Danakali : Quarterly Report - Period Ending 30 September 2017

Danakali Ltd (ASX: DNK) (Danakali or the Company) is pleased to provide this quarterly update on its Colluli Potash Project (Colluli or the Project), located in Eritrea, East Africa.

CONTINUED SUCCESSFUL ADVANCEMENT OF THE WORLD CLASS COLLULI POTASH PROJECT

• Colluli Project fully permitted for construction

• Board and Management Team strengthened to enhance the areas of project financing, market development and construction execution

• Project Financing and Offtake Strategies well defined and progressing through execution phase

• Key pre-requisite funding activities well progressed

• Offtake negotiations well advanced with parties working towards final binding agreements

• Advancement of key operational contracts is a key step towards obtaining Project Financing

• FEED optimisation reduces Colluli earthworks and recovery pond area requirements

  Planned for December Quarter

• Progress negotiations to final binding offtake agreements

• Advance discussions with commercial lenders

• Complete technical compliance and financial evaluation of mining contractor proposals

• Evaluate and finalise preferred power provider proposal

• Complete outstanding FEED activities

• Issue the tender package to suitably qualified Engineering Consulting and Contractors for project execution

  CORPORATE

• Strong cash position of A$16.3m (30 September 2017)

• Mr Andre Liebenberg appointed as independent non-executive director

• Mr Will Sandover appointed as Head of Corporate Development and External Affairs

• Appointment of Ms Melissa Chapman and Ms Catherine Grant-Edwards as Joint Company Secretaries

• Resignation of Mr Chris Els as Company Secretary

• 1,415,000 options exercised

• Dual listing on the London Stock Exchange (LSE) currently under evaluation

Colluli is Positively Unique

Colluli hosts one of the largest and highest-grade sulphate of potash (SOP) ore reserves in the world. The Project is permitted for construction and is one of the most advanced stage greenfield SOP developments globally.

Following the completion of a successful definitive feasibility study1 (DFS) for the production of SOP and the approval of a comprehensive social, environmental impact assessment (SEIA) and associated management plans by Eritrean Ministry of Land, Water and Environment2, a Mining Agreement for the Colluli Project was signed in early 20173. Mining licenses have been awarded for the exploitation of mineral salts within the Colluli resource including potassium, calcium, sodium, magnesium and bromine4.

The life of mine estimate from the planed DFS production rate is in excess of 200 years. When combined with the diverse range of salts within the resource, low incremental growth capital and highly favourable cost curve position, Colluli demonstrates significant future growth potential over and above the highly favourable DFS outcomes1.

Photo: Colluli hosts over 1.2 billion tonnes of potassium bearing salts1

Simplicity is Key

Production of SOP from Colluli is planned to be conducted using the same, simple, commercially proven technology utilised by existing primary producers5. One of the unique and significant advantages of the Colluli Project relative to many emerging SOP projects, is the ability to produce SOP without additional heating, as a result of the right combination of salts (kainite and sylvite) within the resource. In the absence of this combination (kainite only), SOP production requires heating of potassium brines to over 50oC resulting not only in increased energy costs, but lower overall ore feed to product yields5.

Colluli is the only resource globally where primary production of SOP can be achieved with potassium salts extracted in solid form. This provides two key advantages. Firstly, it negates the need for large evaporation ponds, providing a significant capital intensity advantage relative to brine producers. Secondly, it eliminates the time taken to generate a harvest salt via evaporation, providing immediate revenue generation. Combined, these improve overall project returns and deliver lower development capital intensity relative to brine projects.

Photo: Colluli Kainite core. Colluli is the ONLY resource globally that allows SOP to be produced from solid form potassium salts

1. ASX announcement, Colluli Definitive Feasibility Study Results, 30 November 2015

2. ASX announcement, Ministry Approves Social and Environmental Impact Assessment, 6 December 2016 3 ASX announcement, CMSC enters into Mining Agreement for World Class Colluli Project, 1 February 2017 4 ASX announcement, Award of Mining Licenses for World Class Colluli Project, 1 February 2017

1. Company research

   PROGRESS SUMMARY

   The Company's focus has shifted to funding, offtake and construction activities following the signing of a mining agreement, award of mining licenses and approval of the SEIA. Funding and marketing (offtake) strategies have been developed and approved by both the Danakali and Colluli Mining Share Company (CMSC) boards.

   The funding strategy defines the likely funding structure, potential sources and costs of funding and the key requirements from potential lenders to progress through due diligence. These key requirements include product offtake, procurement strategy and key operational and engineering contracts.

   With regard to offtake, the award of the mining licenses for the Colluli Project is a key enabler to advance offtake discussions including volumes, physical form of product, shipment methods and the associated commercial terms6. As discussions have progressed, a select group of potential offtake parties has expressed interest in completing country and site visits which are currently being planned.

   To develop a robust procurement strategy, front end engineering design (FEED) was initiated in the first half of 2017. FEED is being led by global engineering company, Fluor, and will deliver a higher level of accuracy of operating and capital costs, finalise key equipment lists and preferred suppliers and increase the level of engineering relative to the DFS. Increased geotechnical work has also been completed at the recovery pond site, site access road, process plant location and water delivery pipeline corridor.

   An additional 10% of production capacity was identified during the initial phase of the FEED process7. Mining schedules were subsequently refined by AMC Consultants prior to the commencement of the mining contract tendering process. Extensive test work completed throughout the pre-feasibility and definitive feasibility study phases confirmed both the suitability of the open cut mining method for the resource and the suitability of surface miners for the selective extraction of the suite of salts within the resource. The open cut method provides superior resource to reserve conversion relative to alternate mining methods and allows selective extraction of the various salts within the resource.

   The Colluli Potash Project mining tendering process commenced in August 2017. Following an "Expression of Interest" process, tendering documents were developed and issued to the interested parties. Site visits were completed in August 2017. Bids have been received and are undergoing technical compliance and cost adjudication review. The selected bid will be incorporated in the FEED economic model.

   Power generation will follow a build own operate transfer (BOOT) model. Significant progress has been made with Inglett and Stubbs International (ISI), the preferred power supplier for the Project. ISI is working alongside the Colluli project team to provide a power generation solution which is right sized and integrated into the FEED process outcomes. The draft power contract has been developed in collaboration with ISI.

2. ASX announcement, Colluli Potash Project - Progress Update, 19 April 2016

3. ASX announcement, FEED optimisation increases planned Sulphate of Potash production capacity at Colluli, 3 May 2017