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Danakali Half Year Report

Danakali Limited (ASX: DNK, LSE: DNK) (Danakali, or the Company), the potash company focused on the development of the Colluli Potash Project (Colluli, or the Project) in Eritrea, is pleased to announce their Half Year Results for the six month period ended 30 June 2018.

Key operational highlights

· Completion of the FEED Study, confirming Colluli as the most advanced stage greenfield SOP project globally with industry leading capital intensity, first quartile costs, a project level NPV of US$902m and IRR of 29.9% for Module I & II[1]

· Updated JORC-2012 compliant reserves report for Colluli completed as part of FEED[2], estimating:

― 1,100Mt @ 10.5% K2O Ore Reserve

― 203Mt of contained SOP equivalent

― Expected mine life of approximately 200 years at FEED production rates

· Signed binding take-or-pay offtake agreement with global partner EuroChem Trading GmbH for up to 100% of Colluli Module I SOP production for an initial ten year term, with an option to extend a further three years[3]

· Resignation of Danny Goeman as CEO, appointment of Seamus Cornelius as Executive Chairman and appointment of Niels Wage as Chief Commercial Officer[4]

· Engineering, Procurement, Construction & Management and mining contracts advanced to final negotiation stage

· Contract terms for preferred power provider, Inglett & Stubbs International, moved towards finalisation

Key financial highlights

· Healthy cash position of A$14.5M as at 30 June 2018

· Debt Information Memorandum released to select financial institutions

Post-period highlights

· Successful admission to trading on the London Stock Exchange (LSE) Main Market (completed in July 2018), helping to increase the Company's reach to international institutions and raise the profile of the Project[5]

· Significant positive developments in Eritrean-Ethiopian relations including signing of peace treaty

· CMSC's Social and Environmental Management Plans were agreed and finalised following an extensive review process by the Eritrean Ministry of Land, Water & Environment's Department of Environment

· Appointment of Numis as Corporate Broker to the Company

Danakali Executive Chairman, Seamus Cornelius, said: "We have made significant progress in the first half of this year, achieving key milestones on the path to securing the necessary financing and commencing development of the Colluli Potash Project, including confirming a take-or-pay offtake agreement for up to 100% (minimum 87%) of Colluli Module I SOP production with EuroChem and listing on the LSE Main Market in July.

"We have also made good progress on the development of operational and in-country readiness systems and structures, which puts us in a good position to commence the next stages in the project development on completion of financing. We are pleased to see that SOP demand growth continues to outpace low cost supply growth, resulting in a robust pricing environment, and welcome the significant positive developments in Eritrean-Ethiopian relations including the peace treaty signing, which provides a platform of stability for the region."

For more information, please contact:

DANAKALI LIMITED

ABN 56 097 904 302

FINANCIAL REPORT FOR THE HALF YEAR ENDED

30 JUNE 2018

This interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the Annual Report for the year ended 31 December 2017 and any public announcements made by Danakali Limited during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

Corporate Information

Directors

Seamus Cornelius (Executive Chairman) Jing Zhang (Non-Executive Director)

Paul Donaldson (Non-Executive Director) Robert Connochie (Non-Executive Director)

John Fitzgerald (Non-Executive Director) Andre Liebenberg (Non-Executive Director)

Executive Management Joint Company Secretaries

Stuart Tarrant (Chief Financial Officer) Catherine Grant-Edwards

Melissa Chapman

Registered Office & Principal Place of Business

Level 1, 234 Churchill Avenue

Churchill Court

SUBIACO WA 6008

Telephone: +61 (0)8 6315 1444

Facsimile: +61 (0)8 9467 9119

Bank Auditors

National Australia Bank Ernst & Young

100 St Georges Terrace 11 Mounts Bay Road

PERTH WA 6000 PERTH WA 6000

Share Register

Computershare Investor Services Pty Limited

Level 11, 172 St Georges Terrace

PERTH WA 6000

Telephone: 1300 850 505 (Inside Australia)

Telephone: +61 (0)3 9415 4000 (Outside Australia)

Facsimile: +61 (0)3 9473 2500

www.computershare.com

To facilitate trading of Danakali's shares on the Standard Segment of the London Stock Exchange (LSE) Main Market, Danakali has established a Depositary Interest (DI) facility, under which it has appointed Computershare Investor Services Plc as the depositary. Securities of Australian issuers such as Danakali cannot be directly registered, transferred or settled through CREST (which is the electronic settlement system in the UK). The DI facility overcomes this by creating entitlements to Danakali's shares (the DIs), which are deemed to be UK securities and therefore admissible to CREST. The underlying shares are listed and traded on the Standard Segment of the LSE Main Market, while the DIs are transferred in CREST to settle those trades.

Computershare Investor Services PLC

The Pavilions, Bridgwater Road

Bristol BS13 8AE, United Kingdom

Telephone: +44 (0) 370 702 0003

Website

www.danakali.com.au

Stock Exchange Listing

Danakali Limited Shares are listed on the Australian Stock Exchange (ASX:DNK) and the London Stock Exchange (LSE:DNK).

American Depository Receipts

The Bank of New York Mellon sponsors DNK's Level 1 American Depository Receipts Program (ADR) in the United States of America. DNK's ADRs are traded on the over-the-counter (OTC) securities market in the US under the symbol DNKLY and CUSIP: 23585T101. One ADR represents one ordinary share in DNK.

US OTC Market information is available here: http://www.otcmarkets.com/stock/DNKLY/quote

DNK's ADR information can also be viewed here: http://www.adrbnymellon.com/dr_profile.jsp?cusip=23585T101

ADR Holders seeking information on their shareholding should contact: shrrelations@bnymellon.com OR

LONDON NEW YORK

Mark Lewis Rick Maehr

mark.lewis@bnymellon.com richard.maehr@bnymellon.com 

Telephone +44 207 163 7407 Telephone +1 212 815 2275

Contents

Directors' Report

Consolidated Statement of Profit or Loss and Other Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Condensed Consolidated Financial Statements

Directors' Declaration

Directors' Report

Your directors submit their report together with the condensed financial statements of the consolidated entity, being Danakali Limited (Danakali or the Company) and its controlled entities (the Group) for the half year ended 30 June 2018.

Directors

The names of the directors who held office during or since the end of the half year are:

The Directors held their positions throughout the entire half year period and up to the date of this report unless stated otherwise.

PRINCIPAL ACTIVITIES

The principal activity of the Group during the half-year ended 30 June 2018 was advancing the Colluli Potash Project (Colluli, or the Project) in Eritrea, East Africa. There was no significant change in the nature of the Group's activities during the six months to 30 June 2018.

REVIEW AND RESULTS OF OPERATIONS

The net loss after tax of the Group for the half-year ended 30 June 2018 amounted to $1,108,408 (30 June 2017: $4,870,508). Total consolidated cash on hand at the end of the period was $14,455,709 (31 December 2017: $15,559,980).

Project Overview

The Colluli Potash Project is located in the Danakil Depression region of Eritrea, East Africa. Colluli is 100% owned by the Colluli Mining Share Company (CMSC), a 50:50 joint venture between Danakali and the Eritrean National Mining Corporation (ENAMCO).

The proven large resource, with low development capital intensity and, project scalability, estimated bottom quartile operating costs, product diversification potential and ease of access to global markets, supports a Tier 1 asset definition. An estimated mine life of almost 200 years, at production rate increasing to 944ktpa defined during the Front End Engineering Design (FEED) study demonstrates growth potential over decades (ASX Announcement 29 January 2018).

The JORC-2012 compliant Mineral Resource for Colluli is estimated at 1.289Bt @ 11% K2O for 260Mt of contained potassium sulphate (Sulphate of Potash or SOP) equivalent (ASX Announcement, 25 February 2015). The JORC-2012 compliant Ore Reserve estimate for Colluli is estimated at 1,100Mt @ 10.5% K2O for 203Mt of contained SOP equivalent (ASX Announcement 19 February 2018). The Measured and Indicated Mineral Resources are inclusive of those Mineral Resources modified to produce the Ore Reserves (detailed tables follow below).

Mineralisation commences at a depth from surface of 16m, making Colluli the world's shallowest evaporite deposit. The resource is amenable to open cut mining, which provides a very high resource to reserve conversion, and is generally safer, cheaper and more efficient than underground mining. Open cut mining is highly advantageous for low cost modular growth.

Colluli is located in close proximity to both a deep-water port and established infrastructure and is favourably positioned to supply the world's fastest growing markets. Colluli is located in the Danakil Depression region of Eritrea and is approximately 230km by road south-east of the port of Massawa, which is Eritrea's key import/export facility. The Danakil Depression is an emerging potash province, which commences in Eritrea and extends south across the border into Ethiopia.

Following the positive outcomes of a Pre-Feasibility Study (PFS) for the production of SOP (ASX Announcement 4 March 2015) in February 2015 and a Definitive Feasibility Study (DFS) (ASX Announcement 30 November 2015) that was completed in November 2015, FEED was completed in January 2018. FEED contemplates a modular SOP development. Module I is expected to produce 472ktpa of premium SOP product; and Module II, commencing production in year 6 of the Project, will increase total SOP production to 944ktpa.

FEED has provided offtakers and funders with a high level of detail, accuracy and confidence, and provides a robust platform for project execution. FEED confirmed a post-tax project NPV of US$902M and post-tax IRR of 29.9% for Colluli.

SOP is a chloride free, multi-nutrient, specialty fertiliser which carries a substantial price premium relative to the more common potash type; potassium chloride (MOP). Economic resources for primary production of SOP are geologically scarce and there are few current producers.

The unique composition of the Colluli resource favours low energy input, high potassium yield conversion to SOP using commercially proven technology. One of the key advantages of the resource is that the salts are present in solid form (in contrast with production of SOP from brines) which reduces infrastructure costs and substantially reduces the time required to achieve full production capacity.

In addition to the production of SOP, the Colluli resource has the capability of producing potassium magnesium sulphate (SOP-M), MOP, allowing production of three of the four key potash types traded globally. The multi-commodity potential is further supported by the ability to produce rock salt, gypsum and kieserite.

With the award of the Mining Licences and approval of the Mining Agreement in early 2017 (ASX Announcement 1 February 2017), Colluli is materially fully permitted.

In June 2018, a binding take-or-pay offtake agreement was reached with EuroChem Trading GmbH (EuroChem) for up to 100% of Module I SOP production from Colluli (ASX Announcement 12 June 2018). The take-or-pay nature of the Agreement provides cash flow certainty and strengthens the Colluli and Danakali investment propositions.

Reserves and Resources tables

The massive Colluli Ore Reserve has significant capacity to underpin further expansions and support decades of growth beyond Modules I and II.

Table [A]: Colluli SOP Ore Reserve1,2,3

1 The SOP Ore Reserve includes dilutant material; only Sylvite, Carnallite and Kainite mineral species from Sylvinite, Carnallitite and Kainitite rock types contribute to recovered product

2 See ASX announcement, "Colluli Ore Reserve update", 19-Feb-18 for further basis and JORC Code 2012 - Table 1, Sections 1, 2, 3 & 4 for the Colluli SOP Ore Reserve and Colluli SOP Mineral Resource

3 The Measured and Indicated SOP Mineral Resources below are inclusive of those SOP Mineral Resources modified to produce the SOP Ore Reserves

4 Equivalent SOP sourced from Sylvite, Carnallite and Kainite mineral species only, shown prior to the application of processing losses

Over 85% of the Measured and Indicated SOP Mineral Resources are included in the SOP Ore Reserve. Colluli's JORC Code 2012 compliant SOP Mineral Resource remains estimated at 1.289Bt @ 11% K2O for 260Mt of contained SOP equivalent (ASX announcement 25 February 2015). The resource remains open to the south-east of Area A and the west of Area B. The SOP Mineral Resource estimate was completed by AMC Consultants Pty Ltd (AMC), and updates the previous work conducted by Ercosplan Ingenieurgesellschaft Geotechnik und Bergbau mbH. 97% of the SOP Mineral Resource is classified as Measured and Indicated. See Table [B] for a summary of the SOP Mineral Resource.

Table [B]: Colluli SOP Mineral Resource,5,6,7,8

5 ASX announcements 25-Feb-15, 30-Nov-15, 15-Aug-16, 29-Jan-18 and 19-Feb-18

6 The Colluli SOP Mineral Resource also contains an 85Mt Kieserite Mineral Resource

7 The Measured and Indicated SOP Mineral Resources are inclusive of those SOP Mineral Resources modified to produce the SOP Ore Reserve

8 See ASX announcement, "Colluli Ore Reserve update", 19-Feb-18 for further basis and JORC Code 2012 - Table 1, Sections 1, 2, 3 & 4 for the Colluli SOP Ore Reserve and Colluli SOP Mineral Resource

Colluli also has a JORC Code 2012 compliant Measured, Indicated and Inferred Rock Salt Mineral Resource estimate of 347Mt @ 96.9% NaCl. The Rock Salt Mineral Resource contains 28Mt @ 97.2% NaCl of Measured Rock Salt Mineral Resources, 180Mt @ 96.6% NaCl of Indicated Rock Salt Mineral Resources, and 139Mt @ 97.2% NaCl of Inferred Rock Salt Mineral Resources. See Table [C] for a summary of the Rock Salt Mineral Resource.

Table [C]: Colluli Rock Salt Mineral Resource9,10

9 ASX announcements 23-Sep-15, 30-Nov-15, 29-Jan-18 and 19-Feb-18

10 See ASX announcement, "Colluli Ore Reserve update", 19-Feb-18 for further basis and JORC Code 2012 - Table 1, Sections 1, 2, 3 & 4 for the Colluli SOP Ore Reserve and Colluli SOP Mineral Resource

Project Update

FEED results released

As announced on 29 January 2018, the final FEED results have been released, confirming Colluli as the most advanced and economically attractive SOP greenfield development project. There is no other known SOP greenfield development project that has completed FEED.

FEED results underpin the Financial Model prepared for the debt providers and provided offtakers with additional confidence on project economics and fundability, which supported finalisation of bankable offtake agreements (see below). The FEED results reaffirm the outstanding project economics of Colluli.

Binding offtake agreement executed

As announced on 12 June 2018, CMSC entered into a binding take-or-pay offtake agreement with EuroChem for up to 100% (minimum 87%) of Module I SOP production from Colluli. The offtake agreement has a 10 year term from the date of first commissioning of the Colluli SOP processing plant, with an option, if mutually agreed, to extend for a further 3 years.

The offtake agreement reinforces Colluli's position as an advanced stage and economically attractive project relative to other SOP greenfield development projects. The offtake agreement is also expected to be instrumental in unlocking project funding and represents a strong endorsement for the Project. The take-or-pay nature of the offtake agreement (and associated terms) provides cash flow certainty and strengthens the Colluli and Danakali investment propositions.

EuroChem has agreed to provide technical support to the Project on terms to be agreed. EuroChem Group AG will provide a parent company guarantee as part of the Agreement.

Ore Reserve update

Danakali engaged recognised, capable and competent consultants for the development of FEED and the associated cost estimates, including many who were involved with the Colluli DFS (ASX announcement 30 November 2015), providing the engineering team with a high level of specific Colluli expertise and study continuity.

The FEED phase of study investigated options to improve SOP production and cost outcomes for the Project. The Colluli SOP Ore Reserve estimate, as at 29 January 2018, is based on a plant configuration comprising two processing modules and offsite water infrastructure to support the site water requirements. Modifying factors for SOP Ore Reserve estimation are drawn from the sections of the FEED and DFS reports as required. This is the third SOP Ore Reserve estimate for the Project. This estimate replaces the SOP Ore Reserve reported on 30 November 2015.

See above in the Project Overview section for Ore Reserve specifics.

Other key project, Company and external updates

Other key updates during the period include:

§ Material completion of gaining admission to the Standard Segment of the Official List of the Financial Conduct Authority and trading on the LSE Main Market (completed in July 2018) (ASX Announcements 12 July and 24 July 2018)

§ Debt Information Memorandum released to select financial institutions

§ EPCM and mining contracts advanced to final negotiation stage

§ Contract terms for preferred power provider, Inglett & Stubbs International, moved towards finalisation

§ Material completion of the Social and Environmental Management Plans

§ Progress on development of operations and in-country readiness systems and structures

§ Significant positive developments in Eritrean-Ethiopian relations including signing of peace treaty providing a platform of stability for the region

§ SOP demand growth continuing to outpace low cost supply growth, resulting in a robust pricing environment

SUSTAINABLE DEVELOPMENT FRAMEWORK

Danakali and CMSC (CMSC) have a strong commitment to sustainable development which is underpinned by the principles that mineral projects should be financially, technically and environmentally sound and socially responsible.

The company has a Sustainable Development Framework to govern its Corporate Social Responsibilities and Sustainability, which is aligned with its Corporate Governance Framework. The Anti-Bribery Policy has been updated in line with UK standards as a result of the LSE listing.

Further, following a period of consultation and further works, the Eritrean Ministry of Land, Water & Environment requested that CMSC finalise the Social and Environmental Management Plans (SEMPs) by incorporating agreed responses and changes. These have now been agreed and finalised (ASX Announcement 22 August 2018).

PROJECT FUNDING update

Debt

Danakali is engaging in ongoing discussions with potential debt providers. Multiple potential debt providers are well progressed with their due diligence.

Equity

Danakali's Ordinary Shares were admitted to the Standard Segment of the Official List of the Financial Conduct Authority and to trading on the LSE Main Market at 8.00am BST on 24 July 2018, ticker "DNK".

The Company believes Admission will increase its reach to institutional investors in the UK, Europe, Africa and the Middle East, increase share trading liquidity, and further raise the profile of the Project.

Corporate

Board changes

Mr Seamus Cornelius was appointed as Executive Chairman on 14 June 2018. Mr Cornelius has served as Non-Executive Chairman of Danakali since July 2013. He has a high degree of expertise in cross-border transactions, particularly in the resources and finance sectors.

Mr Cornelius is a member of the Company's Audit Committee, and Technical and Risk Committee, and is the Chairman of the Colluli Mining Share Company (CMSC) (the 50:50 joint venture between Danakali and the Eritrean National Mining Company (ENAMCO) and 100% owner of the Colluli Potash Project (Colluli, or the Project)). Mr Cornelius has to this point been an integral part of the Company's progression from Scoping Study through to Front End Engineering Design, signing of a Mining Agreement, awarding of Mining Licences, and, as announced on Tuesday, 12 June 2018, the achievement of a binding take-or-pay offtake agreement with EuroChem Trading GmbH (EuroChem).

Management changes

Mr Danny Goeman resigned as Chief Executive Officer (CEO) of the company with effect from 3 August 2018. Mr Goeman joined Danakali in 2016 as Head of Marketing before assuming the role of CEO in 2017. During his time with the Company, Mr Goeman developed the offtake strategy and contract framework, and led the offtake negotiations on behalf of CMSC. Mr. Goeman's leadership resulted in the execution of a binding take or pay offtake agreement with EuroChem covering up to 100% (minimum 87%) of the planned Module I SOP production from Colluli. Mr Goeman has accepted an offer to become Global Director Sales & Marketing for Fortescue Metals Group (ASX: FMG).  

During the period, the board announced the appointment of Mr Niels Wage as the Company's new Chief Commercial Officer effective 11 June 2018. Mr Wage has significant shipping, trading and commodity experience, and has held a number of senior management roles at BHP, including Vice President Potash, Vice President Freight and Vice President Diamonds.

At Danakali, Mr. Wage will be responsible for workstreams including:

§ Conducting a detailed joint logistics study with EuroChem

§ Further developing CMSC's product sales strategy

§ Developing plans for CMSC's own product export terminal at Anfile Bay, 87km from Colluli

§ Assessing the expansion of CMSC's product range

Shares

During the period, the Company issued the following fully paid ordinary shares:

§ 10,381,821 shares on traditional exercise of unlisted options at $0.35 each

§ 400,000 shares on traditional exercise of unlisted options at $0.405 each

§ 200,000 shares on traditional exercise of unlisted options at $0.450 each

§ 738,346 shares on cashless exercise of 1,949,000 unlisted options at $0.405 each

§ 116,586 shares on cashless exercise of 750,000 unlisted options at $0.527 each

§ 241,974 shares on cashless exercise of 1,600,000 unlisted options at $0.550 each

§ 35,000 shares on vesting of performance rights (Class 7: 20,000; Class 8: 15,000)

At 30 June 2018, there were a total of 263,811,414 fully paid ordinary shares on issue.

Options

There were no unlisted options issued during the period.

The following unlisted options were exercised and converted to shares during the period:

§ 10,381,821 unlisted options exercised at $0.35 each raising $3,633,637

§ 400,000 unlisted options exercised at $0.405 each raising $162,000

§ 200,000 unlisted options exercised at $0.450 each raising $90,000

§ 1,949,000 unlisted options with an exercise price of $0.405 were cashless exercised

§ 750,000 unlisted options with an exercise price of $0.527 were cashless exercised

§ 1,600,000 unlisted options with an exercise price of $0.550 were cashless exercised

There were 75,000 unlisted options exercisable at $0.350 that expired on 29 May 2018.

At 30 June 2018, there were a total of 3,840,000 unlisted options on issue at various exercise prices and expiry dates.

Performance Rights

There were no performance rights issued or cancelled during the period.

The following performance rights vested and were converted to shares during the period:

§ 20,000 Class 7 performance rights vested and converted to shares

§ 15,000 Class 8 performance rights vested and converted to shares

At 30 June 2018, there were a total of 1,373,000 performance rights on issue in the following classes:

§ 308,000 Class 1 performance rights

§ 800,000 Class 4 performance rights

§ 100,000 Class 5 performance rights

§ 50,000 Class 6 performance rights

§ 30,000 Class 7 performance rights

§ 85,000 Class 8 performance rights

Annual General Meeting

The Company's annual general meeting was held on 11 May 2018 (AGM). For more information, refer to the Notice of AGM announced 10 April 2018 and results of the meeting announced 11 May 2018.

Interests in Mining Tenements

The exploration license for the Colluli Potash Project covers over 200km2 and the seven mining licenses awarded to CMCS span over 60km2 of the 100km2 Agreement area. Further details are provided below. There was no change in tenement holding during the period.

Tenement: Colluli, Eritrea License Type: Mining License

Nature of Interest: Owned Current Equity: 50%

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

There were no other significant changes in the Company's state of affairs other than that referred to in the financial statements or notes thereto.

EVENTS OCCURRING AFTER THE STATEMENT OF FINANCIAL POSITION DATE

The Company's Ordinary Shares were admitted to the Standard Segment of the Official List of the Financial Conduct Authority and to trading on the LSE Main Market at 8.00am BST on 24 July 2018 (LSE:DNK).

CMSC's SEMPs were agreed and finalised following an extensive review process by the Eritrean Ministry of Land, Water & Environment's Department of Environment.

On 24 July 2018 the Company issued 356,049 fully paid ordinary shares in lieu of fees to its financial adviser in relation to admission to and trading on the LSE Main Market.

On 26 July 2018 the Company issued 30,000 fully paid ordinary shares on the vesting of performance rights (10,000 Class 6 and 20,000 Class 8).

There are no other events subsequent to 30 June 2018 and up to the date of this report that would materially affect the operations of the Group or its state of affairs which have not otherwise been disclosed in this financial report.

AUDITOR'S INDEPENDENCE DECLARATION

A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 has been received from the Company's Auditors.

This report is made in accordance with a resolution of directors.

Seamus Cornelius

CHAIRMAN

Perth, 12 September 2018

COMPETENT PERSONS AND RESPONSIBILITY STATEMENT

Competent Persons Statement (Sulphate of Potash and Kieserite Mineral Resource)

Colluli has a JORC-2012 compliant Measured, Indicated and Inferred Mineral Resource estimate of 1,289Mt @11% K20 Equiv. and 7% Kieserite. The Mineral Resource contains 303Mt @ 11% K20 Equiv. and 6% Kieserite of Measured Resource, 951Mt @ 11% K20 Equiv. and 7% Kieserite of Indicated Resource and 35Mt @ 10% K20 Equiv. and 9% Kieserite of Inferred Resource.

The information relating to the Colluli Mineral Resource estimate is extracted from the report entitled "Colluli Review Delivers Mineral Resource Estimate of 1.289Bt" disclosed on 25 February 2015 and the report entitled "In excess of 85 million tonnes of Kieserite defined within Colluli Project Resource adds to multi agri-commodity potential" disclosed on 15 August 2016, which are available to view at www.danakali.com.au. The Company confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement and, in the case of estimates of Mineral Resources or Ore Reserves, that all material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. The Company confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

Competent Persons Statement (Sulphate of Potash Ore Reserve)

Colluli Proved and Probable Ore Reserve is reported according to the JORC Code and estimated at 1,100Mt @ 10.5% K2O Equiv. The Ore Reserve is classified as 285Mt @ 11.3% K2O Equiv. Proved and 815Mt @ 10.3% K2O Equiv. Probable. The Colluli SOP Mineral Resource includes those Mineral Resources modified to produce the Colluli SOP Ore Reserves.

The information relating to the January 2018 Colluli Ore Reserve is extracted from the report entitled "Colluli Ore Reserve update" disclosed on 19 February 2018 and is available to view at www.danakali.com.au. The Company confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement and, in the case of estimates of Mineral Resources or Ore Reserves, that all material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. The Company confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

Competent Persons Statement (Rock Salt Mineral Resource)

Colluli has a JORC-2012 compliant Measured, Indicated and Inferred Mineral Resource estimate of 347Mt @ 96.9% NaCl. The Mineral Resource estimate contains 28Mt @ 97.2% NaCl of Measured Resource, 180Mt @ 96.6% NaCl of Indicated Resource and 139Mt @ 97.2% NaCl of Inferred Resource.

The information relating to the Colluli Rock Salt Mineral Resource estimate is extracted from the report entitled "+300M Tonne Rock Salt Mineral Resource Estimate Completed for Colluli" disclosed on 23 September 2015 and is available to view at www.danakali.com.au. The Company confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement and, in the case of estimates of Mineral Resources or Ore Reserves, that all material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. The Company confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

AMC Consultants Pty Ltd (AMC) independence

Quality control and quality assurance

Danakali exploration programs follow standard operating and quality assurance procedures to ensure that all sampling techniques and sample results meet international reporting standards. Drill holes are located using GPS coordinates using WGS84 Datum, all mineralisation intervals are downhole and are true width intervals.

The samples are derived from HQ diamond drill core, which in the case of carnallite ores, are sealed in heat-sealed plastic tubing immediately as it is drilled to preserve the sample. Significant sample intervals are dry quarter cut using a diamond saw and then resealed and double bagged for transport to the laboratory.

Halite blanks and duplicate samples are submitted with each hole. Chemical analyses were conducted by Kali-Umwelttechnik GmBH, Sondershausen, Germany, utilising flame emission spectrometry, atomic absorption spectroscopy and ion chromatography. Kali-Umwelttechnik (KUTEC) has extensive experience in analysis of salt rock and brine samples and is certified according by DIN EN ISO/IEC 17025 by the Deutsche Akkreditierungsstelle GmbH (DAR). The laboratory follows standard procedures for the analysis of potash salt rocks chemical analysis (K+, Na+, Mg2+, Ca2+, Cl-, SO42-, H2O) and X-ray diffraction (XRD) analysis of the same samples as for chemical analysis to determine a qualitative mineral composition, which combined with the chemical analysis gives a quantitative mineral composition.

Forward looking statements and disclaimer

The information in this document is published to inform you about Danakali and its activities. Danakali has endeavoured to ensure that the information enclosed is accurate at the time of release, and that it accurately reflects the Company's intentions. All statements in this document, other than statements of historical facts, that address future production, project development, reserve or resource potential, exploration drilling, exploitation activities, corporate transactions and events or developments that the Company expects to occur, are forward looking statements. Although the Company believes the expectations expressed in such statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in forward-looking statements.

Factors that could cause actual results to differ materially from those in forward-looking statements include market prices of potash and, exploitation and exploration successes, capital and operating costs, changes in project parameters as plans continue to be evaluated, continued availability of capital and financing and general economic, market or business conditions, as well as those factors disclosed in the Company's filed documents.

There can be no assurance that the development of Colluli will proceed as planned. Accordingly, readers should not place undue reliance on forward looking information. Mineral Resources and Ore Reserves have been reported according to the JORC Code, 2012 Edition. To the extent permitted by law, the Company accepts no responsibility or liability for any losses or damages of any kind arising out of the use of any information contained in this document. Recipients should make their own enquiries in relation to any investment decisions.

Mineral Resource, Ore Reserve, production target, forecast financial information and financial assumptions made in this announcement are consistent with assumptions detailed in the Company's ASX announcements dated 25 February 2015, 23 September 2015, 15 August 2016, 1 February 2017, 29 January 2018, and 19 February 2018 which continue to apply and have not materially changed. The Company is not aware of any new information or data that materially affects assumptions made.

No representation or warranty, express or implied, is or will be made by or on behalf of the Company, and no responsibility or liability is or will be accepted by the Company or its affiliates, as to the accuracy, completeness or verification of the information set out in this announcement, and nothing contained in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. The Company and each of its affiliates accordingly disclaims, to the fullest extent permitted by law, all and any liability whether arising in tort, contract or otherwise which it might otherwise have in respect of this announcement or any such statement.

Consolidated Statement of Profit or Loss and Other Comprehensive Income

The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to the financial statements.

Consolidated Statement of Financial Position

The consolidated statement of financial position is to be read in conjunction with the notes to the financial statements.

The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements.

The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements.

1. REPORTING ENTITY

Danakali Limited (Danakali or the Company) is a company limited by shares, incorporated and domiciled in Australia, and whose shares are publicly traded on the Australian Securities Exchange (ASX) and the London Stock Exchange (LSE). The consolidated half year financial report of the consolidated group as at, and for the six months ended 30 June 2018 comprises the Company and its subsidiaries (together referred to as the Group).

The financial report of Danakali for the half year ended 30 June 2018 was authorised for issue by the Directors on 11 September 2018.

The nature of the operations and principal activities of the consolidated entity are described in the Directors' Report.

2. BASIS OF PREPARATION

(a) Basis of preparation

This condensed general purpose financial report for the half year ended 30 June 2018 has been prepared in accordance with AASB 134 Interim Financial Reporting and the Corporations Act 2001.

The half year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the full financial report. It is recommended that the half year financial report be read in conjunction with the annual financial report for the financial year ended 31 December 2017 and considered together with any public announcements made by the Company during the half year ended 30 June 2018 in accordance with the continuous disclosure obligations of the ASX Listing Rules.

The half year financial report has been prepared on a historical cost basis and is presented in Australian dollars.

(b) New standards, interpretations and amendments adopted by the Group

The Group applied all new and amended Accounting Standards and Interpretations that were effective as at 1 January 2018, including:

AASB 9 Financial Instruments (AASB 9)

The Group has adopted AASB 9 as issued in July 2014 with the date of initial application being 1 January 2018. In accordance with the transitional provisions in AASB 9, comparative figures have not been restated. AASB 9 replaces AASB 39 Financial Instruments: Recognition and Measurement ("AASB 39"), bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The accounting policies have been updated to reflect the application of AASB 9 for the period from 1 January 2018 (see note 2(d) for details of the new accounting policy for receivables).

Measurement and classification

Under AASB 9, debt instruments are subsequently measured at fair value through profit or loss (FVPL), amortised cost, or fair value through other comprehensive income (FVOCI). The classification is based on two criteria: the Group's business model for managing the assets; and whether the instruments' contractual cash flows represent 'solely payments of principal and interest' on the principal amount outstanding (the 'SPPI criterion'). The SPPI test is applied to the entire financial asset, even if it contains an embedded derivative. Consequently, a derivative embedded in a debt instrument is not accounted for separately.

At the date of initial application, existing financial assets and liabilities of the Group were assessed in terms of the requirements of AASB 9. The assessment was conducted on instruments that had not been derecognised as at 1 January 2018. In this regard, the Group has determined that the adoption of AASB 9 has impacted the classification of financial instruments at 1 January 2018 as follows:

The loan to Colluli Mining Share Company (see note 5) failed the SPPI test due to the limited recourse nature of the loan. Accordingly, on adoption of AASB 9, the loan has been classified as a financial asset at FVPL.

The change in classification of financial instruments has not resulted in any re-measurement adjustments at 1 January 2018.

Impairment of financial assets

In relation to the financial assets carried at amortised cost, AASB 9 requires an expected credit loss model to be applied as opposed to an incurred credit loss model under AASB 39. The expected credit loss model requires the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition of the financial asset. In particular, AASB 9 requires the Group to measure the loss allowance at an amount equal to lifetime expected credit loss ("ECL") if the credit risk on the instrument has increased significantly since initial recognition. On the other hand, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group is required to measure the loss allowance for that financial instrument at an amount equal to the ECL within the next 12 months.

As at 1 January 2018, the directors of the Company reviewed and assessed the Group's existing financial assets for impairment using reasonable and supportable information. In accordance with AASB 9, where the directors concluded that it would require undue cost and effort to determine the credit risk of a financial asset on initial recognition, the Group recognises lifetime ECL. The result of the assessment is as follows:

Hedge accounting

The Group has not applied hedge accounting.

AASB 15 Revenue from Contracts with Customers (AASB 15)

The Group has adopted AASB 15 as issued in May 2014 with the date of initial application being 1 January 2018. In accordance with the transitional provisions in AASB 15 the standard has been applied using the full retrospective approach.

AASB 15 supersedes AASB 18 Revenue, AASB 111 Construction Contracts and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under AASB 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

At 1 January 2017 and at 1 January 2018 it was determined that the adoption of AASB 15 had no impact on the Group.

(c) Going concern

The financial statements have been prepared on a going concern basis which contemplates the continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business.

At balance date, the Group had cash and cash equivalents of $14,455,709 (31 December 2017: $15,559,980) and a net working capital surplus of $13,924,284 (31 December 2017: $14,521,089). Whilst the existing cash reserves are sufficient to cover the working capital requirements of the Group for the next 12 months, it is anticipated that the Group will commence execution of the project development during this period and as such, additional funding will be necessary to carry out these planned activities.

Under the mining agreement entered into between the Government of the State of Eritrea and Colluli Mining Share Company (CMSC) dated 31 January 2017 (Mining Agreement), CMSC is obliged to spend US$200 million on infrastructure and mine development within the area of the Colluli project mining licences in the 36 months following the provision of formal notice to the Ministry of Energy and Mines that development has commenced. This notice, which is expected to be provided prior to the deadline of 30 October 2018, may be given provided that a certain amount of preliminary work has been done and is not dependent on the Company securing the necessary financing for full development of the Project.

At the date of this report, the directors are satisfied there are reasonable grounds to believe that the Group will be able to continue its planned activities and the Group will be able to meet its obligations as and when they fall due. The directors are confident that the Group will be able to obtain the additional funding requirement via equity raising and the securing of debt. If it appeared that such financing was likely to be delayed, the directors would seek to defer its planned capital expenditure on the project and may seek an extension of the deadline to meet its expenditure obligations pursuant to the Colluli Mining Agreement.

Should the Group not achieve the matters set out above, there is uncertainty whether the Group would continue as a going concern and therefore whether it would realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. The financial statements do not include any adjustment relating to the recoverability or classification of recorded asset amounts or to the amounts or classification of liabilities that might be necessary should the Group not be able to continue as a going concern.

(d) Trade and other receivables (new policy applied from 1 January 2018 due to adoption of AASB 9)

Trade receivables are initially recognised at their transaction price and other receivables at fair value. Receivables that are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest are classified and subsequently measured at amortised cost. Receivables that do not meet the criteria for amortised cost are measured at fair value through profit or loss. This latter category includes the loan to Colluli Mining Share Company.

The group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. The Group always recognises the lifetime expected credit loss for trade receivables carried at amortised cost. The expected credit losses on these financial assets are estimated based on the Group's historic credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as forecast conditions at the reporting date.

For all other receivables measured at amortised cost, the Group recognises lifetime expected credit losses when there has been a significant increase in credit risk since initial recognition. If the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to expected credit losses within the next 12 months.

The Group considers an event of default has occurred when a financial asset is more than 120 days past due or external sources indicate that the debtor is unlikely to pay its creditors, including the Group. A financial asset is credit impaired when there is evidence that the counterparty is in significant financial difficulty or a breach of contract, such as a default or past due event has occurred. The Group writes off a financial asset when there is information indicating the counterparty is in severe financial difficulty and there is no realistic prospect of recovery.

3. SEGMENT INFORMATION

The Group operates in the mining industry in Eritrea. For management purposes, the Group is organised into one main operating segment which involves the exploration of minerals in Eritrea. All of the Group's activities are interrelated and discrete financial information is reported to the Board (Chief Operating Decision Maker) as a single segment.

Accordingly, all significant operating decisions are based upon analysis of the Group as one segment. The financial results from this segment are equivalent to the financial statements of the Group as a whole.

With the exception of fixed assets which are located in Australia, the Group's non-current assets are geographically located in Eritrea.

4. EXPENSES

5. TRADE AND OTHER RECEIVABLES

Danakali's wholly owned subsidiary, STB Eritrea Pty Ltd, is presently funding the Colluli Mining Share Company (CMSC) for the development of the Colluli Potash Project and 50% of the funding is represented in the form of a shareholder loan.

Repayment of this loan, as defined in the CMSC Shareholders Agreement, will be made preferentially from future operating cash flows. The shareholder loan is denominated in USD, non-interest bearing, unsecured and subordinate to any loans from third party secured lenders, under which CMSC may enter into in order to fund the Project Development Capital. For accounting purposes, the fair value of the loan has been determined by applying an interest rate of 25%. The fair value of the loan has been determined using a discounted cash flow methodology. Due to the significant unobserved inputs the fair value is a categorised as level 3 in the fair value hierarchy. The fair value of the loan is sensitive to the discount rate applied. A 50bps movement in the discount rate would change the valuation by $187,859.

The undiscounted underlying loan balance at 30 June 2018 is $30,599,638 (31 December 2017: $27,176,517). 

6. INVESTMENT IN JOINT VENTURE

The Group has an interest in the following joint arrangement:

The Group acquired an interest in Colluli Mining Share Company (CMSC) at the date of its incorporation on 5 March 2014. This acquisition was in accordance with a shareholders agreement entered into with the Eritrean National Mining Corporation (ENAMCO) and executed in November 2013 (Shareholders Agreement). CMSC was incorporated in Eritrea, in accordance with the Shareholders Agreement, to hold the Colluli project with Danakali and ENAMCO holding 50% of the equity each.

Pursuant to the terms of the Shareholders Agreement, at the date of incorporation of CMSC, consideration for the acquisition of shares in CMSC equates to half of the allowable historical exploration costs transferred to CMSC by STB Eritrea Pty Ltd, a wholly owned subsidiary of Danakali. The balance of the allowable historic exploration costs transferred to CMSC are recoverable via a shareholder loan account (see note 5).

The Group's 50% interest in CMSC is accounted for as a joint venture using the equity method. The following tables summarise the financial information of the Group's investment in CMSC at 30 June 2018.

Summarised financial information of joint venture:

There were no material commitments or contingencies within Colluli Mining Share Company for the financial periods above.

7. TRADE AND OTHER PAYABLES

8. ISSUED CAPITAL

of shares

9. RESERVES

(b) Nature and purpose of reserves

Share-based payments reserve

The share-based payments reserve is used to recognise the fair value of share options and performance rights issued.

Foreign currency translation reserve

The foreign currency translation reserve records the exchange differences arising on translation of a foreign joint arrangement.

10. ACCUMULATED LOSSES

(a)

11. SHARE BASED PAYMENTS

(a) Options

Movements in the number of unlisted options (being those the subject of share based payments) on issue during the period is as follows:

(i) During the period, 1,096,906 ordinary shares were issued on the cashless exercise of 3,399,000 unlisted options previously granted as compensation to directors, employees and advisors. The number of shares issued was calculated using the cashless exercise mechanism in accordance with the terms and conditions as amended and approved by shareholders at the Company's annual general meeting held 11 May 2018.

(ii) Vested options.

(iii) 900,000 vested options; 100,000 unvested options.

(iv) Unvested options.

(b) Performance Rights

The Company has a Performance Rights Plan which was re-approved at the annual general meeting of the Company held 17 November 2014. The purpose of the Plan is to provide recognition to employees and advisors of the Company and its subsidiaries for their continued and ongoing support of the Company.

Movements in the number of performance rights on issue during the period is as follows:

The 1,373,000 Performance Rights on issue at 30 June 2018 are subject to the following performance conditions:

Class 1:

§ 308,000 upon completion of securing finance for the development of the Colluli Potash Project

Class 4: 

§ 800,000 upon commencement of construction of the production facility for Colluli.

Class 5: 

§ 20,000 upon commencement of the first development work on the ground at the Colluli site within 1 week of the scheduled development time;

§ 60,000 upon 6-month construction mark if safety, costs and schedule are all on target; and

§ 20,000 upon completion of commissioning and completion of performance testing (performance testing to meet contractual requirements).

Class 6:

§ 10,000 upon successful completion of a dual listing of the Company on the London stock exchange;

§ 15,000 upon Endeavour Financial being paid its first milestone success fee which is linked to a letter of finance support from a lending institution; and

§ 25,000 upon term sheets being signed for the project financing of the Colluli project.

Class 7:

§ 15,000 upon completion of a strategic investment at greater than 30-day VWAP plus 10%; and

§ 15,000 on signing a debt terms sheet for project financing or debt is secured from a strategic investor.

Class 8:

§ 20,000 on completion of a London stock exchange listing;

§ 5,000 on completion of an approval and issued CSR report befitting an ASX200 company;

§ 50,000 on securing a strategic equity partner; and

§ 10,000 on finalising broker mandates which support the equity capital market strategy.

12. FINANCIAL INSTRUMENTS

Set out below is an overview of financial instruments, other than cash and short-term deposits, held by the group as at 30 June 2018:

Fair values:

Set out below is a comparison of the carrying amount and fair values of financial instruments as at 30 June 2018:

13. SUBSIDARY

Interest in subsidiary

The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance with the accounting policy:

(a) (a) (a)

The proportion of ownership interest is equal to the proportion of voting power held.

14. RELATED PARTY INFORMATION

Key Management Personnel (KMP)

The Company has entered into revised arrangements with the following key management personnel (KMP) during the half-year ended 30 June 2018:

Mr Seamus Cornelius, Executive Chairman (Transitioned from Non-Executive to Executive Chairman 14 June 2018):

§ Mr Cornelius is entitled to receive $109,000 per annum under an executive services agreement for the provision of executive duties, the term of which will be three months after the appointment of a new CEO

§ Mr Cornelius remains entitled to receive his pre-existing director fees (approximately $89,000)

Mr Stuart Tarrant, Chief Financial Officer:

Effective from 1 June 2018:

§ Engaged as a permanent full time employee

§ Remuneration of $300,000 per annum (including statutory superannuation)

§ Notice period of 3 months, required to be given by either party for termination

Transactions with directors, director related entities and other related parties

During the half year to 30 June 2018 the following transactions with related parties took place:

Options:

§ On 26 February 2018, 50,000 unlisted options with an exercise price of $0.35 each were exercised by KMP (traditional exercise);

§ On 29 March 2018, 125,000 unlisted options with an exercise price of $0.35 each were exercised by KMP (traditional exercise);

§ On 14 May 2018, 1,400,000 unlisted options with an exercise price of $0.405 were exercised by KMP (cashless exercise)

§ On 29 May 2018, 750,000 unlisted options with an exercise price of $0.527 were exercised by KMP (cashless exercise);

§ On 13 May 2018, 75,000 unlisted options to a KMP exercisable at $0.35 expired;

§ On 29 June 2018, the board resolved, subject to receipt of shareholder approval, to issue of 500,000 unlisted options to Mr Liebenberg.

Performance Rights:

§ On 12 March 2018, 10,000 shares were issued to KMP upon vesting of performance rights; and

§ On 14 June 2018, 10,000 shares were issued to KMP upon vesting of performance rights.

Shares:

§ A total of 175,000 shares were issued to KMP upon traditional exercise of 175,000 unlisted options;

§ A total of 646,953 shares were issued to KMP upon cashless exercise of 2,150,000 unlisted options; and

§ A total of 20,000 shares were issue to KMP upon vesting of performance rights.

15. CONTINGENCIES

There are no material contingent liabilities or contingent assets for the Group at the balance date.

16. COMMITMENTS

(a)

17. EVENTS OCCURRING AFTER THE STATEMENT OF FINANCIAL POSITION DATE

The Company's Ordinary Shares were admitted to the Standard Segment of the Official List of the Financial Conduct Authority and to trading on the London Stock Exchange's (LSE) Main Market at 8.00am BST on 24 July 2018 (LSE:DNK).

CMSC's SEMPs were agreed and finalised following an extensive review process by the Eritrean Ministry of Land, Water & Environment's Department of Environment.

On 24 July 2018 the Company issued 356,049 fully paid ordinary shares in lieu of fees to its financial adviser in relation to admission to and trading on the LSE Main Market.

On 26 July 2018 the Company issued 30,000 fully paid ordinary shares on the vesting of performance rights (10,000 Class 6 and 20,000 Class 8).

There are no other events subsequent to 30 June 2018 and up to the date of this report that would materially affect the operations of the Group or its state of affairs which have not otherwise been disclosed in this financial report.

In the directors' opinion:

1. the financial statements and notes set out on pages 12 to 25 are in accordance with the Corporations Act 2001, including:

a) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and

b) giving a true and fair view of the entity's financial position as at 30 June 2018 and of its performance for the half year ended on that date; and

2. there are reasonable grounds to believe that Danakali Limited will be able to pay its debts as and when they become due and payable subject to achieving the matters set out in note 2(c).

This declaration is made in accordance with a resolution of the directors.

Seamus Ian Cornelius

CHAIRMAN 

Perth, 12 September 2018