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Danakali Ltd. - A Unique and Unrivaled Potash Opportunity in Eritrea

Danakali Ltd. – A Unique and Unrivaled Potash Opportunity in Eritrea

Overview

Danakali Ltd. (ASX:DNK; OTC:DNKLY) is developing the world class Colluli potash project in Eritrea, East Africa. The company completed a highly favourable definitive feasibility study in 2015 for a two stage development focussing on the production of sulphate of potash (SOP). The company signed a mining agreement earlier this month and has been awarded mining licenses. It is now focussing on product offtake and funding for construction. Colluli is the most advanced stage greenfield primary production SOP project in the world.

The Colluli Potash project is wholly owned by the Colluli Mining Share Company (CMSC) which is a 50/50 joint venture between Danakali and the Eritrean National Mining Company (ENAMCO).

The Colluli deposit comprises a JORC 2012 compliant 1.3 billion tonne potassium bearing resource, which includes a massive 1.1 billion tonne ore reserve. It consists of three potassium bearing salts; sylvinite, carnallite and kainite, which gives it unrivalled potash product diversification potential, allowing it to produce sulphate of potash, sulphate of potash magnesia and muriate of potash. The initial development will focus on the production of sulphate of potash (SOP), which is a high quality, chloride free potash type that has limited economically exploitable resources globally. SOP achieves a substantial price premium over the more common potash type, muriate of potash (potassium chloride). The massive ore reserve will support decades of future growth.

In addition to the potassium bearing salts, the resource also contains a JORC 2012 compliant high grade rock salt resource of approximately 350 million tonnes, as well as appreciable amounts of kieserite, magnesium chloride and gypsum. This combination of salts forms the foundation of a l diversified multi-agri commodity business.

Colluli is located only 75km from the Red Sea coast, making it the closest sulphate of potash project to a coastline anywhere in the world. Sitting at the epicentre of booming population growth, Eritrea is strategically positioned to take advantage of the key markets of the future.

The definitive feasibility study demonstrates superior economics relative to all advanced SOP projects throughout the world. Industry leading capital intensity, bottom quartile operating costs, scalability, low incremental growth capital, access to global markets and unrivalled potash and product diversification potential makes the Colluli potash project positively unique and the premier potash and multi agri commodity opportunity.

“Colluli is the best undeveloped potash resource in the world today. It has no peer. It is the world’s shallowest known evaporite deposit, is easily accessible, has excellent diversification potential and is highly fundable. Quite simply it is a large, long life, high quality asset with access to global markets and strong diversification potential – it is positively unique.” said Danakali Managing Director, Paul Donaldson.

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Investment Highlights

  • DFS/BFS complete
    • Project post tax NPV of US$860m and IRR of 29%
    • Capital payback period of 3.5 years for Phase I
  • Massive, high grade potassium bearing resource close to surface
  • Industry leading capital intensity
  • Shallow mineralization, whichallows salts to be extracted in solid form
  • Close proximity to coast and geographically favorable relative to key markets
  • Unrivalled agri-commodity diversification potential
  • Low incremental growth capital
  • Superior economic outcomes relative to all advanced SOP projects
  • Permitting, funding and offtake discussions underway
  • Application for a mining license expected in Q1 of 2016
  • Commissioning targeted for Q4 2018

Mining in Eritrea

The African nation of Eritrea is a stable jurisdiction committed to developing its emerging mining industry. To date, over US$600m has been invested in the industry, and a pipeline of projects continues to grow. The jurisdiction offers favourable import duties, and depreciation rates.

There is already one active copper-gold mine (Bisha) and two more mines are in advanced stages of development (Zara gold and Colluli potash).

The $250 million Bisha Mine, a joint venture between ENAMCO and Nevsun Resources Ltd. (TSX:NSU), was first commissioned in 2013 and has undergone three capacity expansions since. The project commenced as a gold production facility, then transitioned to copper production and has recently completed plant modifications to allow zinc production.

The Zara joint venture between ENAMCO and SFECO was commissioned in late 2015 and has an estimated mine life of approximately seven to ten years.

The Asmara project between ENAMCO and Sichuan Road and Bridge Mining Corporation is progressing following a highly favourable definitive feasibility study.

“The Eritrean Government doesn’t compromise their process and legislation, but the red tape is minimal and access to the appropriate government officials is facilitated by the relationship,” said Managing Director Paul Donaldson.

Danakali’s joint venture partnership with the Eritrean National Mining Company on the Colluli Potash Project has enabled Danakali to quickly navigate the exploration licensing and environmental regulation processes.

Colluli’s location near the coast in Eritrea means it is favourably positioned relative to key growth markets for potassium bearing fertilisers, specifically Africa, India, South East Asia and China. These regions are experiencing increasing population growth, decreasing land and changing dietary preferences; all key drivers of the fertilizer market.

Key Property

Colluli Potash Project — Eritrea, Africa

Danakali’s Colluli Potash Project is located in the Danakil Depression region of Eritrea approximately 350 kilometers southeast of the capital city, Asmara. The Danakil Depression is an emerging potash province with more than 6 billion tonnes of measured and indicated potassium bearing salts identified to date.

The Colluli resource lies a short 75 kilometers from the Red Sea Coast, making it one of the most accessible potash deposits in the world. The project is only 180 kilometers from the port of Massawa, the nation’s key import/export facility.

Colluli is owned by the Colluli Mining Share Company (CMSC) which is a 50/50 joint venture between the Eritrean National Mining Company (ENAMCO) and Danakali. CMSC began actively exploring for potash on the approximately 200 square kilometer project area in 2009.

The Colluli Potash Project has a 2012 JORC Mineral Resource Estimate of 1.289 billion tonnes at 10.76 percent K2O (total contained potassium sulphate of approximately 260 million tonnes). Over 97% of the resource sits within the measured and indicated categories, and comprises a 1.21bt ore reserve.

“What attracted me to this company was the resource size, the shallow depth, the growth fundamentals of the commodity itself, and the proximity of the project to the coast. I felt that Colluli had all the right fundamentals of a successful project in the long-run,” said Danakali Managing Director Paul Donaldson.

Large, shallow deposit with unique mineral composition

Colluli is a considerably large deposit and the shallowest known potassium-bearing evaporite deposit globally (mineralization starts at 16m and runs to 150m). It contains a uniquely rare composition of three key potassium bearing salts in solid form: sylvinite, carnallitite and kainitite. These salts are suitable for low-energy, high potassium yield, production of both potassium sulphate (SOP) and potash of magnesia (SOPM).

In the global fertilizer market, primary production is dominated by brine producers which must carry out the energy-intensive, time consuming work of evaporating the potassium rich brines into salts that can be converted into potassium sulphate. At Colluli, nature has done the work and the potassium salts are extracted and processed in solid form. This negates the need for expansive evaporation ponds, and provides revenue generation in much shorter timeframes.

Colluli’s large deposit size, shallow depth and unique mineral composition present a huge upside for the economics of the project because the fortuitous combination makes the resource highly amenable to low temperature conversion of the salts to SOP by using conventional flotation and mixing. The operating environment is ideal for solar evaporation and a series of recovery ponds will be integrated into the process plant to further improve potassium yields.

The solid form of the salt composition means mined salt can be immediately processed in contrast with brine operations which may take up to three years to form harvest salts for subsequent processing. This provides the distinct economic advantage of immediate return on invested capital.

The open cut mining method allows full resource utilization which is a major advantage over solution mining where up to 70 percent of the resource may be sterilized to ensure adequate mine ground support. By mining all of the potassium bearing salts in the resource, the open cut mining strip ratio is also kept to a minimum.

“There are very few resources—you can count them on one hand—that have the capability to make potassium sulphate with such low energy and at high yields in a single resource. To make SOP, a higher value product from Colluli, all of the salts must be mined, which lowers mine strip ratio, hence mining cost base. Normally to produce a high margin product you have to invest more operating cost, but in our case you invest less. And that’s one of the many great things about the Colluli Project,” said Managing Director Paul Donaldson.

SOP niche market: tight supply, heavy demand

Both SOP and SOPM are high quality, rare potash fertilizers with limited production centers globally; hence they carry a price premium over the more common potassium chloride (MOP).

SOP is an important multi-nutrient potash type suitable for high value crops such as fruits and vegetables. It is essential for chloride intolerant crops. SOP carries a substantial price premium over the more common potassium chloride. There are limited greenfield developments due to the scarcity of economically exploitable resources.

SOP prices are a direct consequence of inadequate supply. There are limited greenfield developments outside of China and none that have coastal access to match Colluli. As population growth expands globally alongside a reduction in arable land and changing dietary preferences, the potassium sulphate market will continue to grow. Projections estimate SOP demand growth of more than 2 million tonnes over the next decade, and the Colluli project has the potential to meet the requirements of the future and transform to a resource of global significance. Bottom quartile operating costs will provide industry leading returns throughout the commodity cycle, and allow the project to grow beyond market growth requirements through the displacement of high cost production.

Substantial project upside also exists in higher production capacity and market development for other contained products such as high purity rocksalt, kieserite (magnesium sulphate), gypsum and magnesium chloride. The resource can also produce the more common, lower priced potassium chloride.

Bankable Definitive Feasibility Study Complete

The highly favourable definitive feasibility study demonstrates leading industry capital intensity, bottom quartile operating costs, low incremental growth capital and very long mine life. It is the most fundable SOP project in the world. Pilot plant tests from the Colluli salts show that product quality will be of the highest level.

SOP from Colluli will be produced using commercially proven technology which comprises simple mineral processing units including flotation and mixing. DFS metallurgical testwork and pilot plant results are highly favorable, showing high purity SOP can be produced from the Colluli salt mix. Flotation tests resulted in recoveries of more than 80 percent potassium. The integrated flotation and recovery pond circuit will provide overall potassium yields in excess of 85 percent.

The DFS demonstrates that Colluli has the potential to become one of the lowest-cost potassium sulphate operations in the world. With Phase I development capital of US$298 million, the project is one of the most fundable in the world. Industry leading capital intensity of US$702 per tonne SOP in combination with bottom quartile operating costs gives an estimated payback of 3.5 years.

“The DFS outcomes validate Colluli as the premier premium potash opportunity. It confirms a robust, low capital intensity, low operating cost project with attractive economic returns and a high level of expandability. It has no peer, no rival. It is positively unique and a global standout with regard to resource quality and versatility,” said Donaldson.

The Colluli resource meets all the criteria of a Tier 1 asset with a mine life of well over 200 years at the proposed production rate of 850ktpa. It is a large, low life, expandable resource, with industry leading capital intensity, bottom quartile operating costs, low incremental growth capital, unrivalled product diversification potential and is located at the epicenter of booming population growth.

Danakali Ltd. - A Unique and Unrivaled Potash Opportunity in Eritrea

Modular approach to development minimizes risks and enhances expansion

The Colluli development philosophy hinges on the ability to effectively manage risk and cost, optimize production processes, and expand the resource to its fullest potential; hence, the joint venture company (Colluli Mining Share Company) is taking a modular, rather than large-scale, approach to development.

“Until you start producing material and putting tonnes on the ship, the PFS and DFS are just estimates on cost structure. From a commercial perspective, by keeping scale down we can minimize exposure to variances in the cost structure and give ourselves the opportunity to get it right,” said Managing Director Paul Donaldson.

The modular approach involves initiating development on a smaller-scale, making it easier for Danakali to manage risks in terms of workforce size and fundability. Analysis of mining projects shows that the larger the capital investment for developing a project increases the likelihood of a cost over-run. Lower CAPEX projects are typically more manageable and more likely to come in at, or under budget.

Such an approach also allows for more optimization opportunities, enhancing the expandability of the project. Module designs can be further optimized with the combination of data, plant performance, and improved understanding of raw material and processing behavior.

Currently, SOP producers supply approximately 6 million tonnes per year to the global market. Phase I production will place Colluli among the world’s top 10 producers. Once in Phase II, Colluli will place among the top 3 producers globally.

Application for a mining license is expected in the first quarter of 2016.

Management

Paul Donaldson – Chief Executive Officer & Managing Director

Paul Donaldson was appointed as CEO in February 2013 and joins Danakali from a series of senior management roles spanning more than 20 years with BHP Billiton (“BHP”). Donaldson has experience in marketing and distribution, logistics and supply chain management, manufacturing and processing management and large scale open pit mine management. At BHP, he was most recently General Manager of the +50 million tonne per annum Area C Iron Ore operation in Western Australia. He was formerly Manager of Technical Marketing based in Asia, contributing to both product suite and product placement strategies for coking coal, manganese and iron ore.

Other highly relevant roles include Manager of Port Operations at the Nelson Point Facility in Western Australia, and Manager of Business Improvement and Logistics at the Cannington Mine. He holds a Masters Degree in Mining Engineering, a Masters Degrees in Business and Technology, and Bachelor of Chemical Engineering degree.

Seamus Cornelius – Non-Executive Chairman

Seamus Cornelius is a corporate lawyer and former partner of one of Australia’s leading international law firms. He specialized in cross-border transactions, particularly in the resources sector. Cornelius has been based in Shanghai and Beijing since 1993 and brings more than 20 years of corporate experience in legal and commercial negotiations. He has also advised global companies on their investments in China and in recent years advised Chinese state-owned entities on their investments in overseas resource projects.He is currently the Chairman of Buxton Resources since 29 November 2010 and Montezuma Mining Company since 30 June 2011.

John Fitzgerald – Non Executive Director

John Fitzgerald has an extensive finance background having previously held positions at NM Rothschild and Sons, Investec Bank Australia, Commonwealth Banks and HSBC Precious Metals.

Tony Kiernan – Non Executive Director

Tony Kiernan has over 25 years of experience in the mining industry and was previously a commercial lawyer. He is currently a corporate advisor and has extensive experience in the administration and operation of public listed companies. He brings particular skills in the areas of Government relations and approvals, corporate strategy and corporate governance, all of which are key areas for the company as it progresses the development of its key asset, the Colluli Potash Project in Eritrea, East Africa.

Kiernan is currently the Non-Executive Chairman of BC Iron since 11 October 2006, Non-Executive Chairman of Venturex Resources Limited since 14 July 2010 and Non-Executive Chairman of Chalice Gold Mines since 15 February 2007.

Liam Cornelius – Non-Executive Director

Liam Cornelius graduated from Curtin University of Technology with a BApp.Sc in Geology. Cornelius has been involved in the exploration industry within Australia, Asia and Africa for nearly 20 years. Whilst originally specializing in gold he has experience with a wide range of commodities including nickel, copper, platinum, uranium and potash.

As a founding member of Danakali, he has played a key role in outlining areas of interest for the company. In addition to project generation and fund raising, he also provides guidance to the Board on future directions.

Chris Els — Chief Financial Officer

Chris Els is a Chartered Accountant (Australia and New Zealand) with over 22 years of experience in senior finance executive roles in mining and agribusiness sectors in Australia, South Africa and Brazil.

James Durrant – Project Manager

James Durrant joined Danakali in May of 2014 following nearly 7 years working in various senior engineering, corporate and operational leadership roles throughout BHP Billiton’s iron ore operations in Western Australia. He has been heavily involved with standardisation and simplification of operating procedures and processes across multi-site operations and facilitated the streamlining and standardisation of organisational structures. He has also managed site infrastructure improvement projects and process change projects to enhance mine performance in both safety and optimisation in the key operational functions of Load and Haul, Mine Planning and Drill and Blast.

Durrant has a BEng in Mechanical Engineering and a MSc in Mining Engineering from the Camborne School of Mines.

Zeray Leake – Country Manager

Zeray Leake is a Geologist with more than 12 years of experience in the development and exploration of potash, gold, base metals and industrial minerals. He previously worked for the Geological Survey of Eritrea.

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