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Ed Bristol
  

 

The Last Entrepreneurial Adventure:

Invest in a Sri Lankan gem mine.

If you like business ventures off the beaten path, this is the ultimate challenge. Of course I'm not talking about a clean investment done via contract over 2,000 shares paid by check in the air-conditioned business center of the Colombo Hilton.

I mean a serious business transaction in cash somewhere in the jungle without telephone, contracts, lawyers or police (at least none you can trust).

 

Part I: How to find a good mine

Since you do not want to raise the price of "your" projected mine by 10.000% you will want to keep a low profile, at least as far as the color of your skin permits. So forget about geological studies or scientific analysis. Even if you wanted to, the government won't let you analyze anything without a project approval that will wreck your nerves and takes at least five years.

How not to do it.
As an innocent businessman (if there is such a thing), you might do as follows: Rent a Jeep, hire a guide who knows his way around the Sri Lankan gem industry, and make arrangements to visit a mine.

Most likely you will end up in Ratnapura. You will be welcomed, filled up with sweet tea and cake, shown how the most terrific stones are found, and you will think that your investment might be well placed there. And since the mine owners are currently in need of an investment for, let's say, a new license or an additional generator, you count yourself lucky and close the deal in cash per handshake.

The next week, however, the mine runs empty, generators are out of stock, your guide disappears into the hospital, the mine owner is off for a funeral in Kandy and, finally, your Jeep breaks down.

While you sit in a rest house that deserves the name "Mosquito Inn" or "Instant Midlife Crisis" and wait for someone to call you back, you begin to realize that you have made a mistake.

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Actually you have made at least two mistakes:

Mistake No. 1: They saw you coming.
You must not give them any time to prepare for you. As, per definition, inexhaustible rich foreigner, you do not fall under any moral protection. Anything goes if you give them time for thought and preparation.

This does not mean that they are bad people, by no means. They simply do things the way they have learned it from their great grandparents who learned it from theirs.

They don't consider any long-term relationship with foreigners, who usually arrive, try to get rich as businessmen or amuse themselves as tourists, and then disappear again. So if you come and invest in their mine, they expect you to disappear soon and hence do not bother too much about fulfillment but are ready to promise you anything before somebody else does and takes all your money.

Mistake No. 2: Initial cash.
Never pay anything without immediate control over at least one crucial resource. Miners do not under any circumstances trust each other, so why should you?

If, for example, a family(!) mining team that has been working, eating and sleeping together for the last 20 years finds a valuable stone, they would never entrust one member to go alone and sell it, because who knows at what price he will sell it?

They will go all together, even if it means hard-core traveling for three days and leaving the mine alone. Or they will sell the stone locally and lose significant money compared to the price they could get in Colombo. If one of them is ill, they can't sell the stone at all.

Again, they are not bad people. They would never blatantly steal from each other, but personal reliability over a period of time tends to become zero. So if they send their brother alone to Colombo to sell a stone, he might come back after four weeks, claiming he lost the stone and has spent all four weeks searching for it. And maybe he did somehow. Who knows?

Sri Lanka is one of those countries where two grown men, both respected members of their communities, will, by the death of their mothers, swear to have experienced two opposite and mutually exclusive versions of the same event.

While you stand there doubting your own perception and Western logic, both publicly announce that they will commit suicide if you don't believe them. You will never find out who was actually lying or whether they were both lying a bit.

It is not an option in this culture to admit having been wrong or having lied. Even if you pile up evidence and thus force someone into a loss of face, it won't help you! He will vanish without a trace, leaving his wife and 12 children behind rather than live with the shame of having been caught being wrong.

How to do it?
There might be other ways of doing it, but since we believe nobody has ever done this before us, our way may be the only way: We call it the "stupid tourist trick".

First of all: Stay away from Ratnapura, for in Ratnapura they always see you coming.

What you then need is a not too good-looking car, a local driver, time and nerves of steel. Drive through the mining areas (which is practically everywhere in South Sri Lanka) and look out for idle men hanging around a village center swinging torches.

When you have found idle men with torches ask your driver to go and tell them he "has" a tourist who wants to buy gems.

You will have to put your head out of the window of the car or they will ignore your driver out of fear of police, since they are all semi-illegal.

After you have identified yourself as a "stupid tourist" these torch swinging idlers will unpack all the synthetics and imitations they can get organized immediately (like the 45 carat synthetic "ruby" crystal above).

After you refuse to buy these (which easily involves two hours of simply saying "no-no-no") they will show you the worst roughs they have, the "dead" spinel, the sprayed topaz and the painted white stones, like the 1000 carat 'yellow' sapphire in the photo.

If you still refuse to buy the bad stuff, they will start to respect you and might show you the first real stones, mixed up with those fakes you have already rejected five times and newly organized synthetics.

Surprisingly, you will not only find synthetics from Thailand (some perfectly disguised) but also cooked stones from Madagascar or diffused ones from India in these villages! How they come there seems to be a miracle but nevertheless it is a frustrating reality.

You'd better bring some food. You will not find anything edible in such a village, unless you want to spend the next days urgently searching for a restroom, which is a nightmare outside of Colombo.

Watch the people and you will recognize their strict internal hierarchies: who is a selling agent, who is retailing and, most importantly: Who is a stone owner?

That's who you look for: A man with hands like steel pliers who owns good stones, meaning he might be a miner without a "Mudhalali" (Sinhala: "Protector").

If you find such a man, buy from him and let your driver question him about his source. If you are lucky he has just started his mine or his Mudhalali is dead or went abroad and he is willing to show you his place.

Ask him to take you there immediately - not tomorrow or you will find them prepared. Don't be surprised if you need to drive another two hours even if he said it is just two minutes, or the other way around. Time estimates are of no value in Sri Lanka. Also be prepared to jungle-walk a good piece, since real mines (meaning not made for tourists) rarely have road access.

There are a lot of things to look at in order to judge a mine, but it would be against our interest to share this knowledge. After you have seen a few dozen mines, you will get a most amazing "feeling" for whether a mine is good or not. It is a combination of the hills, the old dry waterways, the current river, the way the Ilaam (gem gravel) is colored, and of course the capability and spirit of the team you find working.

The latter is a question of personal taste or work ethics. We ask ourselves:
- Do they drink arrack in broad day light?
- Do children work in the shaft?
- Are they respectful of each-other?
- Are they halfway organized?
- Do we like them?

To answer these questions you will need to spend some time there, so take food and mosquito repellent and forget even the basics of Western comfort.

Let's assume you have found a place that you want to put your energy (and you money) into, then read...


Part II: How to be a Mudhalali

Gain immediate control over resources.
Find entry points for your money so that you can withdraw it at anytime. There is always need in many places. If you pay the school money for the kids instead of paying for a generator, you are on the safe side (the generator might vanish over night, the kids will hopefully not). Pay for petrol and food but don't lend them any money. Buy new tools but don't pay salaries. If they buy a new license keep the original and so on.

Keep people away from hospitals.
Sri Lankans love to go to the hospital and you will find that at least 25% of the population (including visitors) is there on any given day. Not that they simulate illness, but they will admit themselves as inpatients no matter whether they have cholera, ate the wrong food, got a cold, infected a fingernail or just don't feel too good.

Hospital is free, good for a change of social life and significantly more comfortable than home. So why not? The downside is tremendous economical damage to the country and the fact that formerly healthy people do get seriously sick in hospital, where after all also truly dead-ill people are present and the hygenic standards are terrifying.

We always carry a mobile pharmacy and the 1,800 pages "Handbook of Nursing" with us to help with little complaints that can be cured easily and should not be the cause of yellow fever gotten in hospital.

The magic of Western medicine and a foreigner reading out of a big medicine book is for simple miners competitive to the hospital experience and you can reduce your sick staff's sick rate by 90%. I'm afraid this is a horror for any one who has studied medicine but don't worry, we do not operate on serious injuries or cure unknown sicknesses.

Take care of the kids.
Sri Lankans love their children. Help to get a daughter married or pay for the marriage party and you will have endless gratitude. Pay the school fees and you will be considered a family member. But remember: that doesn't mean you should be so stupid to trust anyone, be it family or not.

Respect the religious ceremonies.
There is a lot of magic involved in mining. Depending on the moon, stars, symbolic happenings (like "dog shits on Illam") and the outcome of ceremonial prayers, it may not be good to begin work before two in the afternoon or it may have to be stopped on Tuesdays. They are not just trying to arrange their free time, but actually believe that the findings are a result of correct interpretation of the magic signals. If you don't believe in the magic and hinder them from respecting those signals you are simply doing wrong on every level. Besides, they will not find anything. Either it is a self-fulfilling-prophecy that comes to effect or they are just right. 

Be the boss.
Don't apply Western equality. Never work yourself. This is hard, especially for people who like to make things happen and thus like to work, but miners have no respect for a Mudhalali with dirty hands. You will have to get used to sitting and drinking tea while watching others work.

Never let them repair a machine.
Sri Lankans will dismantle a big generator into its smallest pieces with greatest joy and without hesitation but without knowing how to put it all back together, let alone repair it. You end up with a load of generator spare parts unless you find someone who has already successfully repaired precisely such a machine. Since you will most likely find such a person only 12 hours' drive back in Colombo, buy only maintenance-free high quality machines and then pray that they don't break down.

Don't criticize people.
Whatever happens, you are not supposed to criticize anyone openly. Criticism is not a way to improve ourselves or others (as some progressive people try to see it) but a horrible loss of face. This is one of the most difficult lessons to learn, especially when you are actually horribly angry about a ruined generator or simply trying to tell a waiter why you can't eat the food he served.

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Negotiation starts at the moment when the 'Sorter' (meaning the guy who has the privilege to sort through the washed gravel) picks out a colored crystal and turns to you with his fiery eyes saying: 'This is the one!'

Ignore it. Do not let him deceive you and get excited. It will cost you a fortune. 

And also, do not let them deceive themselves and get excited about what they found or they will soon dream of the new big house they will build. Once they have dollar sign in their eyes your own financial prospects will become very negative.

Therefore, immediately declare the found stone to be worthless and pretend not to be interested at all. It is part of the game. Do not let your curiosity lead you into looking at an interesting stone before you are ready to talk money. Every extra attention you give to a good stone will raise his price exorbitant. Look at it, mark it for later, and then ignore it.

When all is sorted the team will put you into a chair and place all finds on a plate filled with water. Don't look at the stones but wait for the tea. After you got your tea, have a first look at the day's outcome and start examining every stone equally and without any special attention to the ones you want to buy.

Let us assume you have found a rough that seems halfway promising (only 1 in 100 does) then you must quickly calculate to make a first offer. Keep the initiative. Naming a price first will get you away from the usual foreigner moon-prices.

Though after a while the miners realize they can't get $2000 for a gram of yellow sapphire from you (as they heard others did from a foreigner), they will nevertheless start the game by asking for 2000 if you let them take the initiative.

It is very tiring to negotiate them down to the realistic $50 every time, so be quick and start the game on the right level. But be aware that any price you name is binding and if they agree you have to take it. There is no backing out of an offer in Sri Lanka unless you want to ruin your reputation.



She just ate a kilo of cake!

 


When you name your price, unbearable despair and sorrow will overcome your mining crew.

They will tear their hair out, run around screaming and swear that they will give up mining if that is the price they get for all the hard work. They will show you their daily bruises and drag their hungry children to the table.

Don't worry. You know the kids already ate the two kilo of cake which you brought in the morning. It is all show.

If they are in serious need they would have already asked you for help before the day started. That is the rule. Being Mudhalali and negotiating a price are two different parts of the play or better the stage. Therefore you have to be merciless. If you want to be generous do it only after you bought the stones. Anything else is bad for business.

If you play your part serious you might (in answer to their ask-price) throw yourself on the ground, claim immediate bankruptcy and describe the debtor's jail your children will suffer in, if that is the price you have to pay.

Whether you play with stoic dignity or share in their emotional drama-show, don't get soft. The back and forth of such a negotiation can take hours. Serious finds might take days to negotiate.

In the end, the dollars you want to pay less than what they ask equal the amount of energy you have to raise to negotiate. 

Buying rough.

So what is a good price? Buying rough is considered to be the most difficult and most risky part in the whole gem trade. Greenhorns easily buy ten stones to get one which turns out to be what they thought it is or were told it might be. Even with decades of experience hardcore gem traders misjudge the color of rough, oversee inclusions or simply buy a synthetic. No-one is free of failures.

Whatever your personal fallout-rate, you have to calculate with a certain percentage of bad judgment and will have to make it up with the good stones you buy.

The most tricky part buying rough is to "see inside the stone". A potentially good rough needs to have a well colored glass-body-like inside without inclusions or color patches. To see inside the stone wet the stone with water or better oil, roll him between your fingers in straight sunlight, use the specially made gem torches and of course the hand lens.

Hardness pencils do not help with the main problem of imagining how a cut stone can come from the rough.

Beside inclusions, do not underestimate the effect of color axis in most stones. Only if the full color axis falls together with the direction a stone can be cut to the table will you harvest a good color in the final gem.

Recovery rate.

Any seller of rough will state that 50% recovery is "guaranteed" but that is very rare, especially if you don't cut on weight but beauty.

The average over the time and all stones will be more likely 20% or less, meaning you must buy a gram rough to get a one carat cut gem. Precision cuts often bring less than 10% yield. Do the math to determine how much you can offer.

A word about security: All gem trade is done in cash.

Coming down a lonely jungle path loaded with five years salary every Tuesday at ten in the morning is not clever. Sri Lankan gem buyers come with bodyguards in different cars and on different roads every week and always unannounced.

We do not take such radical measures and never had a problem, but some caution might be wise especially since you are foreigner and thus more likely to be talked about.

Being a Mudhalali does give you some protection in the direct neighborhood but people do travel to rob others.

No rough stone is too good to be wasted.  

 

Fact is most cutters in Sri Lanka and elsewhere can (maybe) facet a stone, but nothing else, meaning they have no clue about how to make a stone truly shine and sparkle. Even if they don't want to cheat you, chances are high they simply ruin your stones. Also, rarely can a cutter cut all shapes or varieties. One will be good on sapphire, while the other one is good on garnet and only the third knows how to make a star. A good lapidary is the key to the gem market.

 

How to find them? Trial and error based on recommendations.

 

Good cutters are not publicly accessible but work for someone else or run a quite home business in some hidden backyard. Hence you need a recommendation to find them.

 

But just because someone recommends his cousin's brother as a cutter does not mean he is good. You still have to try, which will cost you a fortune in cash, rough stones and foremost nerves. However, here are some do's and don'ts to limit your inevitable novice bleeding:

1. Like in any scientific experiment do not change too many parameters at once. Do not change the variety, the cut, the lapidary and the mine at the same time. Ideally you give similar sized and colored stones to different lapidaries and compare the results.

 

2. Don't underestimate the power of self full-filling prophecies. Respect the cutter's opinion. If he says he cannot or would not cut this way or that way - so be it. If you insist he will surely show you how wrong this or that way was.

 

3. Start your experimental research with a cheaper variety, or (if you are patient) buy synthetic sapphires to test new cutters. They will usually not recognize the difference, but if they do you have a first indication of their qualities.

4. Do not pay per carat but per stone. Commonly cutters are paid per carat out-put, which leads them to optimize the size and not the quality of their cut. This absurd system is responsible for the globally feared 'native' cuts with fat bellies, fish-eyes, potato shapes and depths like the Sargasso Sea.

 

5. Give people time to adapt and to change their (bad) cutting habits. The change from quantity to quality does not come overnight (especially not in a country like Sri Lanka). You will have to invest into somebody to see it all happen.

 

6. Nothing is easier than exchanging a stone on its way from the rough to the cut. Since you will not want to spend your days sitting on the lapidaries lap, you need to trust him sometimes. For this you need above all a social network. Establish a relationship to your cutter, know where he lives, know his wife and best be invited to his daughter's marriage.

 

7. Finally: Don't blame the messenger. If your cutter says you have bought 'dead' stones, you better listen. No lapidary can cut a bad stone into a beauty. For this you need an alchemist.

Don't despair. After a few hundreds stones cut at different lapidaries, you will start to see some correlation between what you buy as a rough and what you set into jewelry one day. May-be.

NEW!

 

Part V: The cost of gemstones

 

Gemstone pricing is a horror. It is hard to conceive why a kilo of ruby or sapphire can cost anything between ten dollar and one billion dollar!

 

I imagine many get so confused that they retreat to diamonds with at least some transparency (if less rarity). There are reddish brown cabochon rubies for three bucks and finest Burmese for the price of a Mercedes. To add to the confusion there are fakes looking like a Mercedes but costing only three bucks.

 

Are there any other products with such wide price variations? How does this happen?

 

Marketing pros differentiate between "market-pricing" and "cost-pricing". A market-price is given to a product by a sale at $X. You may try and find your sales-price by guessing what the market agrees to pay. But is it enough? Market pricing is a trial and error process.

 

"Cost-pricing" on the other hand is based on production cost plus a reasonable profit. Cost-pricing is the way most industrial goods are calculated.

 

At first sight it seems gemstones are "market priced" like paintings or a rare stamp. For such products production costs are mostly irrelevant.

 

But gemstones do have very significant production costs as we can tell now. So what are the actual costs of a mine? How much do we need to charge for our finds to be OK?

 

Insiders know that the gemstone business is a hard one to do accounting for. Multiple layers of suppliers with kick-backs, parcel prices, commissions and partnerships, all in a tax-evasive, cash-only environment. It drives western accountants into madness. Add overheads and international brand marketing; and the mess is complete. I will not even try to number crunch through this.

 

But we can shed some exemplary light on the cost structure of mining and selling gems online. To do so we will simplify and assume a fictions stand-alone mining and marketing operation out of Sri Lanka.

 

In reality of course many mines will share infrastructure; miners will be paid per stone and have no salary; one web site will sell for many mines and so on, but here is not the place to be complicated.

 

 

Let's start right in the jungle. Here are our main costs at the mine:

 

Personal:

  • We will need 8 hard-core deep-in-the-dirt diggers. They earn $5/day or $150 per month (mark: holidays are taken but not given as such). Count $1200 for the worker.
  • One group leader will earn $250 per month.
  • One experienced supervisor who will also do the final sorting. He will need $400.
  • Another monthly $200 should be available for the sick and social stuff

The whole mining team would thus cost us 24.600 per year. As you see, personal in a 3rd world country is cheap but it is not free at all.

 

We will leave small finds, geuda and lower quality to the team so the may educate their children.

 

Mining-Material:

  • A diesel water pump for our needs is $1500 plus $500 for the water tubes. A small but tough electric generator adds $1000. Under the hard jungle conditions both will need repairs and yet give up after 5 years. We will hence depreciate them with $750 annual.
  • 200 bucks are needed for oil and diesel per month
  • An old pick-up will cost an astounding 20.000 in these parts (150% tax on car imports) and we will not have much fun with it. Say, we can finance and maintain it for 4.000 annually.
  • We will need axes, spades, hammers, nails, you name it. They will come up with $250 per month all included.

This block will add 10.000 to our annual mining cost

 

Mining rights:

This splits up into land lease payable to the landowner, the mining licenses and rights, stamp duties, trader licenses and "presents" to the local dignitaries to smooth the work. All-in-all we will clock this with $500 per month or 6k annual.

So far, we have spend 24k on personal, 10k on material and 6k on mining rights; or all-in-all $40k.

 

40k! This is our cash bet on that mine.

 

There were catastrophic cases where we found nothing but dirt, and we also had lucky teams striking it rich. Finding nothing is hell. This is the terrible thrill of gem mining. No walk in the park.

 

We note 40k as "ex-mine" price for whatever the team finds.

Though we know the out-put can run from 0 to 100, we will here assume to have something like an "average" mine to continue our calculations.

 

Bringing the rough from the jungle to Colombo, having them cut and documented is a full time job for a reliable, literate local who will need another $1000/month salary.

 

He/she will also run the administration of some sort of legal entity with accounting and taxes for another $500. For cutting we will add flat 3.000 to our balance sheet.

 

Up to here we have spend 40k to mine, 18k to manage and 3k for cutting our mine out-put, resulting in a total of 61k.

 

This 61k could be called "ex-factory".

 

Finally, our operation will have to cover sales and marketing.

 

Running an independent website with credit card functions and some content is another full time job which clocks in with 12k p.a. for a salary and 6k for web-fees and telco.

 

We will need at least another 12k for PPC on Google and Bing if we want our website to be found.  

 

Running an office with 2 computers and equipment will come with 6k in rent and 12k in equipment (including the depreciated hardware).

 

Marketing & Sales adds a whooping 48k to our ex-factory price. (Now you know why so many website come and disappear within a year)

 

In total we have used 109K to mine and market our gems.

 

$109.000 is the cost-based minimum price for our "average" mine out-put. 

 

So, can we earn any money with a mine?

 

Let's look at some break-even points along the value chain.

 

To have a starting point, let's assume an averagely lucky mining spot could bring an annual out put of:

  • 50 gram of gem quality X-color sapphire
  • 2 gram of ruby
  • 2 gram padparadscha
  • 400 gram of gem quality semi-precious
  • One gram of lucky Alexandrite.

(Remember: For humanity sake, and to keep it simple, we have left the lower quality rough to the miners.)

 

At this point our mine would need to sell 452 grams of gem quality rough at $90/gram to break-even.

 

Breaking even the mine? Yes, if all our rough can be sold untreated.

 

Let us assume a yield of 20% from the rough and we will have for sale after cutting:

  • 50 carat of corundum
  • 2 carat ruby
  • 2 carat padparadscha
  • 400 carat of semi-precious gems (tourmaline, garnet and zircon mostly)
  • One carat of Alexandrite of medium quality.

or 

  • 25 sapphire with an average of 2 carat
  • 2 ruby of 1 carat,
  • 2 pads of 1 carat
  • one carat Alexandrite
  • 200 semiprecious mix with an average of 2 carat.

So far, these 454 carat or 230 gems have cost us 61.000 to mine and process.

 

To break even here we need to sell as an example:

  • The 50 carat sapphire for an average of $500/carat = 25.000
  • The ruby for 1k/carat = 2.000
  • The pad for 1k/carat = 2.000
  • Alex for 3.000
  • 400 carat of "semis" for $75 = 30.000

Breaking even at Colombo? Yes, those prices may be close to what professional traders without a fancy shop may offer in Colombo.

 

Finally we need 48.000 p.a. to market our out-put online.

 

We will hence need a mark up of 80% to cover the cost of sales and marketing. This leads to average $900/carat of sapphire, $1.800 for ruby and pad, $5.400 for the Alex and $135 for all other semi-precious.

 

Breaking even on the web? Yes, possible but you better pray that your mine is a good one. Also mark that you will need more than a year to turnover your stock, hence you need some financial stamina.

 

Reality, of course, is much more tricky:

Can one mine alone hope to survive? No, it can't. We will need a network of mines to sell on the web. Too many variables and risks need to be leveraged and balanced between different operations.

 

Without shared infrastructure and marketing cost there can be no competitive offer in the long run.

 

Summary:

  • We need $109.000 per annum to run a gem mine and offer the finds online out of Sri Lanka.
  • The actual mining operation in the jungle accounted for only 36% of our expenses, processing the gems took 19% and the lion share of 45% went into Sales & Marketing.
  • From a different angle 45% of our expenses were related to local staff, 39% went into locally purchased material or services and only 16% were used for services abroad.

Conclusions:  

  • Government policy must do all to keep Marketing & Sales inside the mining country. Many gem exporting countries have utterly failed here and lost the main value creation to Bangkok.
  • One mine alone can not venture into sales & marketing. Only a network of mines can do so.

Edward Bristol

 

 

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