DNK.L Regulatory News (DNK)

QUARTERLY REPORT

Danakali Limited (ASX: DNK, LSE: DNK) (Danakali, or the Company) is pleased to provide this quarterly update on the activities and financial position of the Company and its Colluli Potash Project (Colluli or the Project), located in Eritrea, East Africa. The Project is 100% owned by the Colluli Mining Share Company (CMSC), a 50:50 joint venture between Danakali and the Eritrean National Mining Corporation (ENAMCO). CMSC is looking to become a leading producer and exporter of Sulphate of Potash (SOP), the premium potash type.

Highlights

§ Credit approval for US$200M CMSC senior debt facility nears completion[1]

- Mandated Lead Arrangers, Afreximbank and AFC have completed due diligence and are moving through final internal approvals

§ International Fertiliser Association Montreal 2019 Conference confirmed strong industry interest in Colluli and validation of the Project's attractive strategic and economic fundamentals

- CEO, Niels Wage, and Chairman, Seamus Cornelius were in attendance

§ High levels of activity in Eritrea

- Project Director, Tony Harrington, continues to drive project execution preparation in-country

Key activities planned for the September 2019 Quarter

§ Finalise CMSC senior debt credit approval

§ Progress remaining project funding requirements

§ Project execution activities

- EPCM preparation with preferred provider DRA Global

- Further tendering and confirmation of suppliers and contractors

Financial position

§ Cash position of A$6.3M as at 30 June 2019 

- Expected to represent ample working capital to take the Company through to commencement of project execution

Project

Project financing - Credit approval for US$200M CMSC senior debt facility nears completion[2]

Mandated Lead Arrangers, AFC and Afreximbank, have completed due diligence and moving through the final internal approvals required ahead of credit approval for US$200M of CMSC senior debt.

The Company continues to complement the Project's senior debt funding progress with:

·; extensive awareness exercises carried out to further raise the profile of Danakali and Colluli (see further detail in 'Corporate' section on page 6);

·; ongoing discussions with strategic, institutional and private client investors and brokers globally; and

·; moving towards financial close for Colluli Module I in parallel with the CMSC senior debt process.

The Company is carefully working towards achieving the further funding requirements at the optimal time and on the optimal terms.

In a positive development for financing in Eritrea more broadly, Danakali and CMSC are aware that prominent global development finance institutions and infrastructure funds and developers have been visiting and showing interest in Eritrea. For example, the International Monetary Fund sent a delegation to Eritrea in May 2019[3]. Key findings included:

·; "The peace agreement with Ethiopia and lifting of international sanctions provide a welcome opportunity for Eritrea to build an impetus for economic development"

·; "The IMF stands ready to support economic reforms through policy advice, technical assistance and training to help achieve macroeconomic stability and inclusive growth"

Project update - Project execution preparation

It is Danakali and CMSC's aim to commence project execution in 2019. In preparation, Danakali and CMSC are currently focused on:

·; Operational contracts

― Finalisation of EPCM contract pending funding

― Tenders for suppliers and sub-contractors

·; Operations readiness

― Ensuring Danakali and CMSC are set up to accept funding and efficiently move into project execution

·; Corporate social responsibility initiatives and ongoing risk assessment

·; Securing the Owner's Team to support project execution activities

·; Safety and medical set-up and processes

·; Logistics and other technical and product optimisation collaboration aspects with offtake partner EuroChem

Operational contracts - EPCM contract ready for execution on confirmation of project funding; and positive impacts of Eritrean-Ethiopian rapprochement observed

Specific conditions of the EPCM contract between CMSC and DRA Global are undergoing finalisation, incorporating the requirements of the Mandated Lead Arrangers. EPCM will commence in line with Figure 1 on confirmation of project funding.

Figure 1: EPCM phases

Clear ongoing benefits resulting from the Eritrea-Ethiopia rapprochement have been identified through CMSC's ongoing tendering for contractors and suppliers. Potential Ethiopian contractors and suppliers have been identified including cement suppliers, and earthworks, civil and mechanical contractors. The ability to seek Ethiopian suppliers and contractors is providing for increased competition in tender processes and more efficient and economic project execution outcomes than would otherwise have been available prior to the rapprochement. CMSC continues to prioritise the assessment of local capacity.

The Eritrea-Ethiopia rapprochement is also encouraging other countries and companies to enter Eritrea. The CMSC office was recently separately visited by 2 leading European automobile companies developing business cases to set up truck supplies and support in Eritrea. Both are looking into providing trucks for Colluli. In-country options on this front have previously been limited so this could represent a positive development from a competition and quality perspective.

Currently fuel service contracts are being discussed with the 2 major petroleum service companies in Eritrea.

CMSC is finalising the implementation of its Emergency Response Plan (ERP) and Emergency Preparedness and Response Package (EPRP). International SOS Emergency Assistance carried out and provided CMSC with an in-country medical assessment report. The International SOS Emergency assistance report is being integrated into the ERP and EPRP. Danakali and CMSC are committed to safe operations for all employees, contractors and external stakeholders. Refer Danakali's Health and Safety Policy: www.danakali.com.au/images/stories/corporate-governance-statement/DNK_Policy_-_Health_and_Safety.pdf.

SOP

SOP industry dynamics - Increasing demand with limited new primary production[4]

Demand is forecast to increase as:

·; SOP underapplication in developing countries is unlocked;

·; agricultural methods become increasingly sophisticated (positive for high value specialty fertilisers like SOP); and

·; Agricultural efficiency becomes increasingly necessary to optimise arable land utilisation to feed growing populations.

There have been consistent increases in chloride-sensitive crop areas since 2011, creating SOP demand, however SOP production (ex-China) has not grown proportionately. Over 50% of the world's SOP supply is produced through the Mannheim Process (a form of secondary production), involving the economically and environmentally costly conversion of Muriate of Potash (MOP) to SOP by adding sulphuric acid and energy intensive heat. The limited ability of secondary producers to expand in order to meet the growing demand is likely attributable to high production costs and environmental issues. This represents an opportunity for new entrants like Colluli to satisfy the production void. This opportunity in the SOP industry is predicted to expand further in future as input costs and environmental scrutiny further inflate the cost of Mannheim Process production.

While China dominates SOP production, the vast majority of its production is consumed in-country. The recent removal of export tariffs on Chinese SOP has had a limited effect on the global market, suggesting there are factors limiting the ability for Chinese production to increase. It is also understood to be uneconomic for China to export to Europe (one of the largest SOP markets) due to prohibitive logistics expenses.

The traded SOP market is dominated by 2 major companies, secondary producers K+S and Tessenderlo, who account for nearly 70% of global SOP exports. Danakali has the opportunity to become another major SOP industry participant given its scale, strategic location and low cost primary production.

Robust SOP pricing environment - SOP premium over MOP of over US$250/t has been sustained leading to outstanding margins for low cost producers[5]

SOP prices provide attractive margins for low cost primary producers. SOP prices are forecast to increase in the medium term as demand continues to outpace supply additions.

Primary producers like Colluli will benefit from the substantial premium of SOP over MOP, which has remained well above US$200/t for over 5 years and is currently over US$250/t (see Figure 3). The premium is expected to be sustained as a result of the conversion costs and environmental issues associated with the Mannheim Process, and robust growth in SOP demand. SOP is consistently chosen over MOP for its applicability to chloride intolerant and chloride sensitive crops. SOP users have indicated they would not switch to MOP even if the cost of doing so declined.

In 2018, key Indian and Chinese MOP contracts were entered into at US$290/t (up from US$240/t and US$230/t respectively the year prior), which has provided a strong support for SOP prices through 2019.

Corporate

Annual General Meeting - All resolutions passed and presentation from CEO

Strong support from shareholders in the latest round of resolutions at the Company's Annual General Meeting (AGM), including:

·; Re-election of John Fitzgerald as a Non-Executive Director;

·; Re-election of Robert Connochie as a Non-Executive Director; and

·; Replacement of the Company's Constitution

Chief Executive Officer (CEO), Niels Wage, delivered an update on the Company and Colluli. The presentation can be found here: www.danakali.com.au/investor-relations/corporate-presentations

International Fertiliser Association Montreal 2019 Conference - Confirmation of strong industry interest in Colluli

CEO, Niels Wage, and Chairman, Seamus Cornelius, attended the International Fertiliser Association Montreal 2019 Conference, the preeminent global fertiliser industry conference. Mr. Wage and Mr. Cornelius met with a range of key industry players and confirmed strong industry interest in Colluli and further validation of the Project's strong strategic and economic fundamentals.

North American investor roadshow - Keen institutional investor interest in Canada and USA

CEO, Niels Wage, and Chairman, Seamus Cornelius, carried out numerous meetings with large institutional investors in Montreal, Toronto and New York. Potash is well understood in North America. It represents a jurisdiction which could have significant interest in Danakali. 

Capital

Cash

Consolidated cash on hand was A$6.3M as at 30 June 2019. Danakali expects that this cash balance will provide the necessary working capital to take the Company through to completion of Colluli project funding and the commencement of project execution.

Securities

As at 30 June 2019, there were a total of 264,422,398 fully paid ordinary shares on issue. The Company issued no fully paid ordinary shares in the June Quarter 2019.

As at 30 June 2019, there were a total of 7,254,055 unlisted options on issue at various exercise prices and expiry dates. The following unlisted options were issued during the June Quarter 2019:

§ 561,800 unlisted options with an exercise price of A$1.119 each expiring 28 March 2022

§ 1,450,000 unlisted options with an exercise price of A$1.114 each expiring 30 May 2022

§ 500,000 unlisted options with an exercise price of A$0.912 each expiring 11 May 2020

§ 301,040 unlisted options with an exercise price of A$1.031 each expiring 24 January 2022

The following unlisted options lapsed during the June Quarter 2019:

§ 400,000 unlisted options with an exercise price of A$0.96 lapsed on 20 June 2019

§ 455,800 unlisted options with an exercise price of A$1.031 lapsed on 7 June 2019

No listed options were exercised during the June Quarter 2019.

As at 30 June 2019, there were a total of 2,300,000 performance rights on issue.

§ 1,000,000 class 9 performance rights were issued during the June Quarter 2019

§ 15,000 class 7 performance rights lapsed during the June Quarter 2019

Interests in mining tenements

The 7 Mining Licenses awarded to CMSC span over 60km2 of the 100km2 Mining Agreement area[7].

Table 1: Tenement holdings

There was no change in tenement holding during the June Quarter 2019.

For more information, please contact:

Visit the Company's website: www.danakali.com; or

Follow Danakali on LinkedIn: www.linkedin.com/company/danakali-limited

Appendix 5B

Mining exploration entity and oil and gas exploration entity quarterly report

Introduced 01/07/96 Origin Appendix 8 Amended 01/07/97, 01/07/98, 30/09/01, 01/06/10, 17/12/10, 01/05/13, 01/09/16

Compliance statement

1 This statement has been prepared in accordance with accounting standards and policies which comply with Listing Rule 19.11A.

2 This statement gives a true and fair view of the matters disclosed.

Sign here: (Joint Company Secretary) Date: 29 July 2019

Print name: Melissa Chapman

Notes

1. The quarterly report provides a basis for informing the market how the entity's activities have been financed for the past quarter and the effect on its cash position. An entity that wishes to disclose additional information is encouraged to do so, in a note or notes included in or attached to this report.

2. If this quarterly report has been prepared in accordance with Australian Accounting Standards, the definitions in, and provisions of, AASB 6: Exploration for and Evaluation of Mineral Resources and AASB 107: Statement of Cash Flows apply to this report. If this quarterly report has been prepared in accordance with other accounting standards agreed by ASX pursuant to Listing Rule 19.11A, the corresponding equivalent standards apply to this report.

3. Dividends received may be classified either as cash flows from operating activities or cash flows from investing activities, depending on the accounting policy of the entity.

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.