Danakali Ltd.

A Unique and Unrivaled Potash Opportunity in Eritrea

This profile is part of a paid investor education campaign.*

Overview

Danakali Ltd. (Danakali) (ASX:DNK) (OTCMKTS:SBMSF) is developing the world class Colluli potash project (Colluli or the Project) in Eritrea, East Africa. The company has completed a highly favourable front end engineering design (FEED) study in 2018 for a two-stage development focusing on the production of sulphate of potash (SOP). The FEED delivers enhanced project economics with a considerably higher level of accuracy and reaffirms the outstanding project economics of Colluli.

Following the signing of the Mining Agreement and the Award of Mining Licenses, Colluli is fully permitted for progressing towards construction.

Offtake discussions are well advanced and the company has experienced very strong interest from the market, with negotiations now progressing towards final binding offtake agreements.. The company signed a mining agreement in February 2017 and has been awarded mining licenses for the exploitation of the resource. It is now focused on offtake, funding and project execution. FEED firmly establishes Colluli as the most advanced SOP greenfield development project in the world

Colluli 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 SOP, sulphate of potash magnesia (SOP-M) and muriate of potash (MOP). The initial development will focus on the production of 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, MOP (potassium chloride). The massive ore reserve will support decades of future growth. With an expected mine life of approximately 200 years at FEED production rates.

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 what will become a globally significant, long life, diversified multi-agri commodity business.

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

The front end engineering design study carries a high level of accuracy and is the final study stage before project execution. The FEED 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 position the Project favorably. Unlike other SOP resources which are primarily potassium-rich brines, the salts in the Colluli deposit are present in solid form which greatly simplifies processing, assures production rates, and negates the need for capital intensive evaporation ponds. Colluli is positively unique and the premier potash and multi-agri commodity opportunity globally.

Through optimisation of the FEED study for the plant, the Company has managed to enhance the expected annual output for the first phase of production by 10 percent to 472ktpa.

In December 2017 Danakali announced that they would be seeking dual listing on the London Stock Exchange (LSE), which is expected to be executed in the first half of 2018.

Danakali’s Chief Executive Officer, Danny Goeman said “The successful completion of FEED, as well as the completion of permitting in 2017, further enhances Danakali and CMSC’s ability to finalise binding offtake agreements, advance towards financial close, and execute the Project. We are looking forward to working with our joint venture partners to ensure the successful development of Project Modules I and II and unlocking the significant expansion and multi-commodity potential of the resource.”

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Investment Highlights

  • FEED phase complete confirming Colluli as the most advanced and economically attractive SOP greenfield development project in the world.
    • Project post tax NPV of US$902m and IRR of 29.9%
    • Capital payback period of 3.25 years for Module I
    • Lowest development capital of all advanced stage SOP projects globally
  • SOP annual production increased by 10 percent to 472ktpa (Module I) and 944ktpa (Module II) through FEED optimisation
  • Study phase complete, and well positioned for funding and construction
  • One of the highest-grade SOP deposits in the world
  • Industry leading capital intensity
  • Shallow mineralisation, which allows salts to be extracted in solid form
  • Close proximity to coast and geographically favorable relative to key markets
  • Unrivalled multi-commodity diversification potential
  • Low incremental growth capital
  • Superior economic outcomes relative to all advanced SOP projects
  • Fully permitted
  • Offtake well progressed
  • Solid cash position allowing the company to focus on key deliverables

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 mining industry, and a pipeline of projects continues to grow. The jurisdiction offers favourable import duties, and depreciation rates.

There are two active mines in country, the Bisha copper-zinc mine and the Zara gold mine. The Asmara project is currently in construction and Colluli is currently sourcing construction funding. To date, all mining projects achieving positive DFS outcomes in Eritrea have progressed to production.

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 currently under construction following a highly favourable definitive feasibility study.

Danakali’s joint venture partnership with the Eritrean National Mining Corporation is a key enabler to the success of the project.

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 fertiliser market.

Key Asset

Colluli Potash Project — Eritrea, Africa

Colluli is located in the Danakil Depression region of Eritrea, East Africa. Colluli is approximately 177km southeast of the capital, Asmara, and 180km from the port of Massawa, which is Eritrea’s key import/export facility.

The Project is a joint venture between ENAMCO and Danakali with each having 50% ownership of the joint venture company, CMSC. CMSC is responsible for the development of the Project.

The Danakil Depression is an emerging potash province, which commences in Eritrea and extends south across the border into Ethiopia. It is one of the largest unexploited potash basins globally; over 6Bt of potassium bearing salts suitable for production of potash fertilisers have been identified in the region to date (ASX announcement 25 February 2015 and http://circumminerals.com/resources).

Colluli is located approximately 75km from the Red Sea coast providing unrivalled future logistics potential. The Project resides on the Eritrean side of the border, giving Colluli a significant advantage relative to all other potash development projects in the Danakil Depression, which need to ship from the Tadjoura Port in Djibouti – over 600km by road from the closest project on the Ethiopian side of the border.

Colluli boasts the shallowest mineralisation in the Danakil Depression. Mineralisation commences at just 16m below surface. Consequently, Colluli has significant mining, logistics and, in turn, capital and operating cost benefits over other potash development projects in the Danakil Depression and other potash development projects globally. The Project also carries a significantly lower level of complexity as a consequence of predictable processing plant feed grade and predicable production rates due to low reliance on ambient conditions.

Large, shallow deposit with unique mineral composition

Colluli is a massive deposit and the shallowest known potassium-bearing evaporite deposit globally (mineralisation 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 SOP and SOPM.

In the global fertiliser 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 SOP. 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. The in-situ grade of Colluli ore is almost 25 times higher than potassium rich brines.

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 commercially proven, 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 utilisation which is a major advantage over solution mining where up to 70 percent of the resource may be sterilised 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 SOP 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 in operating costs, but in our case you invest less. And that’s one of the many great things about the Colluli Project,” said Danakali Non-Executive Director Paul Donaldson.

SOP niche market: tight supply, heavy demand

Both SOP and SOP-M are high quality, rare potash fertilisers with limited production centres globally; hence they carry a price premium over the more common 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 MOP. 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 SOP 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 MOP.

The aspiration of the company is to rapidly grow the project to a 4 million tonne per annum potash business, an 8 to 10 million tonne per annum salt business, and a 2 million tonne per annum gypsum business, with 500,000 tonnes per annum of kieserite and magnesium chloride. This would cement Danakali as a large scale long term global business.

Front End Engineering Design study phase completed

In January 2018, Danakali released the results of its FEED process, which further established Colluli as the most progressed, economically attractive and fundable SOP greenfield development project. The Colluli project is the only SOP greenfield project that has completed the FEED phase.

ENAMCO General Manager, Berhane Habtemariam said: “We are very pleased that FEED has been completed and has improved the Project’s already highly attractive valuation outcomes. Colluli has the potential to make a significantly positive impact in Eritrea. Our economy and people stand to benefit through considerable revenue generation, the expansion of our mining industry, the development of skills, and the flow-on effects to associated industries. Our joint venture with Danakali continues to achieve its stated goals in a timely and professional manner, we expect this to continue as CMSC focuses on binding offtake, funding, and development in the immediate term.”

As the final stage before project execution, the FEED study carries an operating and capital cost accuracy of within 10 percent and addresses optimization opportunities across the entire project supply chain. The completed FEED provides funders and offtakers with a greater degree of insight regarding financial strategies, suppliers and procurement processes, spurring additional confidence in the project. The FEED results also reaffirm the project’s strong economics as outlined in the definitive feasibility study, supported by reduced anticipated capital requirements for Module I.

danakali-table-1

“We are extremely happy with the FEED outcomes for Colluli, which are the culmination of a long period of high quality work from our study team and consultants,” said Mr. Goeman. “Colluli is the premier and most progressed SOP greenfield development project globally. It has industry leading capital intensity, forecast first quartile operating costs, and highly attractive economic returns. As such, the FEED results confirm what we already knew, but importantly, provide us with a much greater degree of accuracy and certainty, with key cost and valuation outcomes improving significantly.”

The highly favourable FEED study demonstrates industry leading 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. FEED 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 FEED demonstrates that Colluli has the potential to become one of the lowest-cost potassium sulphate operations in the world. With Module I development capital of US$302 million, the project is one of the most fundable in the world. Industry leading capital intensity of US$640 per tonne SOP in combination with bottom quartile operating costs gives an estimated payback of 3.25 years.

The Colluli resource meets all the criteria of a Tier 1 asset with an estimated mine life of approximately 200 years at the proposed production rate of 944ktpa. It is a large, long 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 epicentre of booming population growth.

danakali-table-2

Advancing towards construction

In May 2017, Danakali announced that FEED optimisation of the Colluli plant design could help deliver a 10 percent increase in annual production throughput and a reduction in mine gate costs, improving annual revenue. This brought the expected Module I annual SOP output to 472 kt, reduced capital expenditure to $332 million from the $337 million outlined in the DFS (including working capital) and consequently materially reductions in Danakali’s already industry leading capital intensity. The engineering and optimisation work also identified opportunities for reducing development capital and water consumption.

In June 2017, Danakali and ENAMCO disclosed that they had appointed Turner & Townsend, global construction and project management consultants, to help define the full scope of the EPC bidding requirements as the FEED process continued.

Modular approach to development minimises risks and enhances expansion

The Colluli development philosophy hinges on the ability to effectively manage risk and cost, optimise 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 minimise exposure to variances in the cost structure and give ourselves the opportunity to get it right,” said Non-Executive 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, the higher the likelihood of a cost over-run. Lower capital expenditure projects are typically more manageable and more likely to come in at, or under budget.

Such an approach also allows for more optimisation opportunities, enhancing the expandability of the project. Module designs can be further optimised 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. Module I production will place Colluli among the world’s top 10 producers. Once in Module II, Colluli will place among the top 3 producers globally.

Management

Danny Goeman – Chief Executive Officer

Mr. Goeman has more than 25 years of extensive experience in management, sales & marketing, strategy development and high level commercial negotiations, including more than 20 years with the Rio Tinto group of Companies.

He held a number of senior positions at Rio Tinto including Chief Price Negotiator – Iron Ore, General Manager Sales & Marketing, and General Manager Industry Analysis. Mr Goeman has a wealth of experience in leading commercial transactions in different geographies including Australia, Asia and Europe, and has experience in a range of commodities including diamonds, iron ore, coal and potash.

Mr. Goeman joined Danakali in 2016 as Head of Marketing before becoming Chief Executive Officer in late 2017. In his time at Danakali he has developed the offtake strategy and offtake contract frameworks, and led the offtake negotiations on behalf of the Colluli Mining Share Company.

Stuart Tarrant – Chief Financial Officer

Mr. Tarrant is a senior finance professional with broad experience in all aspects of accounting and financial management. Mr. Tarrant has spent over 15 years in finance with significant exposure within companies experiencing accelerated growth or change.

Mr. Tarrant’s was previously Head of Finance with Danakali and developed a comprehensive economic financial model, the outputs of which formed the basis for the definitive feasibility study. Mr. Tarrant also previously held Financial Manager roles within BHP. His roles while at BHP included financial management of Area C and the integration into BHP of HWE Mining.

Prior to Danakali and BHP Billiton, Mr. Tarrant held positions for Leighton Contractors, Great Southern and the Bank of Western Australia.

Tony Harrington – Construction Manager

Mr. Harrington was appointed as Project Manager in May 2017 for the execution phase of the Project. Mr. Harrington has over 30 years’ experience in the mining industry delivering EPC, EPCM and lump sum projects in the capacity of both client representative and service provider over a diverse range of commodities, with a wide range of mineral processing units, across multiple jurisdictions including East and West Africa, Southern Africa, China, Continental Europe, UK and Australia.

With a mechanical and project management background Mr. Harrington has extensive experience in all aspects of project execution cycle and construction, plus assembly of surface infrastructure, materials handling systems, flotation circuits, pumping systems, tanks, cyclones, liberation circuits, thickeners and tailings storage facilities.

Mr. Harrington brings significant experience and an excellent track record in delivering projects in remote locations and developing jurisdictions. Two examples include the US$0.3B Kwale Minerals Sands Project in Kenya, the first ever large scale mine built in the country, and the US$0.3B Chimimiwango expansion at the Lumwana Copper Mine in Zambia.

Willian Sandover – Head of Corporate Development & External Affairs

Mr. Sandover joined Danakali in 2017 after 10 years in investment banking and corporate advisory. He previously worked at UBS Investment Bank in resources advisory, Macquarie Capital in equity capital markets advisory, and he was most recently an Executive Director at independent capital markets advisory firm, Vesparum Capital.

Mr. Sandover has extensive experience in the areas of corporate strategy, equity capital markets, advanced financial modelling and project valuation, mergers & acquisitions, and strategic partnerships. During his career he has carried out high profile transactions and provided corporate advisory services for companies such as Barrick Gold, Galaxy Resources, Goodman Group, and QBE. He has also acted as strategic investor relations advisor to numerous mid-cap ASX-listed companies across the metals & mining, financial services, funds management, and sustainable technology sectors.

Mr. Sandover holds a double degree in Commerce and Science from the University of Western Australia, with majors in Finance and Applied Mathematics. He has also completed a Master of Finance (Investment Banking) degree at INSEAD.

Board

Seamus Cornelius – Non-Executive Chairman

Mr. Cornelius is a corporate lawyer and former partner of one of Australia’s leading international law firms. He specialised in cross-border transactions, particularly in the resources sector. Cornelius was based in Shanghai and Beijing for over 20 years before moving to London recently. He 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 resources projects.

He has also been the Chairman of Buxton Resources since November 2010, Montezuma Mining Company since June 2011 and Duketon Mining since February 2013.

Paul Donaldson – Non-Executive Director

Mr. Donaldson was appointed as CEO in February 2013, joining Danakali from a series of senior management roles spanning more than 20 years with BHP. Mr. Donaldson transitioned to a Non-Executive Director role in December 2017 after overseeing the completion of the resource definition drilling, definition of the development path, and scoping, pre-feasibility, definitive feasibility and front-end engineering design studies.

Mr. 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.

John Fitzgerald – Non- Executive Director

Mr. Fitzgerald has over 30 years finance and corporate advisory experience in the resource sector. Previously, he held senior positions at NM Rothschild and Sons, Investec Bank Australia, Commonwealth Bank and HSBC Precious Metals. He is the Managing Director of Optimum Capital, a debt and corporate advisory business focused on the mining sector.

Mr Fitzgerald is Non-Executive Chairman of Carbine Resources Limited (appointed April 2016), Non-Executive Chairman of Dakota Minerals Limited (December 2015) and a Non-Executive Director of Northern Star Resources Limited (November 2012).

Previously, Mr. Fitzgerald was Non-Executive Chairman of Atherton Resources Limited (December 2009 to November 2015).

Mr. Fitzgerald is a Chartered Accountant, a Fellow of the Financial Services Institute of Australasia (FINSIA) and a graduate member of the Australian Institute of Company Directors.

Robert Connochie– Non-Executive Director

Mr. Connochie is a highly-experienced potash and mining specialist with over 40 years of industry experience.

He brings extensive senior line management experience from the potash industry, including corporate development, evaluations, marketing, financing and acquisitions.

Previously, Mr. Connochie held positions as Chairman of Canpotex (a world leading potash exporter for over 40 years) and Chairman of Behre Dolbear Capital, Inc.

Other notable former positions include Chairman and CEO of Potash Company of America, CEO Asia Pacific Potash and Director, Athabasca Potash.

Mr. Connochie was Chairman of the Phosphate and Potash Institute, Director of the Fertiliser Institute, and Director of the Saskachewan Potash Producers Association.

He is currently a Non-Executive Director of Behre Dolbear, Australia, and Behre Dolbear, International.

Andre Liebenberg – Non-Executive Director

Mr. Liebenberg is an experienced mining industry professional and has extensive investor market, finance, business development and leadership experience. Mr Liebenberg has spent over 25 years in private equity, investment banking, senior roles within BHP Billiton and most recently at QKR Corporation.

Mr. Liebenberg’s previous roles within BHP Billiton included Acting President for BHP Billiton’s Energy Coal division, Chief Financial Officer for the Energy Coal division, the Head of Group Investor Relations and Chief Financial Officer for the Diamonds and Specialty Products division. These roles were based in London, Melbourne and Sydney. Mr. Liebenberg’s experience within BHP Billiton included key roles in the BHP Billiton merger, the bid for Rio Tinto and the bid for Potash Corp. of Saskatchewan.

Prior to BHP Billiton, Mr. Liebenberg worked for UBS in London and the Standard Bank Group in Johannesburg.

Zhang Jing – Non-Executive Director

Ms. Zhang joined the board in June 2016, and has previously held investment and project managerial roles in public listed companies in China. She has more than 15 years of international trading and business development experience in China.

Ms. Zhang holds a Master’s degree in International Consultancy and Accounting from the University of Reading in the United Kingdom.


 

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