Danakali : Quarterly Report - Period Ending 31 March 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.

• Signing of the Mining Agreement and award of Mining Licenses

• Commencement of value engineering and optimisation as part of FEED

• Commencement of pre-construction geotechnical investigations for pond and plant foundations

• Advancement of power generation bidding process

• Advancement of expressions of interest for mining contract

• Heads of Agreement distributed to selected parties for product offtake

  PLANNED FOR JUNE QUARTER

• Advancement of the FEED process

• Selection of preferred power generation contractor for the Colluli project

• Commencement of mining contract strategy

• Commencement of DFS pit schedule optimisation

• Completion of transition of product volumes to Heads of Agreement

• Progress procurement packages and discussions with commercial lenders

  CORPORATE

  • Strong cash position of A$9.5m at quarter end

  • 881,001 options exercised

  • Highly-experienced potash and mining executive appointed to the board

  PROJECT UPDATE - PERMITTING COMPLETE AND FEED WELL ADVANCED

  The first quarter of 2017 saw the achievement of a very significant project milestone when the Colluli Mining Share Company (CMSC) entered into a Mining Agreement with the Eritrean Ministry of Energy and Mines (MoEM) and was awarded Mining Licenses for the exploitation of mineral resources within the Colluli tenements. The Mining Agreement provides exclusivity to CMSC to apply for mining licenses within the Colluli tenements which contain over 1.3 billion tonnes of potassium bearing salts and Ore Reserve of over 1.1 billion tonnes.1

  Other achievements throughout the quarter included the assembly of the front-end engineering design (FEED) team, progression of pre-construction engineering and continuation of tendering for key operational contracts.

  The highlights include:

• Mining licenses awarded. The signing of the Mining Agreement and award of the Mining licenses makes Colluli the most advanced greenfield SOP development globally. Colluli is also the most fundable advanced stage greenfield development and demonstrates superior economic returns and upside potential in contrast with other advanced stage SOP projects.
• Fluor appointed for FEED and engineering well advanced. Globally recognised and highly reputable engineering company, Fluor, in combination with Global Potash Solutions ("GPS"), Knight Piésold ("KP") and Elemental Engineering ("EE") have initiated the FEED and optimisation process for the project. The process commenced with an optimisation phase. The outputs of this phase are currently being prioritised and quantified for further evaluation. The FEED and optimisation process will contribute directly to a subsequent lump sum EPC bidding process
• Tendering for the power station complete.
• Mining contract tendering process underway.

In February, the most significant mile stone of the Colluli Project to date was achieved with the award of Mining Licenses to CMSC for the exploitation of mineral resources within the Colluli tenements.

The award of the licenses followed the signing of the Mining Agreement between CMSC and the MoEM.

1. ASX announcement, May 2015

   CMSC Chairman Mr. Seamus Cornelius and Minister of Energy and Mines Mr. Sebhat Ephrem signing the mining agreement

   The Mining Agreement is applicable to the entire 1.3 billon tonne JORC-2012 compliant resource, and provides exclusive rights to CMSC to apply for mining licenses to exploit the potassium, magnesium, calcium and sodium salts within the resource, as well as bromine.

   The award of the Mining Licenses follows the completion of a series of pre-requisites including the completion and submission of a Definitive Feasibility Study2 (DFS), submission of a comprehensive social and

   environmental impact assessment and associated management plans, a series of pre- and post DFS stakeholder engagements with local and regional communities and stakeholders, and the signing of the Mining Agreement.

   International EPC company Fluor advancing FEED with industry experts

   Early in the quarter internationally recognised and highly reputable construction and engineering company Fluor, was awarded the contract to conduct the FEED and optimisation work for the Colluli project. Global Potash Solutions, Elemental Engineering and Knight Piésold joined the FEED team to optimise and refine the DFS engineering, further refine capital and operating cost estimates and prepare the project for construction.

   GPS oversaw the metallurgical test program, process flowsheet development and initial optimisation work for the Colluli potash project throughout the prefeasibility and definitive feasibility study phases of the project and have worked closely with the Fluor process engineering team and EE to finalise the process, select the plant equipment and develop commissioning procedures.

   FEED has progressed through process refinement and optimisation phases. The optimisation opportunities are currently being quantified and prioritised. Throughout the next quarter, construction and logistics surveys will be completed to further refine the construction schedule, equipment selection of the optimised infrastructure will be completed, procurement packages finalised and fully integrated with the debt funding process.

2. ASX announcement, November 2015

All bids for power generation for the Colluli potash project were received during the March 2017 quarter and a comprehensive evaluation of the tenders is nearing completion. The bidding process followed an expressions of interest phase which was completed in January 2017. Power consultancy firm ECG Engineering were engaged to assist in the tendering and evaluation process.

Tender submissions were received from a group of international and highly reputable power providers with extensive experience in both Africa and other developing jurisdictions. The bids were based on the power generation technical specifications determined in the DFS. These specifications are currently being refined as part of the front-end engineering design (FEED) process lead by Fluor.

An expressions of interest phase has been completed ahead of the tendering process for the mining contract. An appointment will be made to further optimise and refine the mining schedule to support the tendering process in the upcoming quarter.

There have been no changes to the potassium bearing salt ore reserve since 30 November 2015 nor the rock salt mineral resource estimate since 23 September 2015.