Danakali : Quarterly Report - Period ending 31 March 2021

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Announcement

Friday, 30 April 2021

QUARTERLY REPORT

For the period ending 31 March 2021

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 progressing to become a leading producer and exporter of Sulphate of Potash (SOP), the premium potash type.

Highlights

Restructure of the Board and Executive

• Mr Seamus Cornelius, re-appointed as Executive Chairman and CEO position made redundant
• Board size and fee rationalisation undertaken

Project Progress

• Process test work, necessary to determine final process equipment selection, undertaken during the quarter with completion expected in Q2
• Commencement of investigation to compress the project development schedule
• Completion of negotiations with Aggreko for the supply of a 12MW power plant
• Negotiations with preferred camp provider, RA International (RAI), materially completed

Project Financing

• Industry and financial investors engagement with regard to securing a fully funded position for the Project
• Further discussions with Africa Finance Corporation and Afreximbank regarding increased participation in the Project
• Subsequent to quarter end (29 April 2021), successful Placement of A$20.3 Million to advance Colluli was announced

Environmental, Social and Governance (ESG)

• Initial discussions on a Hybrid solution commenced with Aggreko to assist the Company to deliver on its carbon net zero target for SOP Production

Key activities planned for Q2 2021

Project Progress

• Finalise contract with Aggreko for the supply of a 12MW power plant
• Finalise contract with RAI for the supply of Accommodation, Support Services and other infrastructure
• Finalise process test work, mass balance modelling and process flow diagrams to determine process equipment selection
• Finalise an optimisation opportunity to simplify infrastructure through the use of sea water in processing
• Finalise the investigation of the development schedule compression opportunities with EPCM Contractor,

DRA and Vendors once processing equipment selection has been determined.

Project Financing

▪

• Industry and financial investors engagement with regard to securing a fully funded position for the Project
• Further discussions with Africa Finance Corporation and Afreximbank regarding increased participation in

the Project

Environmental, Social and Governance (ESG)

• Advance commercial discussions with Aggreko regarding a Hybrid power solution

Corporate & Financial

• Cash balance of A$7.6M as of 31 March 2021
• Release of the 2020 Financial Report

Danakali Limited

Level 1, 2A/300 Fitzgerald St, North Perth, WA 6006 Tel: [phone] / ABN 56 097 904 302

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Project & Corporate Update

COVID-19

In response to lower cases, the Government of Eritrea has relaxed many of the measures placed to curtail the spread of COVID-19. Management of COVID-19 has been relatively effective to date where total cumulative cases at the end of March were 3,285, with 3,029 recovered and 10 fatalities. The controls left in place are the opening of kindergarten through to secondary schools, hotels and restaurants and the use of public transport.

These final measures are planned to be relaxed in April 2021 along with commercial flights to compliment the charter flights which have continued during the pandemic on a reduced basis.

Environmental & Social Governance

Clean Energy Zero Carbon SOP

As announced on 10 March 2021, the Company is continuing the process of evaluating its renewable energy options of solar, wind and geothermal energy with a view to becoming zero carbon in the production of Sulphate of Potash (SOP).

Solar and Wind

The early assessment work on the solar and wind energy potential of Colluli has been completed and this has confirmed that both of these renewable energy sources can be incorporated into the future generation of power for the Project.

Initially, the Company is working with its preferred power provider, Aggreko, on further developing these solutions through the investigation of a hybrid power solution.

Geothermal

Colluli is located in the Danakil depression which lies within the East African Rift Valley, one of the world's most geothermally endowed rifts. Significantly, the mining license area is in close proximity to known geothermal gradients including at Alid, located on the axis of the Danakil depression, between the Red Sea and the Afar Triple Junction. Alid has been recognised by the Eritrean Ministry of Mines and Energy (MoEM) as a potential high geothermal resource due to the evidence of various surface manifestations and the presence of underground magma.

In 1996, detailed geological and geochemical work funded by USAID and conducted by United States Geological Survey (USGS) and MoEM identified a high temperature reservoir at Alid. Samples collected indicate a reservoir temperature of a hydrothermal-convection system likely to be in the range of 250°-300°C2, which is extremely promising as a geothermal power source. Follow up work in 2015 demonstrated structural trends and temperature permeability that are very favourable for an electric grade geothermal resource.

The importance of geothermal and other renewable energy sources is set out in Eritrea's national renewable energy policy and development framework. Danakali will utilise the impressive body of work already conducted in Eritrea to develop its plans and further its commitment to carbon neutral SOP production.

Danakali Limited

Level 1, 2A / 300 Fitzgerald St, North Perth, 6006 Tel: [phone]/ ABN 56 097 904 302

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E&S Management System Development

CMSC operational management systems will align with the Equator Principles, IFC standard for Environmental and Social Performance and the World Bank Group Environment, Health and Safety Guidelines. During the quarter, the Company further advanced the Environmental and Social Action Plan (ESAP) requirements, which is now approximately 87% complete. ESAP closure is a one of the conditions precedent to the US$200m Senior Debt and the senior lenders are regularly engaged with regard to the progress.

Project

Preferred Power Contractor

Negotiations with Aggreko relating to the 12MW (Heavy Fuel Oil (HFO)) power plant power contract were completed during the quarter with the contract approval expected in Q2 2021.

Process Test Work

As announced on 2 September 2020, process test work is being undertaken before EPCM Phase 3 (Detailed Design) commences to increase the accuracy of equipment selection and process definition allowing future schedule and plant commissioning risk mitigation. The detailed test work was completed during Q1 with final reports expected in Q2 2021.

Investigation of Schedule Compression

In parallel to the Test Work, the Company has identified that the current development path contains some opportunities for compression which have been investigated during the quarter. Finalisation of this optimisation is subject to the selection of equipment from the Test Work and a final review by Colluli's EPCM Contractor, DRA Global.

Progress with Mine Site Accommodation Provider

As announced on 20 August 2020, RA International were appointed as the preferred accommodation provider. Commercial discussions have been materially completed during the quarter with the final contract expected to be finalised in Q2 2021.

Corporate

Appointment of Executive Chairman and restructure of Board and Executive

On 26 February 2021, the Company announced the following management changes:

• Non-ExecutiveChairman, Mr Seamus Cornelius, was re-appointed as Executive Chairman
• The role of Chief Executive Officer (CEO), held by Mr Niels Wage, was made redundant as part of a reallocation of responsibilities
• Basic board fees were reduced by 33% for all board members and board size to be reduced at the upcoming AGM

Executive Chairman

Mr Seamus Cornelius was appointed as Non-Executive Chairman of the Company on 15 July 2013 and acted in the role of Executive Chairman from 14 June 2018 to 25 June 2019. Mr Cornelius is a corporate lawyer and former partner of one of Australia's leading law firms. He has a high degree of expertise in cross-border transactions,

Danakali Limited

Level 1, 2A / 300 Fitzgerald St, North Perth, 6006 Tel: [phone]/ ABN 56 097 904 302

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particularly in the resources and finance sectors. Mr Cornelius is a member of the Company's Audit and Risk Committee, Remuneration and Nomination Committee and is the Chairman of CMSC.

On 26 March 2021, the Company confirmed that Mr Cornelius shall be entitled to receive fixed remuneration of A$225,000 per annum plus superannuation at the statutory rate. In addition, Mr Cornelius will be eligible to participate in the Company's incentive plans, the terms and operation of which are at the discretion of the Board and subject to shareholder approval in the case of securities. This remuneration package includes existing director fees and executive services to be performed as part of the expanded role.

CEO

With the ongoing serious disruption to international travel caused by the Covid-19 pandemic, the Company advised that as part of the restructure of roles and responsibilities, which will increase efficiencies and reduce operating costs, the role of Mr Niels Wage, the Company's Chief Executive Officer, was made redundant. His responsibilities were assumed by the Executive Chairman with support from other team members.

Mr Wage joined Danakali in June 2018 as Chief Commercial Officer before assuming the role of CEO in March 2019. Highlights of Mr Wage's tenure include leading the Company through signing of documentation for the US$200m senior debt facility for CMSC from African Export Import Bank and Africa Finance Corporation (AFC) (refer announcement 23 December 2019) and while the Company secured the US$21.5m equity investment from AFC (refer announcement 10 December 2019), Mr Wage also oversaw the commencement of the development of the Project including the completion of EPCM Phases 1 and 2.

Mr Wage supported an orderly transition of his responsibilities and intends to pursue other opportunities.

Project Financing

The Company maintained institutional and strategic equity engagement during the quarter with a number of face- to-face meetings with targeted investors in the United Kingdom, US and Australia with Danakali's Executive Chairman, Seamus Cornelius, Executive team, ESG Team and Corporate Development presenting and attending.

With a continued focus on obtaining full funding for Colluli's development through additional debt, equity and quasi-equity investments, meetings with AFC were held to discuss a potential further investment.

Capital

Cash

Consolidated cash on hand was A$7.6M as at 31 March 2021. Please refer to the Appendix 5B for the quarter which estimates that available funding is sufficient for more than 3 quarters.

Securities

As at 31 March 2021, there were a total of 319,688,347 fully paid ordinary shares on issue. A total of 947,041 shares were issued during the March 2021 Quarter upon the exercise of unlisted options at $0.00 expiring 31 December 2021.

As at 31 March 2021, there were a total of 5,264,112 unlisted options on issue at various exercise prices and expiry dates. The following unlisted options were issued during the March 2021 Quarter:

Danakali Limited

Level 1, 2A / 300 Fitzgerald St, North Perth, 6006 Tel: [phone]/ ABN 56 097 904 302

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• 500,000 unlisted options exercisable at $0.527 expiring 29 January 2023
• 250,000 unlisted options exercisable at $0.501 expiring 3 December 2023
• 250,000 unlisted options exercisable at $0.780 expiring 24 March 2023

A total of 947,041 unlisted options at $0.00 expiring 31 December 2021 were exercised during the March 2021 Quarter. No unlisted options lapsed during the March 2021 Quarter.

As at 31 March 2021, there were a total of 360,000 performance rights on issue. No performance rights were issued or converted during the period. A total of 900,000 performance rights lapsed during the March 2021 Quarter.

Related Party Transactions

In accordance with ASX Listing Rule 5.3.5, payments to related parties of the Company and their associates during the quarter totaled A$0.117m. The Company advises that this relates to Director fees. Refer to the Remuneration Report in the Financial Report for further details on director remuneration.

Interests in mining tenements

The 7 Mining Licenses awarded to CMSC span over 60km2 of the 100km2 Mining Agreement area. There were no mining exploration activities undertaken during the quarter.

Tenement holdings

Tenement	Colluli, Eritrea
Nature of interest	Owned
License type	Mining Licenses
Current equity	50%

There was no change in tenement holding during the March 2021 Quarter.

For more information, please contact:

Danakali
Seamus Cornelius	Mark Riseley
Executive Chairman	Head of Corporate Development
[phone]	[phone]

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Announcement authorised for release by the board of Danakali.

Danakali Limited

Level 1, 2A / 300 Fitzgerald St, North Perth, 6006 Tel: [phone]/ ABN 56 097 904 302