cobalt sulfates, which are
to be imported, the other raw materials are locally available.

The present demand for the proposed product is estimated at 538 tons per annum. The
demand is expected to reach at 1058 tons by the year 2017.

The total investment requirement is estimated at Birr 5.19 million, out of which Birr 1.72
million is required for plant and machinery. The plant will create employment
opportunities for 40 persons.

The project is financially viable with an internal rate of return (IRR) of 20.48 % and a net
present value (NPV) of Birr 3.35 million, discounted at 8.5%.

The plant will have a forward linkage effect with the livestock sector and backward
linkage effect with the manufacturing sector.

II. PRODUCT DESCRIPTION AND APPLICATION

In Ethiopia, as in many developing countries, natural pastures are the main source of
nutrients for cattle. As a consequence, seasonality in quantity and quality of available
herbage has a marked influence on animal productivity. Mineral licks are supplementary
animal feed components in cylindrical shaped blocks which are useful to enrich the feed
with desirable minerals. Even though the country has a large number of cattle, there is no
mineral lick producing plant except a very old one in Awash with very small production
capacity. It is therefore believed that there would be a high demand for the product.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

 6-4

Feed is the most important component in livestock production. The feeding pattern of the
farmers is not based on scientific feeding system which aims at meeting the energy and
protein requirement of animals. Although the amount and quality of feed resources is the
determining factors for the condition and productivity of animals the use of improved
feed is very low in the city due to various factors. Hence, the productivity of livestock,
such as meat, milk and other livestock products has remained very low.

Mineral licks are concentrated animal feed which contain different minerals/nutrients that
are required for healthy growth of animals, hence, they are supplementary feed in
addition to the traditional types of feed.

Currently there is only one plant in the country which produces mineral licks. The plant
is located at Awash Sebat town in the Afar Regional State. The production capacity of
the plant is about 1000 tones per annum. The plant supplies its products to the eastern
part of the country and satisfies only a small portion of the total demand.

To determine the present potential demand for mineral licks in the city the livestock
population has been taken as a starting base. According to the Resource potential
Assessment of the city there are 66,700 cattle (31,000 in intra urban areas and 35,700 in
the peri-urban areas). Moreover, the population of sheep and goats together reaches over
28,000. The recommended annual consumption of mineral licks is 12.5. kg for cattle and
2.25 kg for sheep's and goats

As per the recommended annual consumption for cattle, sheep and goats, the total
amount of mineral licks required for the City’s livestock population is 897 tons.
Considering conditional limiting factors such as product adaptability, awareness and
income of farmers, only 60% of the cattle populations are assumed to be fed with mineral
licks initially. Accordingly, the current demand for mineral licks in the City is estimated
at 538 tons.
 6-5

2. Projected Demand

As mentioned above mineral licks are supplementary animal feed components which are
useful to enrich the feed with desirable minerals. The demand for mineral licks is
influenced by the size of livestock population, awareness of farmers towards the
importance of the product, establishment of modern cattle farms and availability of the
product in the City. As these conditions are believed to be improved in the future, a
growth rate of 7% is considered in projecting the demand for mineral licks. Table 3.1
below depicts the projected demand for mineral licks in Addis Ababa for the period 2008-
2017.
Table 3.1
PROJECTED DEMAND FOR MINERAL LICKS IN ADDIS ABABA (TONS)

Year Projected
Demand
2008 575
2009 616
2010 659
2011 705
2012 755
2013 807
2014 864
2015 924
2016 989
2017 1058
Demand for mineral licks in Addis Ababa will grow from 575 tons in 2008 to 755 tons by
the year 2012. By the year 2017, the demand will grow to 1058 tons.

3. Pricing and Distribution

The existing plant at Awash Sebat has been selling the product at a price of Birr 6.00 per
2.25 kg. The same price is assumed for the product of the envisaged product.

The envisaged plant can sell its product directly to bulk end users or appoint an agent for
clients which require in small quantity. In order to create awareness about the presence
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and usefulness of the mineral licks, the plant has to create a linkage with the Department
of Agriculture.

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

Based on the market study, the capacity of the envisaged plant is rated at 100% of the
2009 demand, i.e., 616 tons of mineral licks per annum on the basis of one shift of 8
hours per day and 300 days per year operation. A cylindrical block of mineral licks in its
dried form weighs 2.25 kg on the average and about eight blocks are produced in one
batch. The capacity of the plant can be increased after some years provided that the
product is reliably promoted in the initial period of production.

2. Production Program

The plant will attain 80% and 90% of the production capacity in the first and second year,
respectively. Full capacity will be reached in the third year and onwards. This assumption
is made considering the fact that the manufacturing technology will not take long time to
master. The formulated production program is given in Table 3.3.

Table 3.3
ANNUAL PRODUCTION PROGRAM

Sr. Description Year 1 Year 2 Year 3

No.
1 Production, tons 492.8 554.4 616
2 Capacity utilization (%) 80 90 100

IV. MATERIALS AND INPUTS

A. RAW MATERIALS
 6-7

The major raw materials required for the production of mineral licks are first, second or
third grade salt, milled bone, molasses, lime, copper sulfate, zinc sulfate, magnesium
sulfate and cobalt sulfate.

Except copper, zinc, magnesium and cobalt sulfates, which are to be imported, the other
raw materials are locally available. Molasses will be supplied from sugar factories at
Wonji and Methara or from Fincha Sugar Factory. Salt and bone meal can be supplied
from the region. Lime can be obtained from Mugar Cement Factory. The annual
requirement of raw materials at full production capacity of the plant and the
corresponding estimated costs are shown in Table 4.1.

Table 4.1
RAW MATERIALS REQUIREMENT AND ESTIMATED COSTS

Sr. Qty. Cost Birr)

No. Description (Tons) FC LC TC
1 Salt 348.60 - 313.74 313.74
2 Bone meal 229.08 - 564.73 564.73
3 Molasses 34.86 – 2,092.0 2,092.0
4 Lime 34.86 – 2,859.0 2,859.0
5 Copper sulfate 6.72 170,67 15,429.0 186,104.0
6 Zinc sulfate 5.72 34,260.40 5,552.70 39,813.0
7 Magnesium sulfate 3.13 7,780.75 3,426.24 11,207.0
8 Cobalt sulfate 6.97 188.24 3,426.24 3,614.0
 6-8

Grand Total 669.95 212,904 33,663.65 246,568.0

B. UTILITIES

Electricity is the major input required by the plant for operating production equipment
and lighting. Water is also required in production process, for cleaning and drinking
purposes. The annual utilities consumption at full operation capacity (100%) of the
envisaged plant and corresponding cost are estimated and presented in Table 4.2.

Table 4.2
UTILITIES REQUIREMENT AND ESTIMATED COSTS (IN BIRR)

Sr. Description Unit of Qty. Cost

No. Measure
1 Electricity kWh 100,396 47,548.
2 Water m3 1254 4,076
Total 51,624

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Production of mineral licks needs very simple technology and involves salt grinding,
weighing, blending, shaping, drying, storing and dispatching. A simple process which
normally involves:

o Salt grinding;
o Weighing of ingredients;
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o Blending of salt, lime and bone meal in metal plates;

o Mixing of copper sulfate, zinc sulfate, magnesium sulfate and cobalt sulfate with
water;
o Blending of the above mixture with molasses in metal plates;
o Mixing of all ingredients in electrically operated mixer;
o Shaping in manually operated forming machine;
o Drying in ambient temperature for about 24 hours; and
o Storing for delivery.

The mineral licks producing plant does not emit any pollutant to the environment

2. Source of Technology

The machinery could be made available locally from importers or local machine
manufacturer at a competitive price.
 6-10

B. ENGINEERING

1. Machinery and Equipment

Major machineries and equipments required for the production of mineral licks are salt
grinding machine, weighing scale, mixing machine, and shaping machines operated
manually and/or using electric power. The major machinery and equipment required by
the plant and the cost estimates are given in Table 5.1.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT OF MINERAL LICKS PLANT
WITH ESTIMATED COSTS

Sr. Description Qty. No Cost (‘000 Birr)

No. F.C L.C. Total
1 Salt grinding machine 1 10.56 3.52 14.08

2 Weighing scale (big 2 35.99 32.54 68.53

and small size)
3 Mixing machine 2 112.65 15.62 128.27
4 Shaping machine 3 - 42.30 42.30
Grand Total 159.21 93.98 253.19

From the above table, machinery and equipment cost is estimated at Birr 253,192, of
which Birr 159,210 is required in foreign currency and the balance Birr 93,982 is
required in local currency.

2. Land, Building and Civil Works

The production building shall be made up of hollow block walls, corrugated iron sheet
roofing and cement screed floor in which the total area of land including provision for
open space is about 1,000 m2.
 6-11

The required built-up area for housing of machinery and equipment, storage of product
and office is 750 m2, about 45% of which is for production building, 24% for finished
products store, 15% for raw materials store and 16% for office.

Assuming the unit cost of Birr 2,300 per m2, the total building expense is estimated at
Birr 1,725,000.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease prices.
The lease period ranges from 99 years for education, cultural research health, sport,
NGO , religious and residential area to 80 years for industry and 70 years for trade while
the lease payment period ranges from 10 years to 60 years based on the towns grade and
type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
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manufacturing sector, industrial zone preparation is one of the strategic intervention

measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m 2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and Administration
Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for this
profile, since it is a manufacturing project, a land lease rate of Birr 346 per m2 is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
 6-13

INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion Paymen
Scored point period Period t
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years i.e.
Birr 667,286 annually.

VI. MANPOWER AND TRAINING REQUIREMENTS

A. MANPOWER REQUIREMENT

The total manpower requirement is 40 persons. About 44% of the workers will be
engaged in production activity while the remaining will be involved in service giving and
administrative works. The list of required manpower and annual labour cost including
fringe benefits is given in Table 6.1. Annual expenditure for manpower is estimated at
Birr 353,250.
 6-14

B. TRAINING REQUIREMENT

The two production shift leaders should be given a seven days On-The-Job Training
during commissioning by knowledgeable technical personnel of the machinery supplier.
Cost of training, at a rate of about 120 USD per day per trainee, is estimated at Birr
14,280.
Table 6.1
MANPOWER REQUIREMENT AND ANNUAL LABOUR COST

Sr. Description No. of Monthly Annual

No. Persons Salary Salary
(Birr) (Birr)
1 Plant Manager 1 3,000 36,000
2 Secretary 1 900 10,800
3 Production and Technical Department Head 1 2000 24,000
4 Finance and Administration Dept. Head 1 2000 24,000
5 Commercial Dept. Head 1 2000 28,800
6 Operator 4 600 25,200
7 General Cleaning Workers 6 350 21,600
8 Shift Mechanic 2 900 21,600
9 Shift Electrician 2 900 14,400
10 Personnel 1 1200 13,200
11 Time Keeper 2 450 10,800
12 Guard 3 1200 14,400
13 Accountant 1 1200 10,200
14 Cashier 1 850 7,200
15 Store keeper 1 600 10,200
16 Purchaser 1 850 4,200
17 Driver 1 500 6000

Sub-Total 40 282,600
Employees’ Benefit (25% B. salary) - 70,650
Grand Total - 353,250

VII. FINANCIAL ANALYSIS

The financial analysis of the mineral licks project is based on the data presented in the
previous chapters and the following assumptions:-
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Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw Material import 90 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
5.19 million, of which 3 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 6-16

Table 7.1
INITIAL INVESTMENT COST ( ‘ 000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 1,725.00 - 1,725.00
3 Plant Machinery and Equipment 93.98 159.21 253.19
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 250.00 - 250.00
6 Pre-production Expenditure* 442.27 14.28 456.55
7 Working Capital 329.91 - 329.91
Total Investment cost 5,017.16 173.49 5,190.65

* N.B Pre-production expenditure includes interest during construction ( Birr 327.99

thousand ) training (Birr 14.28 thousand ) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 1.05
million (see Table 7.2). The raw material cost accounts for 23.36 per cent of the
production cost. The other major components of the production cost are financial cost,
depreciation and direct labor which account for 23.17 %, 22.03% and 12.16 %),
respectively. The remaining 19.27 % is the share of utility, repair and maintenance, labor
over head and other administration cost.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
246.56 23.36
Utilities 51.62 4.89
Maintenance and repair
12.66 1.20
Labour direct 128.38 12.16
Labour overheads
53.49 5.07
Administration Costs 85.58 8.11
Land lease cost
- -
Total Operating Costs 578.29 54.80
Depreciation 232.5 22.03
Cost of Finance 244.6 23.17
Total Production Cost
1,055.35 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 969.98 thousand to
Birr 1.01 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 12.48 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
 6-18

dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity (year 3) is estimated by using income statement projection.

BE = Fixed Cost = 31 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required
recovering the original investment outlay through the accumulated net cash flows earned
by the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 5 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
 6-19

in a bank account. Accordingly, the IRR of this porject is computed to be 20.48 %

indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be Birr
3.35 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 40 persons. In addition to supply of the domestic
needs, the project will generate Birr 1.13 million in terms of tax revenue.