Danakali Limited
Annual Report 2017

Plain-text annual report

2017 ANNUAL REPORT DANAKALI LIMITED ABN 56 097 904 302 FOR THE YEAR ENDED 31 DECEMBER 2017 Executive summary Danakali is focused on the development of the world class Colluli Potash Project, the most advanced and economically attractive SOP greenfield development project. Shallow mineralisation Colluli is the shallowest evaporite deposit in the world, with mineralisation starting at just 16m, allowing open-cut mining. Compelling business case Front End Engineering Design (FEED) confirmed a post- tax project NPV of US$902M and post-tax IRR of 29.9%1 for Colluli. There is no other known SOP greenfield development project that has completed FEED. Salts extracted in solid form Colluli is the only SOP resource that allows extraction of potassium salts in solid form. Primary production of SOP typically comes from potassium rich brines, which require considerable evaporation. Colluli meets the criteria for a Tier 1 project: Industry leading capital intensity; • Forecast first quartile operating costs; • • Proximity to coast and global markets; • Outstanding grade; and • Exceptionally long mine life (approximately 200 years). Colluli is a standout greenfield development opportunity. Fully permitted Colluli is fully permitted following the signing of the Mining Agreement in February 2017; and the subsequent awarding of the requisite Mining Licenses. FEED completion transitions Colluli from study phase into project execution phase FEED provides offtakers and funders with a high level of detail, accuracy and confidence, and provides a robust platform for project execution. The modular development approach underpins a highly scalable, long life project. Module I is expected to produce 472ktpa of premium SOP product. Module II will increase total SOP production to 944ktpa1. World class resource and reserve The Colluli deposit, located in the Danakil Depression in Eritrea, comprises a massive JORC-2012 compliant Ore Reserve estimate of 1,100Mt @ 10.5% K2O for 203Mt of contained Sulphate of Potash (SOP) equivalent. The Danakil Depression is the only potash basin in the world that exhibits the most favourable combination of potassium salts for low cost, high yield production of SOP. Extracting the salts in solid form provides superior economic outcomes: it enables the salts to be processed immediately, significantly reducing the time between mining and revenue generation; and it reduces the evaporation pond footprint contributing to a lower capital intensity. Simple, energy efficient, commercially- proven processing The processing method to be utilised at Colluli is the most commonly used, low cost process for production of SOP. Colluli salt composition is ideal for low energy, high yield conversion to SOP at ambient temperatures. Proximity to coast and established infrastructure Colluli is the closest SOP deposit to a coastline, only 75km from the Red Sea coast. Colluli is 230km from the established port of Massawa. The port of Massawa is equipped with bulk and container loading facilities. An outstanding economic, social and community dividend Positive impact through infrastructure, job creation, taxes, royalties, and associated economic development. Creation of hundreds of permanent jobs for Eritrean nationals. Long term training for trades and professionals. Industry leading project economics Positively unique • • Open-cut mining • • Proximate to coast Simple, proven processing 1 Modules I & II, Module II commences in the 6th year of production Page 2 Danakali Annual Report 2017DANAKALI LIMITEDColluli highlights Exceptional economics Low development capital Industry leading capital intensity NPV US$902M IRR of 29.9% MODULE I US$302M MODULE II US$202M US$534/t First quartile operating costs Exceptional cashflow Most advanced greenfield SOP project US$242/t FOB Port of Massawa >US$10B Undiscounted over first 60 years ü FEED complete ü Fully permitted Simple, commercially proven processing High grade primary production SOP Closest SOP deposit to coast Well understood, low risk approach Chloride free and multi-nutrient Only 75km from Red Sea coast Large scale, long life Reserve Supportive mining jurisdiction Economic, social and community dividends ~200 years mine life 1.1Bt Ore Reserve Strong government relationship >300 Eritrean jobs (Module I) NOTE: All results over Module I and II unless stated Page 3 Danakali Annual Report 2017DANAKALI LIMITED Corporate Information Directors Seamus Ian Cornelius Paul Michael Donaldson John Daniel Fitzgerald Zhang Jing Robert Gordon Connochie Andre Liebenberg Executive Management Danny Goeman Stuart Tarrant Company Secretary Catherine Grant Edwards Melissa Chapman (Non-Executive Chairman) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) (Chief Executive Officer) (Chief Financial Officer) (Joint Company Secretary) (Joint Company Secretary) Registered Office and Principal Place of Business Level 1, 234 Churchill Avenue Churchill Court SUBIACO WA 6008 Telephone: +61 (0)8 6315 1444 Bank National Australia Bank Level 12, 100 St Georges Terrace PERTH WA 6005 Share Register Computershare Investor Services Pty Limited Level 11, 172 St Georges Terrace PERTH WA 6000 Telephone: Telephone: Facsimile: www.computershare.com 1300 850 505 (Inside Australia) +61 (0)3 9415 4000 (Outside Australia) +61 (0)3 9473 2500 Auditors Ernst and Young 11 Mounts Bay Road PERTH WA 6000 Website www.danakali.com Stock Exchange Listing Danakali Limited (Code: DNK) is listed on the Australian Securities Exchange with trading also available on the Frankfurt and Berlin Stock Exchanges: Frankfurt: SO3-Fra: http://en.boerse-frankfurt.de/stock/Danakali-share Berlin: SO3-Ber: https://www.boerse-berlin.de/index.php/Aktien?isin=AU000000DNK9 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: DNK’s ADR information can also be viewed here: https://www.adrbnymellon.com/?cusip=23585T101 ADR Holders seeking information on their shareholding should contact: shrrelations@bnymellon.com OR http://www.otcmarkets.com/stock/DNKLY/quote LONDON NEW YORK Rick Maehr Mark Lewis richard.maehr@bnymellon.com mark.lewis@bnymellon.com Telephone +1 212 815 2275 Telephone +44 207 163 7407 Page 4 Danakali Annual Report 2017DANAKALI LIMITED Contents Chairman’s Letter Chief Executive Officer’s Letter Overview of Danakali and Colluli Directors’ Report Audit Independence Letter 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 Consolidated Financial Statements Directors' Declaration Independent Audit Report ASX Additional Information How to invest Competent Persons and Responsibility Statements Page 6 7 9 25 50 52 53 54 55 56 80 81 86 89 89 Page 5 Danakali Annual Report 2017DANAKALI LIMITEDChairman’s Letter Dear fellow shareholders, Thank you for your continued support over the past year. 2017 represented another important year of progress for Danakali. The FEED study was completed for the Colluli Potash Project allow the Offtake and Project Financing processes to advance further. In addition, the Mining Agreement was signed and Mining Licenses granted for our 50:50 joint venture company, CMSC. Colluli is now not only the best and most important pre-production SOP asset in the world, it is also the most advanced towards production. None of the tremendous achievements of recent years would have been possible without the hard work of our executive team and supporting teams across Australia and Eritrea, the continued support of our joint venture partners ENAMCO, and the enthusiasm of all our shareholders. Paul Donaldson, who recently transitioned from Managing Director & CEO to Non-Executive Director, and Danny Goeman, our newly promotion CEO, deserve special acknowledgement for their outstanding contributions. One of our priorities for 2018 is to build our capacity, both within Danakali and Colluli, to transition away from the study phase into project execution. Having experienced the quality and quantity of progress from the Danakali team over the past year and having worked in some high-performance environments, I can safely say that few people are as committed or work as hard as the Danakali executive team. In 2018 we have set ourselves several objectives within a clearly established framework with the intention of driving value for our shareholders and all other stakeholders. These objectives include dual-listing Danakali in London, securing binding, bankable off-take for 80 to 85% of phase 1 SOP production, appointing a lead bank to arrange our project finance, and commencing project execution. Naturally, with a genuinely strategic tier 1, exceptionally long life and high quality asset such as Colluli, we cannot ignore the possibility that other opportunities, from outside the planned value driving framework mentioned above, present themselves during the course of this year. I can assure all shareholders that should any other opportunities present themselves they will be given full and proper consideration at the relevant time. In a world where so much seems to be changing at an ever-increasing pace, certain fundamental things remain the same. Global population continues to rise, increasing the demand for reliable sources of food and decreasing arable land. This transition requires improved efficiencies in agriculture whilst consuming less water. Colluli is uniquely placed to supply SOP and other premium, chloride free fertilisers to hungry populations for many generations to come. One of the “hidden” benefits of Colluli and SOP is that when a farmer applies SOP as a fertiliser, far less water is wasted in the agricultural process. SOP is chloride free and therefore the farmer does not have to pour huge quantities of water on the soil to wash away the chlorides and prevent salt built up in the soil. We will also provide jobs and skills training to the people of Eritrea both in the short term and across generations. A key part of our social and environmental plan is to ensure that Colluli reaches its potential as a transformational asset for generations of people in Eritrea, across Africa, the Middle East and India. I look forward to another year of positive progress and constant improvement in all areas. Yours sincerely Seamus Cornelius Non-executive Chairman Page 6 DANAKALI LIMITED Danakali Annual Report 2017 CEO’s Letter Dear shareholders, 2017 and early 2018 has been an important period for Danakali with considerable progress in several key areas including the recent completion of Front-End Engineering Design (FEED). The FEED outcomes for Colluli were the culmination of a long period of high quality work from our study team and consultants. FEED has further strengthened Colluli’s position as the most progressed greenfield primary sulphate of potash (SOP) project in the world. It has delivered industry leading capital intensity, first quartile operating costs, and highly attractive economic returns. FEED provides us with a much greater degree of accuracy and certainty, with key cost and valuation outcomes improving significantly. Together with the completion of permitting in 2017, FEED further enhances Danakali and CMSC’s ability to finalise binding offtake agreements, advance towards financial close, and execute the Project. 2017 saw a marginal price recovery for the more common potash type, potassium chloride (muriate of potash or MOP). Further investment appetite for MOP projects, however, has diminished, due to the impact of historical investment in new capacity from existing producers and new entrants. MOP supply growth is expected to continue to outpace demand growth suggesting limited scope for material price uplifts in the next decade. In contrast, the SOP industry is forecast to tighten compared to 2017 levels throughout the next decade. SOP prices have remained resilient due mainly to the lack of new primary production capacity outside of China, and growing demand for SOP products. Several sources have cited supply shortages in 2017, with waiting periods for high quality granular SOP product from selective suppliers in Europe reportedly exceeding 4 months. The premium of SOP over MOP in 2017 averaged ~US$270/mt, and the market is expected to remain supply constrained, with new supply after 2022 doing little to mitigate a tightening supply situation which becomes increasingly tighter up to 2026, expected to lead to increasing SOP prices. 2017 has been another year of significant progress in several key areas for both Danakali and CMSC. This includes the approval of the Colluli Mining Agreement and subsequent award of Mining Licenses in February 2017. Further to the completion of FEED, the key catalysts for project financing are the advancement of offtake and key commercial contracts. During the year, the Company entered into heads of agreement with several offtake parties, with negotiations in the December 2017 Quarter focussing primarily on the finalisation of a few remaining commercial terms contained in the binding bankable offtake agreements. The Company also progressed several key operational contracts including (i) EPCM, (ii) Mining, and (iii) Power. Danakali continued to receive support from the investment community, evidenced by the successful A$12.25M share placement in May 2017, and a share price appreciation of 49% over the 12-month period. The Company has conducted extensive social and environmental impact analysis, assessment and planning. The Eritrean government and local communities firmly support the Colluli development. The Project has the potential to provide long-term economic, social and community dividends, with local communities set to benefit from jobs and skills development. Danakali and the Eritrean government are focused on sustainable development for the benefit of all stakeholders. Turning our attention to 2018, the year has started positively with strong progress on offtake negotiations. In addition, the negotiation and appointment of the key EPCM, Mining and Power contracts position Colluli for project execution, upon completion of project financing. The scheduled dual listing on the London Stock Exchange further complements our already strong Australian equity market support. I would like to thank the Company’s shareholders for their ongoing support and express my sincere appreciation to the Danakali and CMSC management teams for their assiduous contribution to the Project. 2018 is poised to be a defining year for Danakali, and I am excited about the opportunities ahead that will enable us to progress to project execution. Yours sincerely Danny Goeman Chief Executive Officer DANAKALI LIMITED Danakali Annual Report 2017 Page 7 FORWARD LOOKING STATEMENTS AND DISCLAIMER “Colluli is the premier and most advanced SOP greenfield development project globally. It has industry leading capital intensity, forecast first quartile operating costs, and highly attractive economic returns. We are focused on working with our joint venture partner to ensure the successful development of Modules I and II, and unlocking the significant expansion and multi- commodity potential of the resource.” Danny Goeman, CEO FORWARD LOOKING STATEMENTS AND DISCLAIMER The information in this document is published to inform you about Danakali Limited (the Company or 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 the Colluli Potash Project (Colluli or the Project) 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 and financial assumptions made in this document are consistent with assumptions detailed in the Company’s ASX announcements dated 25 February 2015, 4 March 2015, 19 May 2015, 23 September 2015, 30 November 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. Page 2 Page 8 Danakali Annual Report 2017DANAKALI LIMITED“Colluli is the premier and most advanced SOP greenfield development project globally. It has industry leading capital intensity, forecast first quartile operating costs, and highly attractive economic returns. We are focused on working with our joint venture partner to ensure the successful development of Modules I and II, and unlocking the significant expansion and multi- commodity potential of the resource.” Danny Goeman, CEO FORWARD LOOKING STATEMENTS AND DISCLAIMER The information in this document is published to inform you about Danakali Limited (the Company or 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 the Colluli Potash Project (Colluli or the Project) 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 and financial assumptions made in this document are consistent with assumptions detailed in the Company’s ASX announcements dated 25 February 2015, 4 March 2015, 19 May 2015, 23 September 2015, 30 November 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. Page 2 Project overview Resource & Reserve Standout development opportunity Danakali Limited (ASX: DNK) (Danakali, or the Company) is focused on the development of the world class Colluli Potash Project (Colluli or the Project) located in the Danakil 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). 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. 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 the other potash development projects in the Danakil Depression, which need to ship from the Tadjoura Port in Djibouti – over 790km by road from the closest project on the Ethiopian side of the border1. Colluli boasts the shallowest evaporite mineralisation globally and consequently has significant mining, logistics and, in turn, capital and operating cost benefits over other potash development projects in the Danakil Depression and elsewhere. The resource is amenable to open-cut mining: a proven, high productivity mining method. Open-cut mining provides higher resource recoveries relative to underground and solution mining methods, and is generally safer and more easily expanded. The Project carries a significantly lower level of complexity due to predictable processing plant feed grade, predictable production rates – given low reliance on weather conditions – and simple, commercially proven mineral processing technology. Colluli is fully permitted following the signing of the Mining Agreement in February 2017; and the subsequent awarding of the requisite Mining Licenses. The project is rapidly progressing to construction. Massive 1.1Bt Ore Reserve The Danakil Depression is located in the Southern region of Eritrea and extends over 300km into Eastern Ethiopia. It hosts the youngest evaporite deposit and the largest unexploited potash basin in the world. Over 6Bt of potassium bearing salts suitable for production of potash fertilisers have been identified in the region to date2. The deposit differentiates itself by its depth and composition. With mineralisation commencing at just 16m, Colluli is the shallowest known potash deposit in the world, making it amenable to open-cut mining. In contrast, most potash evaporite deposits typically sit at depths of up to 1km beneath the earth’s surface. Deep, underground potash deposits have high development costs, and exposure to cost and time overruns. The Colluli resource comprises three potassium bearing salts in solid form: Sylvinite, Carnallitite and Kainitite. These salts are suitable for high yield, low energy production of SOP. The salt composition in the Danakil Depression provides the ability to produce a suite of potash products including SOP, Sulphate of Potash-Magnesia (SOP-M) and MOP. Such potash product diversification cannot be achieved by any other known potash deposit region in the world. Colluli is high grade. The JORC-2012 compliant Mineral Resource for Colluli is estimated at 1.289Bt @ 11% K2O for 260Mt of contained SOP equivalent. The JORC-2012 compliant Ore Reserve estimate for Colluli is estimated at 1,100Mt @ 10.5% K2O for 203Mt of contained SOP equivalent. The Measured and Indicated Mineral Resources are inclusive of those Mineral Resources modified to produce the Ore Reserves. Colluli has significant diversification potential beyond potash, including the option to produce additional salt products such as Kieserite (MgSO4.H2O), Gypsum (CaSO4.2H2O), Magnesium Chloride (MgCl2) and Rock Salt (NaCl). Colluli contains a JORC-2012 compliant rock salt Mineral Resource of 347Mt @ 96.9% NaCl. 1 2 Peer announcement ASX announcement 25 February 2015 and peer announcements Page 9 Danakali Annual Report 2017DANAKALI LIMITEDFEED results summary FEED firmly establishes Colluli as the most advanced and attractive SOP greenfield development project • • Danakali share of NPV of US$439M with IRR of 31.3% Enhanced project economics with considerably higher level of accuracy • • Industry leading capital intensity and forecast first quartile operating costs Project level NPV of US$902M with IRR of 29.9% for Modules I and II • Operating and capital cost accuracy level of ±10% • Critical milestone for offtake and debt processes • No other known SOP greenfield development project has completed FEED Table 4: Key Colluli FEED economic estimates and outcomes1 100% of the Project (equity / pre-debt basis) Annualised SOP production Strip ratio (waste:ore) Module I development capital5 Incremental Module II development capital5 Capital intensity5 Incremental Module II capital intensity5 Average mine gate cash costs6 Average total cash costs6,7 Average annual undiscounted free cash flows6 Post tax NPV (10% real) Post tax IRR Module 1 payback period8 Danakali’s 50% share of the Project (post-finance basis) Average annual undiscounted free cash flows6 Post finance NPV (10% real) Post finance IRR Module I2 Module I & II3,4 472ktpa 944ktpa 1.9 2.1 US$302M US$202M US$640/t US$534/t US$427/t US$165/t US$149/t US$258/t US$242/t US$88M US$173M US$505M US$902M 28.1% 29.9% 3.25 years US$43M US$85M US$242M US$439M 29.7% 31.3% 1 Economic estimates and outcomes reported in US$ real 2 Assumed that Module I is 60% debt / 40% equity funded 3 Module II production expected to commence in year 6 4 Assumed that module is 100% funded from project cash flows and third-party debt 5 Including contingency, excluding sustaining and working capital 6 Average for first 60 years of production 7 Includes mine gate cash costs, product logistics, and royalties 8 Distance to port for Colluli and greenfield potash developments in Australia and Ethiopia Page 10 Colluli is the only known SOP greenfield development project that has completed FEED Typical accuracy levels of mining project study phases +100% -50% Scoping Study PFS DFS FEED Colluli – improved economic outcomes and increased accuracy1 COLLULI STUDY ACCURACY 25% 15% 10% SOP PRODUCTIO N 850 ktpa 850 ktpa 944 ktpa US$428M US$298M US$302M I E L U D O M I I E L U D O M DEV ELOPMENT CAP ITAL 2 CAPITAL INTENSITY 2 AVERAGE MINE GATE CAS H COSTS 3,4 POS T TAX NPV (10% REAL) US$835/t US$556/t US$534/t US$202M US$162/t US$168/t US$165/t US$846M US$860M US$902M POST TAX IRR 24.7% 29.0% 29.9% Source: ASX announcements 30-Nov-15 and 29-Jan-18, AACE 1 All results for Modules I & II unless stated 2 Including contingency, excluding sustaining and working capital 3 Average for first 60 years of production 4 Includes mine gate cash costs, product logistics, and royalties Danakali Annual Report 2017DANAKALI LIMITEDFEED results summary FEED firmly establishes Colluli as the most advanced and attractive SOP greenfield development project higher level of accuracy • • • Enhanced project economics with considerably • Danakali share of NPV of US$439M with IRR of 31.3% Industry leading capital intensity and forecast first quartile operating costs Project level NPV of US$902M with IRR of 29.9% for Modules I and II • Operating and capital cost accuracy level of ±10% • Critical milestone for offtake and debt processes • No other known SOP greenfield development project has completed FEED Table 4: Key Colluli FEED economic estimates and outcomes1 100% of the Project (equity / pre-debt basis) Annualised SOP production Strip ratio (waste:ore) Module I development capital5 Incremental Module II development capital5 Capital intensity5 Incremental Module II capital intensity5 Average mine gate cash costs6 Average total cash costs6,7 Average annual undiscounted free cash flows6 Post tax NPV (10% real) Post tax IRR Module 1 payback period8 Post finance NPV (10% real) Post finance IRR Danakali’s 50% share of the Project (post-finance basis) Average annual undiscounted free cash flows6 Module I2 Module I & II3,4 472ktpa 944ktpa 1.9 2.1 US$302M US$640/t US$534/t US$202M US$427/t US$165/t US$149/t US$258/t US$242/t US$88M US$173M US$505M US$902M 28.1% 29.9% 3.25 years US$43M US$85M US$242M US$439M 29.7% 31.3% 1 Economic estimates and outcomes reported in US$ real 5 Including contingency, excluding sustaining and working capital 2 Assumed that Module I is 60% debt / 40% equity funded 6 Average for first 60 years of production 3 Module II production expected to commence in year 6 7 Includes mine gate cash costs, product logistics, and royalties 4 Assumed that module is 100% funded from project cash flows 8 Distance to port for Colluli and greenfield potash developments and third-party debt in Australia and Ethiopia FEED accuracy Colluli is the only known SOP greenfield development Colluli is the only known SOP greenfield development FEED is the final study stage before project execution and represents the project that has completed FEED project that has completed FEED culmination of several years of robust technical work that has continually delivered high quality outcomes Typical accuracy levels of mining project study phases Typical accuracy levels of mining project study phases +100% +100% -50% -50% Scoping Study Scoping Study PFS PFS DFS DFS FEED FEED Colluli – improved economic outcomes and increased accuracy1 Colluli – improved economic outcomes and increased accuracy1 CO LLULI STU DY CO LLULI STUDY ACC URACY ACC URACY 25% 25% 15% 15% 10% 10% SO P PRODUCTI ON SO P PRODUC TION 850 850 ktpa ktpa 850 850 ktpa ktpa 944 944 ktpa ktpa DEVELO PM ENT DEVELO PM ENT CA PITAL 2 CA PITAL 2 I I E E L L U U D D O O M M I I I I E E L L U U D D O O M M CA PITAL CA PITAL IN TE NSITY 2 IN TE NSITY 2 AVERAGE MINE GATE AVERAGE MINE GATE CASH C OSTS 3, 4 CASH C OSTS 3, 4 PO ST TAX NPV PO ST TAX NPV (10 % REAL) (10 % REAL) US$428M US$428M US$298M US$298M US$302M US$302M US$835/t US$835/t US$556/t US$556/t US$534/t US$534/t US$202M US$202M US$162/t US$162/t US$168/t US$168/t US$165/t US$165/t US$846M US$846M US$860M US$860M US$902M US$902M PO ST TAX I RR PO ST TAX I RR 24.7% 24.7% 29.0% 29.0% 29.9% 29.9% Source: ASX announcements 30-Nov-15 and 29-Jan-18, AACE Source: ASX announcements 30-Nov-15 and 29-Jan-18, AACE 1 All results for Modules I & II unless stated 1 All results for Modules I & II unless stated 2 Including contingency, excluding sustaining and working capital 2 Including contingency, excluding sustaining and working capital 3 Average for first 60 years of production 3 Average for first 60 years of production 4 Includes mine gate cash costs, product logistics, and royalties 4 Includes mine gate cash costs, product logistics, and royalties Page 11 Danakali Annual Report 2017DANAKALI LIMITED Peer comparison Colluli is clearly more advanced and economically attractive than any other greenfield SOP development1 Colluli is more advanced and economically attractive than any other SOP greenfield development project1 Colluli2 Danakali Yara Dallol Yara Servier Lakes Crystal Peak Beyondie3 Kalium Lakes Lake Wells4 Salt Lake Potash SOLID SALTS SOLID SALTS PLAYA BRINE BRINE BRINE Mackay Agrimin BRINE Operating costs Colluli’s positively unique attributes enable forecast first quartile cash costs If operating in 2016, Danakali would have been the lowest cost SOP producer outside of China. Mine gate costs outside of China in 2016 (US$/t) Mine gate costs outside of China in 2016 (US$/t) Open-cut Solution Trench & well Trench & bore Trench & bore Trench S TU DY L EVE L CO MPLETE D FEED DFS DFS PFS SCOPING STUDY SCOPING STUDY CO NTA IN ED SO P EQUIVA LEN T RE S ERV E 203Mt No disclosed reserve 7.7Mt 2.7Mt No reserve No reserve P RO DUCTI O N 944 ktpa CA PI TA L IN TEN SITY 600 ktpa 298 ktpa 150 ktpa 400 ktpa 370 ktpa US$534/t US$1,233/t US$1,221/t US$1,1735/t US$5355/t US$700/t P OS T-TAX IRR 29.9% P ER MI TTI NG FULLY PERMITTED No disclosed IRR MINING AGREEMENT SIGNED 20.8% 22.5% No public IRR No public IRR NOT FULLY PERMITTED NOT FULLY PERMITTED NOT FULLY PERMITTED NOT FULLY PERMITTED ü 1.1Bt Ore Reserve ü Outstanding grade ü Shallow mineralisation ü Open-cut mining ü Favourable combination of potassium salts enable simple, proven, low cost, high yield processing methods ü Proximity to coast and established port ü Approximately 200 year mine life Source: ASX announcements 29-Jan-18 and 19-Feb-18, and peer announcements 1 SOP development projects covered are a representative but non-exhaustive selection of SOP greenfield development projects 2 Colluli metrics shown for Modules I & II 3 Beyondie metrics shown for 150ktpa SOP production scenario (also have 75ktpa and 300ktpa scenarios) 4 Lake Wells metrics shown for 400ktpa SOP production scenario (also have a 200ktpa scenario) 5 Converted to US$ using assumed exchange rate of US$0.80/A$ ü Conventional truck and shovel methods utilised, complemented by continuous surface miners ü Scale of resource and shallowness allows a modular development approach ü Solid salt extraction and resulting small evaporation pond footprint Attractive FEED outcomes are made possible by Colluli’s positively unique features Page 12 t / $ S U t / $ S U 500 450 500 400 450 350 400 300 350 250 300 200 250 150 200 100 150 50 100 50 Colluli Module I Colluli Module I 1,000 1,000 SOP production capacity (kt) 2,000 2,000 3,000 3,000 4,000 4,000 Source: Integer Research and Danakali analysis SOP production capacity (kt) Source: Integer Research and Danakali analysis Danakali Annual Report 2017DANAKALI LIMITEDOperating costs Colluli’s positively unique attributes enable forecast first quartile cash costs If operating in 2016, Danakali would have been the lowest cost SOP producer outside of China. Mine gate costs outside of China in 2016 (US$/t) t / $ S U 500 450 400 350 300 250 200 150 100 50 Colluli Module I 1,000 2,000 SOP production capacity (kt) 3,000 4,000 Source: Integer Research and Danakali analysis Attractive FEED outcomes are made possible by Colluli’s positively unique features ü 1.1Bt Ore Reserve ü Outstanding grade ü Shallow mineralisation ü Open-cut mining ü Favourable combination of potassium salts enable simple, proven, low cost, high yield processing methods ü Proximity to coast and established port ü Approximately 200 year mine life ü Conventional truck and shovel methods utilised, complemented by continuous surface miners ü Scale of resource and shallowness allows a modular development approach ü Solid salt extraction and resulting small evaporation pond footprint Page 13 Danakali Annual Report 2017DANAKALI LIMITEDMining Simple, low cost, open-cut mining Single open-cut mine, with a progressive working face that provides access to each of the mineralised layers simultaneously. Mining will be conducted by mining contractors using conventional mechanised equipment (including surface miners, excavators, bulldozers and haul trucks) and methods. No drill and blast is required. Colluli’s shallow mineralisation results in a low average strip ratio. The overburden contains industrial Rock Salt, which is extracted at a rate of more than 1.8Mtpa. Commercialisation of this Rock Salt is expected to offset a portion of the mining costs in the future. This has not been reflected in the FEED results. Processing Simple, energy efficient, commercially- proven processing The processing method to be utilised at Colluli is the most commonly used, low cost process for production of SOP. The ore body consists of three main members being Sylvinite, Carnallitite and Kainitite which are fed as ore feed into the processing plant, and from which the minerals Sylvite, Carnallite and Kainite are extracted and mixed to produce SOP. Colluli is one of the few resources globally comprising Sylvite, Carnallite and Kainite in an ideal ratio to combine using conventional flotation and mixing processes to produce SOP at ambient temperature. Ambient temperature processing has a positive impact on process yield, and requires significantly lower energy inputs relative to Kainite brine conversion. Further, the availability of the salts in solid form means that no pre-evaporation ponds are necessary, reducing capital requirements and time to revenue (as illustrated on the next page). Potassium yields are further improved using recovery ponds which collect brines exiting the processing plant. Highly favourable weather conditions within the Danakil Depression provide an environment with extremely high evaporation rates, which significantly reduce pond size requirements and allow rapid recovery of remnant potassium that is recirculated to the processing plant. Processing plant water is planned to be pumped along an 87km pipeline from an abstraction and desalination facility on the Red Sea coast, and will be supplemented by a small number of water bores at the Colluli site. Product CMSC will produce a high grade premium SOP product Production at Colluli will initially focus on Standard and Granular SOP, with expansion to include Soluble SOP and Standard, Granular and Soluble SOP-M as the Project progresses. Colluli SOP samples have properties which place the product at the high end of the quality spectrum. These properties are a result of the process plant design and the liberation characteristics of the salts within the Colluli resource. Representative CMSC SOP samples have been assessed and well received by prospective offtakers. Page 14 SOP-M is chloride free and contains potassium, sulphur and magnesium. Colluli SOP-M samples demonstrate high solubility which is sought-after by end-markets. Rock Salt is scheduled for stockpiling to enable commercialisation. Colluli Rock Salt has been found to be highly effective for deicing across the varying cut- off grades modelled. Product specifications for all potential CMSC products are available at: danakali.com.au/products Danakali Annual Report 2017DANAKALI LIMITEDSimple, low cost, open-cut mining Colluli’s shallow mineralisation results in a low average strip ratio. Single open-cut mine, with a progressive working face that provides access to each of the mineralised layers simultaneously. Mining will be conducted by mining contractors using conventional mechanised equipment (including surface miners, excavators, bulldozers and haul trucks) and methods. No drill and blast is required. The overburden contains industrial Rock Salt, which is extracted at a rate of more than 1.8Mtpa. Commercialisation of this Rock Salt is expected to offset a portion of the mining costs in the future. This has not been reflected in the FEED results. Mining Processing Simple, energy efficient, commercially- proven processing The processing method to be utilised at Colluli is the most commonly used, low cost process for production of SOP. The ore body consists of three main members being Sylvinite, Carnallitite and Kainitite which are fed as ore feed into the processing plant, and from which the minerals Sylvite, Carnallite and Kainite are extracted and mixed to produce SOP. Colluli is one of the few resources globally comprising Sylvite, Carnallite and Kainite in an ideal ratio to combine using conventional flotation and mixing processes to produce SOP at ambient temperature. Ambient temperature processing has a positive impact on process yield, and requires significantly lower energy inputs relative to Kainite brine conversion. Further, the availability of the salts in solid form means that no pre-evaporation ponds are necessary, reducing capital requirements and time to revenue (as illustrated on the next page). Potassium yields are further improved using recovery ponds which collect brines exiting the processing plant. Highly favourable weather conditions within the Danakil Depression provide an environment with extremely high evaporation rates, which significantly reduce pond size requirements and allow rapid recovery of remnant potassium that is recirculated to the processing plant. Processing plant water is planned to be pumped along an 87km pipeline from an abstraction and desalination facility on the Red Sea coast, and will be supplemented by a small number of water bores at the Colluli site. Product CMSC will produce a high grade premium SOP product Production at Colluli will initially focus on Standard and Granular SOP, with expansion to include Soluble SOP and Standard, Granular and Soluble SOP-M as the Project progresses. Colluli SOP samples have properties which place the product at the high end of the quality spectrum. These properties are a result of the process plant design and the liberation characteristics of the salts within the Colluli resource. Representative CMSC SOP samples have been assessed and well received by prospective offtakers. SOP-M is chloride free and contains potassium, sulphur and magnesium. Colluli SOP-M samples demonstrate high solubility which is sought-after by end-markets. Rock Salt is scheduled for stockpiling to enable commercialisation. Colluli Rock Salt has been found to be highly effective for deicing across the varying cut- off grades modelled. Product specifications for all potential CMSC products are available at: danakali.com.au/products TIME BETWEEN SALT EXTRACTION Colluli has the unique ability to process solid salts, leading to industry leading capital intensity AND REVENUE GENERATION and shortest extraction to port timeframe of any SOP greenfield development project SOLID SALTS NEAR SURFACE – OPEN-CUT (COLLULI) COST & TIME SAVINGS Less than one week from extraction to port MINE PROCESS TRUCK SHIP SOLID SALTS AT DEPTH – SOLUTION WATER PUMP TREATMENT DISSOLVE PUMP EVAPORATE MINE PROCESS TRUCK SHIP Several months (at least) from extraction to port LAKE WATER BRINE LAKE WATER PUMP EVAPORATE MINE PROCESS TRUCK SHIP Several months (at least) from extraction to port PLAYA BRINE TRENCH BORE PUMP EVAPORATE MINE PROCESS TRUCK SHIP Several months (at least) from extraction to port Page 15 Danakali Annual Report 2017DANAKALI LIMITEDLogistics Eritrea 3 K M 1 1 Asmara Massawa Port 230K M Danakil (Circum) Yara Dallol (Yara) Marsa Fatuma Anfile Bay 87KM Proposed water pipeline Road Port terminal Potential port terminal Colluli Potash Project Potash development project Water pipeline DANAKIL DEPRESSION Ethiopia 7 9 0 K M + Djibouti Tadjoura Port Colluli is only 230km by road from the established Port of Massawa Once processed, SOP precipitate will be dried and compacted before being loaded onto containers for export. Loaded containers will be transported by truck on the established coastal road to the Port of Massawa. Colluli is only 75km from the Red Sea coast (87km from a potential port export terminal at Anfile Bay) and 230km from the Port of Massawa, making Colluli the closest SOP deposit to a coastline (see illustration below compared to Australian projects and other projects in the Danakil Depression). The proximity to the coast and established port infrastructure gives Colluli unrivalled access to the global export markets via one of the busiest trade routes in the world. Massawa is an existing, well established port providing the necessary infrastructure and skills required to satisfy the multi-commodity trade in and out of Eritrea including the exports of products from existing mines in Eritrea. Located on the major Red Sea shipping channel, it allows direct access to the key markets of India, Southeast Asia, DISTANCE TO PORT FOR COLLULI AND GREENFIELD DISTANCE TO PORT FOR COLLULI AND GREENFIELD the Middle East, Europe and the rest of Africa. Colluli has been assigned a lay down area at the Port of Massawa. POTASH DEVELOPMENTS IN AUSTRALIA AND ETHIOPIA POTASH DEVELOPMENTS IN AUSTRALIA AND ETHIOPIA Distance to port for Colluli and other SOP greenfield development projects The alternative product exporting option at Anfile Bay will be subject to further review and has the potential to unlock significant value for Colluli, by enabling the low cost export of additional volumes resulting from (i) additional modules, and (ii) the expansion of the product suite (including non-potash materials). ¢AUSTRALIAN PROJECTS ¢ETHIOPIAN PROJECTS ¢AUSTRALIAN PROJECTS ¢ETHIOPIAN PROJECTS 790km+ Circum (Danakil) Circum Tadjoura, Djibouti 790km+ Circum (Danakil) Circum Tadjoura, Djibouti 860km 860km Beyondie Beyondie Kalium Lakes Kalium Lakes Geraldton, WA Geraldton, WA 790km 790km Yara Dallol Yara Dallol Yara Yara Tadjoura, Djibouti Tadjoura, Djibouti 877km Lake Disappointment Reward Port Headland, WA 877km Lake Disappointment Reward Port Headland, WA 988km 988km Lake Wells Lake Wells Salt Lake Potash Salt Lake Potash Esperance, WA Esperance, WA 1320km 1320km Mackay Mackay Agrimin Agrimin Darwin, NT Darwin, NT 1495km 1495km Karinga Karinga Lakes Lakes Verdant Verdant Darwin, NT Darwin, NT 87km Colluli (potential) Anfile Bay 87km Colluli (potential) Anfile Bay Port Port Port Port 230km Colluli Massawa 230km Colluli Massawa Page 16 Red SeaDanakali Annual Report 2017DANAKALI LIMITEDLogistics Project execution Upside potential Eritrea Asmara 3 K M 1 1 Massawa Port Marsa Fatuma 230K M Danakil (Circum) Yara Dallol (Yara) Anfile Bay 87KM Proposed water pipeline DANAKIL DEPRESSION Ethiopia 7 9 0 K M + Road Port terminal Potential port terminal Colluli Potash Project Potash development project Water pipeline Djibouti Tadjoura Port Colluli is only 230km by road from the established Port of Massawa Once processed, SOP precipitate will be dried and compacted before being loaded onto containers for export. Loaded containers will be transported by truck on the established coastal road to the Port of Massawa. Massawa is an existing, well established port providing the necessary infrastructure and skills required to satisfy the multi-commodity trade in and out of Eritrea including the exports of products from existing mines in Eritrea. Located on the major Red Sea shipping channel, it allows direct access to the key markets of India, Southeast Asia, Colluli is only 75km from the Red Sea coast (87km from a potential port export terminal at Anfile Bay) and 230km from the Port of Massawa, making Colluli the closest SOP deposit to a coastline (see illustration below compared to Australian projects and other projects in the Danakil Depression). The proximity to the coast and established port infrastructure gives Colluli unrivalled access to the global export markets via one of the busiest trade routes in the world. The alternative product exporting option at Anfile Bay will be subject to further review and has the potential to unlock significant value for Colluli, by enabling the low cost export of additional volumes resulting from (i) the Middle East, Europe and the rest of Africa. Colluli has DISTANCE TO PORT FOR COLLULI AND GREENFIELD DISTANCE TO PORT FOR COLLULI AND GREENFIELD additional modules, and (ii) the expansion of the product been assigned a lay down area at the Port of Massawa. suite (including non-potash materials). POTASH DEVELOPMENTS IN AUSTRALIA AND ETHIOPIA POTASH DEVELOPMENTS IN AUSTRALIA AND ETHIOPIA Distance to port for Colluli and other SOP greenfield development projects 87km 87km Colluli (potential) Colluli (potential) Anfile Bay Anfile Bay Port Port Port Port 230km 230km Colluli Colluli Massawa Massawa ¢AUSTRALIAN PROJECTS ¢ETHIOPIAN PROJECTS ¢AUSTRALIAN PROJECTS ¢ETHIOPIAN PROJECTS 790km+ 790km+ Circum (Danakil) Circum (Danakil) Circum Circum Tadjoura, Djibouti Tadjoura, Djibouti 860km 860km Beyondie Beyondie Kalium Lakes Kalium Lakes Geraldton, WA Geraldton, WA 1320km 1320km Mackay Mackay Agrimin Agrimin Darwin, NT Darwin, NT 790km 790km Yara Dallol Yara Dallol Yara Yara Tadjoura, Djibouti Tadjoura, Djibouti 877km 877km Lake Disappointment Lake Disappointment Reward Reward Port Headland, WA Port Headland, WA 1495km 1495km Karinga Karinga Lakes Lakes Verdant Verdant Darwin, NT Darwin, NT 988km 988km Lake Wells Lake Wells Salt Lake Potash Salt Lake Potash Esperance, WA Esperance, WA High degree of expandability and multi-commodity potential The modular development approach delivers low upfront development costs and a high degree of expandability, underpinning a scalable, long life project. Module I will be utilised as a platform for growth. The Project has significant multi-commodity potential presenting major additional value upside. The potassium salt composition in the resource provides the option to diversify the potash product suite as the project grows. Colluli has unrivalled potash product versatility. Potash products including SOP, MOP, and SOP-M all have the potential to be produced at Colluli. The production of other agri and salt products including Rock Salt, Kieserite, Gypsum and Magnesium Chloride, is also possible from the Colluli resource. A port development at Anfile Bay could assist in unlocking this potential. FEED completion transitions Colluli into project execution phase The completion of FEED unlocks Danakali’s ability to focus on financial close and project execution. FEED provides offtakers with additional confidence on project execution and fundability, and project financiers with a level of certainty which further de-risks the investment proposition and underpins the Financial Model. FEED also provides the platform for detailed engineering and design to commence as the first step in the development phase of Colluli. Colluli will be developed to its full potential by adopting the principles of risk management, resource utilisation and modularity. CMSC will develop the resource through a de- risked modular development approach, initially focussing on SOP production: • 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 The Project’s execution phase will incorporate engineering design, procurement, construction, management and commissioning of facilities. CMSC intend to engage an experienced Engineering, Procurement, Construction & Management (EPCM) provider to manage the project. The EPCM provider will be responsible for all aspects of design, procurement and construction, management and pre- commissioning of the complete process plant and associated infrastructure, including provision of all temporary construction facilities. The management aspect will include provision of all engineering, drafting, procurement, contracting, construction and project services to complete the project scope. “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. The FEED results provide us with a much greater degree of accuracy and certainty, with key cost and valuation outcomes improving significantly. 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.” CEO, Danny Goeman Page 17 Red SeaDanakali Annual Report 2017DANAKALI LIMITEDIntroduction to potash Danakali is concentrating on Sulphate of Potash (SOP) the premium potash type Danakali is concentrating on SOP, the premium potash type NITROGEN Adds crop volume through enhancing protein and chlorophyll production N K P POTASSIUM Improves crop strength and quality, increases nitrogen uptake, increases water use efficiencies, and raises resistance to infection and parasites PHOSPHATE Helps transfer energy and is the key to photosynthesis BARLEY OATS BRAN RICE CORN 2 highest volume potash types: MOP and SOP MOPKCI The bulk potash ~61Mtpa demand in 20161 Low value chloride tolerant crops Demand is elastic (easy to substitute) Market is well supplied by global potash majors Generally higher development costs SOPK2S04 The premium potash ~7Mtpa demand in 20161 High value chloride sensitive crops Demand is inelastic (difficult to substitute) Global supply shortage of primary resources High margin Preliminary Colluli focus SOP market dynamics1,2 SOP historical prices and premium to MOP1 Over 50% of SOP supply produced through costly secondary production Generates price floor to advantage of primary SOP producers China consumes all that it produces and exports are limited Significant demand upside if application rates in developing countries rise to US and Chinese levels SOP NW Europe FOB (US$/t) US$600 US$400 US$200 SOP price premium (US$/t) 2013 2014 2015 2016 2017 2018 Source: 1. 2. Integer Research Danakali analysis Page 18 Danakali Annual Report 2017DANAKALI LIMITEDIntroduction to potash Danakali is concentrating on Sulphate of Potash (SOP) Danakali is concentrating on Sulphate of Potash (SOP) SOP market overview The SOP market is profitable, growing and increasingly undersupplied SOP commands a price premium over MOP, in part because of its suitability for application on higher-value chloride sensitive crops and lack of primary supply. SOP is generated by either primary or secondary production processes. Primary production occurs directly from suitable economically exploitable resources. These resources are geologically scarce and currently insufficient to meet demand outside of China. The demand shortfall is supplemented by secondary production which involves the conversion of MOP to SOP by adding sulphuric acid in a high cost thermal conversion process (the Mannheim Process). Over 50% of the world’s SOP supply is produced this way, generating a price floor to the advantage of primary producers who tend to have significantly lower production costs. Historically, SOP prices command a price premium over MOP and this premium has increased to more than US$270/t in the last 3 years. Expandability of existing operations outside of China is constrained and there are limited greenfield developments for primary production of SOP at an advanced stage. The SOP market outside of China is likely to become increasingly undersupplied in the coming years without significant capacity investment. the premium potash type the premium potash type Danakali is concentrating on SOP, the premium potash type NITROGEN NITROGEN Adds crop volume through Adds crop volume through enhancing protein and enhancing protein and chlorophyll production chlorophyll production N N K K P P PHOSPHATE PHOSPHATE Helps transfer energy Helps transfer energy and is the key to and is the key to photosynthesis photosynthesis POTASSIUM POTASSIUM Improves crop strength and quality, increases nitrogen Improves crop strength and quality, increases nitrogen uptake, increases water use efficiencies, and raises uptake, increases water use efficiencies, and raises resistance to infection and parasites resistance to infection and parasites BARLEY BARLEY OATS OATS BRAN BRAN RICE RICE CORN CORN 2 highest volume potash 2 highest volume potash types: MOP and SOP types: MOP and SOP MOPKCI MOPKCI The bulk potash The bulk potash ~61Mtpa demand in 20161 ~61Mtpa demand in 20161 Low value chloride tolerant crops Low value chloride tolerant crops Demand is elastic (easy to substitute) Demand is elastic (easy to substitute) Market is well supplied by global potash majors Market is well supplied by global potash majors Generally higher development costs Generally higher development costs SOPK2S04 SOPK2S04 The premium potash The premium potash ~7Mtpa demand in 20161 ~7Mtpa demand in 20161 High value chloride sensitive crops High value chloride sensitive crops Demand is inelastic (difficult to substitute) Demand is inelastic (difficult to substitute) Global supply shortage of primary resources Global supply shortage of primary resources High margin High margin Preliminary Colluli focus Preliminary Colluli focus SOP market dynamics1,2 SOP market dynamics1,2 SOP historical prices and premium to MOP1 SOP historical prices and premium to MOP1 SOP NW Europe FOB SOP NW Europe FOB (US$/t) (US$/t) Over 50% of SOP supply produced through costly Over 50% of SOP supply produced through costly secondary production secondary production Generates price floor to advantage of primary Generates price floor to advantage of primary SOP producers SOP producers are limited are limited China consumes all that it produces and exports China consumes all that it produces and exports Significant demand upside if application rates in Significant demand upside if application rates in developing countries rise to US and Chinese levels developing countries rise to US and Chinese levels US$600 US$600 US$400 US$400 US$200 US$200 Source: Source: 1. Integer Research Integer Research 1. 2. Danakali analysis Danakali analysis 2. SOP price premium (US$/t) SOP price premium (US$/t) 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 CHANGING NEEDS There is also a limit in the extent to which existing secondary producers can increase output to service growing demand. Hydrochloric acid (HCl) is produced as a by-product in OUR FUTURE GLOBAL SOCIETY HAS Reduction in arable land per person in comparison to a soccer pitch Reduction in arable land means more fertiliser required to increase crop yields. Reduction in arable land per person in comparison to a football field 62% 1960 4,500m2 33% 2005 2,400m2 25% 2050 1,800m2 Source: the content on this page was generated utilising industry insights from Integer Research, the data in the infographic is sourced from the Food and Agriculture Organization of the United Nations Page 19 secondary production. For every 1t of SOP produced via the Mannheim Process, 1.2t of HCl is produced. HCl is costly to handle and transport. In some cases, HCl disposal can result in negative values for producers, making some secondary SOP production ultimately unprofitable. SOP’s growth fundamentals are underpinned by four key drivers: 1. Global population growth 2. Reduction in arable land 3. Evolving dietary preferences 4. Under-application in developing countries Global demand outside of China is expected to be driven particularly from Latin America, South Asia, Africa, and the fertiliser producing countries in Western Europe. There is significant upside potential in the SOP market if India changes its fertiliser pricing policy. India is the second largest SOP crop growing country in the world after China, but currently utilises very little SOP due to the fertiliser subsidy scheme which applies to MOP and drives irrational purchasing behaviour (currently MOP in India is heavily subsidised). The global SOP market has a potential size far greater than current consumption if application rates increase to levels comparable to those applied in the US market. The expected SOP demand and supply dynamics supports the premise that the industry will tighten throughout the next 10 years, supporting a robust pricing environment. Danakali Annual Report 2017DANAKALI LIMITEDOverview of Eritrea Danakali has been operating in Eritrea since 2009 and has found the country to be safe, stable and development focused Eritrea is located on the Horn of Africa. It is bordered by Sudan in the west, Ethiopia in the south, and Djibouti in the southeast. The north-eastern and eastern parts of Eritrea have an extensive coastline along the Red Sea. Eritrea is one of the youngest countries in the world, achieving its independence in 1991. Eritrea has a stable government and is one of the fastest growing economies globally1. Drivers of the economy include mineral exports, agricultural output and infrastructure development. The Eritrean government promotes principles of self-reliance. Eritrea was the only sub-Saharan African country to meet its Millennium Development Goals by 20152. Eritrea achieved large reductions in malaria, maternal mortality and HIV/AIDs prevalence, while improving access to potable water and almost doubling adult literacy rates. The Eritrean government is focused on developing food security and agricultural production; infrastructure development; and human resources. Great emphasis is placed on community and individual rights as well as issues of social justice, such as access to education, health, food and equitable access to services. Mining and investment in Eritrea Eritrea’s development aspiration is to achieve rapid, balanced, home-grown and sustainable economic growth while ensuring social equity and justice; and mineral exports are recognised as fulfilling a key role in achieving this Eritrea has supportive laws for mining investment including low import duties on capital development, accelerated tax depreciation and 10 year carry forward of losses. Progression of the mining industry has seen Eritrea experience some of the highest economic growth rates in Africa1, primarily driven by the development of the Bisha Copper-Zinc Mine which has been operational since 2010 and has completed three subsequent expansions. With a stable and maturing mining jurisdiction, a pipeline of mining projects has developed. The Zara (Koka) Gold Mine is commissioned and producing, the Asmara Copper-Zinc- Gold-Silver Project is in advanced stages of development and Colluli sits fourth in the country’s pipeline of projects. Prominent global institutional investors have made major investments in Nevsun (NSU.TSE)3 and Danakali. 1 2 3 World Bank, The Economist World Health Organisation Morningstar Asmara, Eritrea Page 20 Danakali Annual Report 2017DANAKALI LIMITEDOverview of Eritrea Mining and investment Government support and strategic alliance Danakali has been operating in Eritrea since 2009 and has found the country to be safe, stable and development focused Eritrea is located on the Horn of Africa. It is bordered by Sudan in the west, Ethiopia in the south, and Djibouti in the southeast. The north-eastern and eastern parts of Eritrea have an extensive coastline along the Red Sea. Eritrea is one of the youngest countries in the world, achieving its independence in 1991. Eritrea has a stable government and is one of the fastest growing economies globally1. Drivers of the economy include mineral exports, agricultural output and infrastructure development. The Eritrean government promotes principles of self-reliance. Eritrea was the only sub-Saharan African country to meet its Millennium Development Goals by 20152. Eritrea achieved large reductions in malaria, maternal mortality and HIV/AIDs prevalence, while improving access to potable water and almost doubling adult literacy rates. The Eritrean government is focused on developing food security and agricultural production; infrastructure development; and human resources. Great emphasis is placed on community and individual rights as well as issues of social justice, such as access to education, health, food and equitable access to services. 1 2 3 World Bank, The Economist World Health Organisation Morningstar in Eritrea Eritrea’s development aspiration is to achieve rapid, balanced, home-grown and sustainable economic growth while ensuring social equity and justice; and mineral exports are recognised as fulfilling a key role in achieving this Eritrea has supportive laws for mining investment including low import duties on capital development, accelerated tax depreciation and 10 year carry forward of losses. Progression of the mining industry has seen Eritrea experience some of the highest economic growth rates in Africa1, primarily driven by the development of the Bisha Copper-Zinc Mine which has been operational since 2010 and has completed three subsequent expansions. With a stable and maturing mining jurisdiction, a pipeline of mining projects has developed. The Zara (Koka) Gold Mine is commissioned and producing, the Asmara Copper-Zinc- Gold-Silver Project is in advanced stages of development and Colluli sits fourth in the country’s pipeline of projects. Prominent global institutional investors have made major investments in Nevsun (NSU.TSE)3 and Danakali. “We were very impressed with the country itself, and with Colluli. Management has a very good relationship with the Government.” Hartleys, research note, November 2016 Asmara, Eritrea Permitting The Eritrean government has been transparent, collaborative and responsive Danakali has a strong, effective working relationship with the Eritrean government through its joint venture agreement with ENAMCO. ENAMCO and Danakali each hold a 50% ownership in CMSC. The CMSC Board was established following the incorporation of CMSC in March 2014. The CMSC Board is overseeing project development. The CMSC Board has 5 members; 3 members from Danakali and 2 from ENAMCO. The structure allows the Eritrean government direct insight into the mining industry, which is an important part of Eritrea’s development. “The government is pragmatic in its approach to the development of the Eritrean mining industry. The Eritrean people are friendly, patriotic and exhibit no signs of corruption.” Baillieu Holst research: Postcard from Eritrea, July 2016 Colluli is fully permitted The Social and Environmental Impact Assessment (SEIA) and Social and Environmental Management Plans (SEMP), conducted according to the Equator Principles, were submitted by CMSC in Q2 2016 and approved by the Eritrean Ministry of Land, Water and Environment in Q4 2016. The application for Mining Licenses was submitted by CMSC in Q2 2016 and awarded in Q1 2017, along with approval of the Mining Agreement. The Mining Agreement provides exclusive access to CMSC over the 1.289Bt SOP Mineral Resource. The Mining Licenses span over 60km2 of the 100km2 Mining Agreement area and represent more than 60 years of the approximately 200 year mine life. Additional Mining Licenses can be applied for within the agreement area as required to sustain and/or grow operations. The Mining Licenses allow exploitation of potassium, calcium, sodium, and magnesium salts from the Colluli resource, as well as bromine. This facilitates significant growth potential through the diversification of potash product types and monetisation of other salts within the resource. Page 21 Danakali Annual Report 2017DANAKALI LIMITEDDanakali Board An experienced, multi-disciplinary and international board Seamus Cornelius Chairman Technical background Corporate lawyer (LLB, LLM). Relevant experience Andre Liebenberg Non-Executive Director Technical background MBA, BSc (Elec) Eng. Relevant experience • Corporate lawyer with over 20 years’ experience in the resource sector, including in complex cross- border commercial negotiations • Mining industry professional with extensive investor, market, finance, business development and leadership experience • Former partner at one of Australia’s leading law firms • Chairman of Duketon Mining, Montezuma Mining, and Buxton Resources • Over 25 years in private equity and investment banking, and senior roles at BHP Billiton and QKR Corporation Robert Connochie Non-Executive Director Technical background Civil Engineering (B.A. Sc.), MBA Relevant experience Paul Donaldson Non-Executive Director Technical background Masters Degree (Mining Engineering), Masters Degree (Business and Technology), BEng Chemical (Hons), Assoc Dip. Applied Science (Metallurgy). Relevant experience • • • Potash and mining specialist with over 40 years of industry experience • Extensive senior line management experience in the potash industry, including corporate development, evaluations, marketing, financing and acquisitions Previously Chairman of Canpotex, Chairman of Behre Dolbear, Chairman and CEO of Potash Company of America, CEO of Asia Pacific Potash, and Director of Athabasca Potash John Fitzgerald Non-Executive Director Technical background Chartered Accountant, Fellow of FINSIA, BSc Applied Science. Relevant experience • • Extensive project finance and corporate advisory experience in the resource sector Previously at Optimum Capital, NM Rothschild and Sons, Investec Bank Australia and HSBC Precious Metals • Non-Executive Director of Northern Star Resources Page 22 Extensive operational, technical marketing and supply chain management from senior management positions within BHP Billiton • Managed large scale, open-cut mining operations, significant growth and sustaining capital projects, and complex pyro metallurgical, beneficiation and manufacturing processes • High-level business improvement, integrated supply chain management, technical operational management and frontline leadership experience Zhang Jing Non-Executive Director Technical background Master’s Degree in International Consultancy and Accounting. Relevant experience • • Extensive international trading and business development experience in China Investment and project management roles held in public listed companies in China Danakali Annual Report 2017DANAKALI LIMITEDDanakali senior management Danny Goeman, a highly experienced mining industry professional, assumed the role of CEO in late 2017 Danny Goeman Chief Executive Officer • Joined Danakali in 2016 and has since developed the offtake strategy and offtake contract frameworks, and led the offtake negotiations on behalf of CMSC • More than 25 years’ experience in sales and marketing, strategy development, and high level commercial negotiations • More than 20 years with the Rio Tinto group of companies • • Experience across multiple commodities in multiple jurisdictions Significant customer engagement experience Stuart Tarrant Chief Financial Officer William Sandover Head of Corporate Development & External Affairs • • Extensive exposure in the mining industry • Financial modelling, financial systems deployment, procurement, budgeting, and cost analysis and optimisation experience Extensive investment banking and corporate advisory experience at UBS, Macquarie and Vesparum • Has been involved in raising more than A$10B in equity and hybrid capital for ASX-listed companies • Has held a series of senior financial positions, including at BHP Tony Harrington Project Manager • Appointed as Project Manager in May 2017 ahead of the project execution phase for Colluli • Over 30 years’ experience 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, and across multiple jurisdictions including East and West Africa, Southern Africa, China, Continental Europe, UK and Australia • Tony has acted as overall Project Manager, or one of the Senior Managers on over 25 development projects globally Selected project experience: • • • • • Base Resources, Kwale Mineral Sands Project, Kenya Barrick Mining, Chimiwungo expansion at the Lumwana Copper Mine, Zambia Ashanti Goldfields, Sansu Gold Mine BIOX Gold Plant, Ghana Dundee Precious Metals, Chelopech Gold Mine, Bulgaria Billiton, Groote Eylandt Manganese Mine Upgrade, Australia (Gulf of Carpentaria) Page 23 Danakali Annual Report 2017DANAKALI LIMITEDValues Our core values are our guiding principles that define our internal conduct and our relationships with the external operating environment and will not be compromised People Our employees, customers, local communities, business partners, shareholders and other stakeholders are vital to our business success and future growth. The health, safety and wellbeing of our people are paramount. Our business success is underpinned by educating our employees about our business, embracing diversity, encouraging ideas that improve our business, demonstrating a “can do“ attitude, respecting each other, promoting and rewarding teamwork, and aligning ourselves to a set of common goals. Integrity We conduct ourselves with uncompromising integrity and honesty as individuals and as a company. This means standing up for what we believe in, speaking out against something that is wrong and putting values ahead of short term results. We are forthright with bad news and difficult issues. We strive to earn enduring credibility with others, which we believe is essential to long- term personal and business relationships. This means doing what we say we will do. Planet We respect our operating environment at local, national and international levels and are focussed on continually reducing the environmental footprint of our business. We achieve this through creating environmental management plans, using energy efficiently, conserving water, minimising waste generation and managing waste responsibly. Performance We are a performance driven organisation, and continually strive for improvement in the things that matter most to our business. We embrace innovation, responsibility and accountability, and always consider short, medium and long term time horizons. Simplicity We embrace the principle that everything should be as simple as possible. We maintain simplicity in our internal processes and procedures with objectives that are succinct, quantitative, and time bound. Please see Danakali’s 2017 CSR Report, expected to be released soon after Danakali’s 2018 Investor Pack, for information on Danakali’s Environmental, Social and Governance policies and outlook. Page 24 Danakali Annual Report 2017DANAKALI LIMITEDValues Our core values are our guiding principles that define our internal conduct and our relationships with the external operating environment and will not be compromised Planet results. We are forthright with bad news and difficult issues. We strive to earn enduring credibility with others, which we believe is essential to long- term personal and business relationships. This means doing what we say we will do. People Our employees, customers, local communities, business partners, shareholders and other stakeholders are vital to our business success and future growth. The health, safety and wellbeing of our people are paramount. Our business success is underpinned by educating our employees about our business, embracing diversity, encouraging ideas that improve our business, demonstrating a “can do“ attitude, respecting each other, promoting and rewarding teamwork, and aligning ourselves to a set of common goals. Integrity We conduct ourselves with uncompromising integrity and honesty as individuals and as a company. This means standing up for what we believe in, speaking out against something that is wrong and putting values ahead of short term We respect our operating environment at local, national and international levels and are focussed on continually reducing the environmental footprint of our business. We achieve this through creating environmental management plans, using energy efficiently, conserving water, minimising waste generation and managing waste responsibly. Performance We are a performance driven organisation, and continually strive for improvement in the things that matter most to our business. We embrace innovation, responsibility and accountability, and always consider short, medium and long term time horizons. Simplicity We embrace the principle that everything should be as simple as possible. We maintain simplicity in our internal processes and procedures with objectives that are succinct, quantitative, and time bound. Please see Danakali’s 2017 CSR Report, expected to be released soon after Danakali’s 2018 Investor Pack, for information on Danakali’s Environmental, Social and Governance policies and outlook. DANAKALI LTD DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2017 Page 25 Danakali Annual Report 2017DANAKALI LIMITEDDirectors’ Report The directors present their report together with the financial statements of the consolidated entity being, Danakali Ltd (“Danakali” or the “Company”) and its controlled entities (“the Group”) for the financial year ended 31 December 2017. DIRECTORS The names and details of the Company’s directors in office during the financial period and until the date of this report are as follows. Where applicable, all current and former directorships held in listed public companies over the last three years have been detailed below. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities: Seamus Ian Cornelius Non-Executive Chairman, LLB, LLM, appointed 15 July 2013 Mr Cornelius is a corporate lawyer and former partner of one of Australia’s leading international law firms. He has a high degree of expertise in cross-border transactions, particularly in the resources and finance sectors. Mr Cornelius has been based in China since 1993, and has advised global companies, banks, major resource companies and Chinese State-owned entities on resource project investments both within China and abroad. Mr Cornelius is currently the Non-Executive Chairman of Buxton Resources Ltd (appointed 29 November 2010), Montezuma Mining Company Ltd (appointed 30 June 2011), and Duketon Mining Ltd (appointed 8 February 2013). Special Responsibilities: Mr Cornelius is a member of the Audit Committee and a member of the Technical and Risk Committee. Paul Michael Donaldson Managing Director and Chief Executive Officer; Master’s Degree - Mining Engineering, Master’s Degree - Business and Technology, BEng Chemical (Honours, University Medal), Assoc Dip. Applied Science (Metallurgy), initially appointed Chief Operating Officer 29 November 2012, transitioned to Chief Executive Officer 1 February 2013 and additionally appointed Managing Director 29 April 2014, transitioned from Chief Executive Office and Managing Director role to Non-Executive Director role on 21 December 2017. Mr Donaldson joined Danakali from a series of senior management roles spanning more than 25 years with BHP Billiton (“BHP”). At BHP Mr Donaldson managed large scale, open cut mining operations, significant growth and sustaining capital projects, and complex pyro metallurgical, beneficiation and manufacturing processes. Mr Donaldson headed the BHP Carbon Steel Materials Technical Marketing Team, managed the Port Hedland iron ore facility as well as occupying key roles in product and infrastructure planning across large scale supply chains. Mr Donaldson also brings extensive experience in high-level business improvement and logistics from base metal operations and a high degree of integrated supply chain management, technical operational management and frontline leadership experience in the steel industry. Special Responsibilities: Mr Donaldson is a Chairman of the Technical and Risk Committee and a member of the Remuneration and Nomination Committee. John Daniel Fitzgerald Independent Non-Executive Director, CA, appointed 19 February 2015 Mr Fitzgerald has over 30 years of finance and corporate advisory experience in the resource sector. Previously, he held senior positions at NM Rothschild and Sons, Investec Bank Australia, Commonwealth Bank, HSBC Precious Metals and Optimum Capital. Mr Fitzgerald is Non-Executive Chairman of Carbine Resources Limited (appointed 13 April 2016) and Novo Litio Minerals Limited (appointed 23 December 2015) and a Non-Executive Director of Northern Star Resources Limited (appointed 30 November 2012), Previously Mr Fitzgerald was Non-Executive Chairman of Atherton Resources Limited (14 December 2009 to 9 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. Special Responsibilities: Mr Fitzgerald is Chairman of the Audit Committee and member of the Remuneration and Nomination Committee. Ms Zhang has more than 15 years of international trading and business development experience in China and previously held investment and project managerial roles in public listed companies. Ms Zhang holds a Master’s degree in International Consultancy and Accounting from the university or Reading in the United Directors’ Report Zhang Jing Non-Executive Director, M. Sc, appointed 17 June 2016 Kingdom. None Special Responsibilities: Robert Gordon Connochie Independent Non-Executive Director, B.A. Sc, M.B.A., appointed 6 February 2017 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 marketing, corporate development, evaluations, financing and acquisitions. Chairman of Behre Dolbear Capital, Inc. Previously, Mr. Connochie held positions as Chairman of Canpotex (a world leading potash exporter for over 40 years) and Further, Mr Connochie was Chairman and CEO of Potash Company of America, CEO Asia Pacific Potash, Director of Athabasca Potash, Chairman of the Phosphate and Potash Institute, Director of the Fertiliser Institute, and Director of the Saskachewan Potash Producers Association. Special Responsibilities: Mr Connochie is a member of the Technical and Risk Committee. Andre Liebenberg Independent Non-Executive Director, MBA, BSc (Elec) Eng., appointed 2 October 2017 Mr. Liebenberg is an experienced mining industry professional with extensive investor, market, finance, business development and leadership experience, and has spent over 25 years in private equity, investment banking, and held senior roles within QKR Corporation and BHP Billiton. In a previous role, Mr. Liebenberg had the opportunity to visit Eritrea and is familiar with the jurisdiction. In addition to the CFO role at QKR Corporation, Mr. Liebenberg occupied senior executive roles within BHP Billiton including Head of Group Investor Relations, as well as CFO roles for the Energy Coal and Diamonds and Speciality Products divisions. These roles were based in London, Melbourne and Sydney. Mr. Liebenberg’s experience within BHP Billiton also 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 at UBS in London and Standard Bank Group in South Africa. Special Responsibilities: Anthony William Kiernan Mr Liebenberg is Chairman of the Remuneration and Nomination Committee and a member of the Audit Committee. Independent Non-Executive Director, LLB, appointed 15 October 2012, resigned 6 February 2017 Mr 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 skills in the areas of Government relations, corporate strategy and corporate governance. Mr Kiernan is currently the Non-Executive Chairman of Pilbara Minerals Ltd (appointed 1 July 2016), Venturex Resources Limited (appointed 14 July 2010) and Chalice Gold Mines Ltd (appointed 15 February 2007). In addition, Mr Kiernan is Chairman of the Fiona Wood Foundation which focuses on research into burn injuries. Previously Mr Kiernan was Non-Executive Chairman of BC Iron Ltd (11 October 2006 until 7 December 2016). Special Responsibilities: Audit and Risk Committee. During his appointment Mr Kiernan was Chairman of the Remuneration and Nomination Committee and a member of the DANAKALI LIMITED Page 26 ABN 56 097 904 302 4 DANAKALI LIMITED ABN 56 097 904 302 5 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report The directors present their report together with the financial statements of the consolidated entity being, Danakali Ltd (“Danakali” or the “Company”) and its controlled entities (“the Group”) for the financial year ended 31 December 2017. DIRECTORS The names and details of the Company’s directors in office during the financial period and until the date of this report are as follows. Where applicable, all current and former directorships held in listed public companies over the last three years have been detailed below. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities: Seamus Ian Cornelius Non-Executive Chairman, LLB, LLM, appointed 15 July 2013 Mr Cornelius is a corporate lawyer and former partner of one of Australia’s leading international law firms. He has a high degree of expertise in cross-border transactions, particularly in the resources and finance sectors. Mr Cornelius has been based in China since 1993, and has advised global companies, banks, major resource companies and Chinese State-owned entities on resource project investments both within China and abroad. Mr Cornelius is currently the Non-Executive Chairman of Buxton Resources Ltd (appointed 29 November 2010), Montezuma Mining Company Ltd (appointed 30 June 2011), and Duketon Mining Ltd (appointed 8 February 2013). Mr Cornelius is a member of the Audit Committee and a member of the Technical and Risk Committee. Special Responsibilities: Paul Michael Donaldson Managing Director and Chief Executive Officer; Master’s Degree - Mining Engineering, Master’s Degree - Business and Technology, BEng Chemical (Honours, University Medal), Assoc Dip. Applied Science (Metallurgy), initially appointed Chief Operating Officer 29 November 2012, transitioned to Chief Executive Officer 1 February 2013 and additionally appointed Managing Director 29 April 2014, transitioned from Chief Executive Office and Managing Director role to Non-Executive Director role on 21 December 2017. Mr Donaldson joined Danakali from a series of senior management roles spanning more than 25 years with BHP Billiton (“BHP”). At BHP Mr Donaldson managed large scale, open cut mining operations, significant growth and sustaining capital projects, and complex pyro metallurgical, beneficiation and manufacturing processes. Mr Donaldson headed the BHP Carbon Steel Materials Technical Marketing Team, managed the Port Hedland iron ore facility as well as occupying key roles in product and infrastructure planning across large scale supply chains. Mr Donaldson also brings extensive experience in high-level business improvement and logistics from base metal operations and a high degree of integrated supply chain management, technical operational management and frontline leadership experience in the steel industry. Mr Donaldson is a Chairman of the Technical and Risk Committee and a member of the Remuneration and Nomination Independent Non-Executive Director, CA, appointed 19 February 2015 Mr Fitzgerald has over 30 years of finance and corporate advisory experience in the resource sector. Previously, he held senior positions at NM Rothschild and Sons, Investec Bank Australia, Commonwealth Bank, HSBC Precious Metals and Optimum Capital. Mr Fitzgerald is Non-Executive Chairman of Carbine Resources Limited (appointed 13 April 2016) and Novo Litio Minerals Limited (appointed 23 December 2015) and a Non-Executive Director of Northern Star Resources Limited (appointed 30 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. Special Responsibilities: Mr Fitzgerald is Chairman of the Audit Committee and member of the Remuneration and Nomination Committee. Special Responsibilities: Committee. John Daniel Fitzgerald November 2012), 2015). DANAKALI LIMITED ABN 56 097 904 302 Directors’ Report Zhang Jing Non-Executive Director, M. Sc, appointed 17 June 2016 Ms Zhang has more than 15 years of international trading and business development experience in China and previously held investment and project managerial roles in public listed companies. Ms Zhang holds a Master’s degree in International Consultancy and Accounting from the university or Reading in the United Kingdom. Special Responsibilities: None Robert Gordon Connochie Independent Non-Executive Director, B.A. Sc, M.B.A., appointed 6 February 2017 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 marketing, corporate development, evaluations, 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. Further, Mr Connochie was Chairman and CEO of Potash Company of America, CEO Asia Pacific Potash, Director of Athabasca Potash, Chairman of the Phosphate and Potash Institute, Director of the Fertiliser Institute, and Director of the Saskachewan Potash Producers Association. Special Responsibilities: Mr Connochie is a member of the Technical and Risk Committee. Andre Liebenberg Independent Non-Executive Director, MBA, BSc (Elec) Eng., appointed 2 October 2017 Mr. Liebenberg is an experienced mining industry professional with extensive investor, market, finance, business development and leadership experience, and has spent over 25 years in private equity, investment banking, and held senior roles within QKR Corporation and BHP Billiton. In a previous role, Mr. Liebenberg had the opportunity to visit Eritrea and is familiar with the jurisdiction. In addition to the CFO role at QKR Corporation, Mr. Liebenberg occupied senior executive roles within BHP Billiton including Head of Group Investor Relations, as well as CFO roles for the Energy Coal and Diamonds and Speciality Products divisions. These roles were based in London, Melbourne and Sydney. Mr. Liebenberg’s experience within BHP Billiton also 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 at UBS in London and Standard Bank Group in South Africa. Special Responsibilities: Mr Liebenberg is Chairman of the Remuneration and Nomination Committee and a member of the Audit Committee. Anthony William Kiernan Independent Non-Executive Director, LLB, appointed 15 October 2012, resigned 6 February 2017 Mr 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 skills in the areas of Government relations, corporate strategy and corporate governance. Mr Kiernan is currently the Non-Executive Chairman of Pilbara Minerals Ltd (appointed 1 July 2016), Venturex Resources Limited (appointed 14 July 2010) and Chalice Gold Mines Ltd (appointed 15 February 2007). In addition, Mr Kiernan is Chairman of the Fiona Wood Foundation which focuses on research into burn injuries. Previously Mr Fitzgerald was Non-Executive Chairman of Atherton Resources Limited (14 December 2009 to 9 November Previously Mr Kiernan was Non-Executive Chairman of BC Iron Ltd (11 October 2006 until 7 December 2016). Special Responsibilities: During his appointment Mr Kiernan was Chairman of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee. 4 DANAKALI LIMITED ABN 56 097 904 302 Page 27 5 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Liam Raymond Cornelius Non-Executive Director, BApp.Sc, appointed 21 August 2001, resigned 17 November 2017 Mr Cornelius graduated from Curtin University of Technology with a BApp.Sc in Geology and has been involved in the exploration industry within Australia, Asia and Africa for over 20 years. Mr Cornelius has experience with a wide range of commodities including gold, nickel, copper, platinum, uranium and potash. As a founding member of Danakali Ltd, Mr Cornelius has played a key role in outlining areas of interest for the Company. Special Responsibilities: During his appointment Mr Cornelius was a member of the Remuneration and Nomination Committee. COMPANY SECRETARY Catherine Grant-Edwards and Melissa Chapman Appointed Joint Company Secretary 7 July 2017 Ms Melissa Chapman (Certified Practicing Accountant (CPA), AGIA/ACIS, GAICD) and Ms Catherine Grant-Edwards (Chartered Accountant (CA)) were appointed as Joint Company Secretary on 7 July 2017. Ms Chapman and Ms Grant- Edwards are directors of Bellatrix Corporate Pty Ltd (Bellatrix), a company that provides company secretarial and accounting services to a number of ASX listed company. Between them, Ms Chapman and Ms Grant-Edwards have over 30 years’ experience in the provision of accounting, finance and company secretarial services to public listed resource and private companies in Australia and the UK, and in the field of public practice external audit. Christiaan Philippus Els B. Com (Hons), CA, appointed 1 February 2016, resigned 7 July 2017 Mr Els is an associate member of the Chartered Institute of Management Accountants, a member of the Certified Practicing Accountants of Australia and the Chartered Global Management Accountants. Mr Els was appointed as Chief Financial Officer from 3 December 2015. INTERESTS IN SHARES, OPTIONS AND PERFORMANCE RIGHTS OF THE COMPANY As at the date of this report, the interests of the directors in the shares, options and performance rights of Danakali Limited were: Director S I Cornelius P M Donaldson J D Fitzgerald Z Jing R G Connochie A Liebenberg PRINCIPAL ACTIVITIES Ordinary Shares Options over Ordinary Shares Performance Rights 9,798,184 2,768,334 258,334 - - - 1,675,000 600,000 1,475,000 100,000 500,000 - - 800,000 - - - - The principal activity of the Group during the period was advancing the Colluli Potash Project in Eritrea, East Africa. There was no significant change in the nature of the Group’s activities during the financial year ended 31 December 2017. CORPORATE STRUCTURE Danakali Limited is a company limited by shares that is incorporated and domiciled in Australia. DANAKALI LIMITED Page 28 ABN 56 097 904 302 6 7 Directors’ Report REVIEW OF OPERATIONS PROJECT OVERVIEW The Colluli Potash Project (Colluli, or the Project) is located in the Danakil Depression region of Eritrea, East Africa. Colluli is approximately 177km south-east 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 the Eritrean National Mining Company (ENAMCO) and Danakali with each having 50% ownership of the joint venture company, the Colluli Mining Share 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. In addition, the potassium bearing salts are present in solid form (in contrast with production of SOP from brines). Shallow access to salts in solid form provides Colluli with significant mining, logistics and, in turn, capital and operating cost advantages over 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 predictable production rates due to low reliance on ambient conditions. Shallow mineralisation makes the resource amenable to open cut mining: a proven, high productivity mining method. Open cut mining provides higher resource recoveries relative to underground and solution mining methods, is generally safer, and can be more easily expanded. The Colluli resource comprises three potassium bearing salts in solid form: Sylvinite, Carnallitite and Kainitite. These salts are suitable for high yield, low energy production of Sulphate of Potash (SOP), which is a high-quality potash fertiliser carrying a price premium over the more common Muriate of Potash (MOP). SOP is chlorine free and is commonly applied to high value crops such as fruit, vegetables, nuts, and coffee. Economic resources for primary production of SOP are geologically scarce and there are few current primary producers. The JORC-2012 compliant Mineral Resource for Colluli is estimated at 1.289Bt @ 11% K2O for 260Mt of contained 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. Colluli will be developed to its full potential by adopting the principles of risk management, resource utilisation and modularity, using the first module as a platform for growth. The Colluli FEED modules are: • Module I – 472ktpa SOP production • Module II – additional 472ktpa SOP production commencing in year 6 The massive Colluli Ore Reserve has significant capacity to underpin further expansions and support decades of growth beyond Modules I and II. Colluli has significant diversification potential beyond SOP, including the option to produce additional potash and salt products such as MOP, SOP-M, kieserite (MgSO4.H2O), gypsum (CaSO4.2H2O), magnesium chloride (MgCl2), and rock salt (NaCl). The Colluli SOP Mineral Resource also comprises an 85Mt Kieserite (magnesium sulphate) Mineral Resource (ASX announcement 15 August 2016). Kieserite is a suitable fertiliser for magnesium deficient soils. A 347Mt Rock Salt (sodium chloride) Mineral Resource (ASX announcement 23 September 2015) has also been established at Colluli. Unprocessed Rock Salt can be used for de-icing, processed Rock Salt can be used as table salt. Subsequent to year end, on 29 January 2018, the Company announced it had completed the Front-End Engineering Design (FEED) for Colluli. FEED firmly establishes Colluli as the most progressed, economically attractive, and fundable SOP greenfield development project globally. It provides offtakers and funders with a high level of study detail and accuracy and is the final study stage before project execution. The FEED results reaffirm the outstanding project economics of Colluli. Industry leading capital intensity achieved in the DFS (ASX announcement 30 November 2015) further reduced as a result of lower development capital requirements for Module I and increased annual production rate. This, combined with forecast first quartile operating costs, resulted in a Project Net Present Value (NPV10) of US$902M and Internal Rate of Return (IRR) of 29.9%. The Danakali economic outcomes were an NPV10 of US$439M and IRR of 31.3%. Mining Agreement Executed and Mining Licenses Awarded As announced on 1 February 2017, CMSC entered into a mining agreement (Mining Agreement) with the Eritrean Ministry of Energy and Mines (MoEM) and was awarded mining licenses (Mining Licenses) for the exploitation of mineral resources within the Colluli tenements. DANAKALI LIMITED ABN 56 097 904 302 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Liam Raymond Cornelius Non-Executive Director, BApp.Sc, appointed 21 August 2001, resigned 17 November 2017 Mr Cornelius graduated from Curtin University of Technology with a BApp.Sc in Geology and has been involved in the exploration industry within Australia, Asia and Africa for over 20 years. Mr Cornelius has experience with a wide range of commodities including gold, nickel, copper, platinum, uranium and potash. As a founding member of Danakali Ltd, Mr Cornelius has played a key role in outlining areas of interest for the Company. Special Responsibilities: During his appointment Mr Cornelius was a member of the Remuneration and Nomination Committee. COMPANY SECRETARY Catherine Grant-Edwards and Melissa Chapman Appointed Joint Company Secretary 7 July 2017 Ms Melissa Chapman (Certified Practicing Accountant (CPA), AGIA/ACIS, GAICD) and Ms Catherine Grant-Edwards (Chartered Accountant (CA)) were appointed as Joint Company Secretary on 7 July 2017. Ms Chapman and Ms Grant- Edwards are directors of Bellatrix Corporate Pty Ltd (Bellatrix), a company that provides company secretarial and accounting services to a number of ASX listed company. Between them, Ms Chapman and Ms Grant-Edwards have over 30 years’ experience in the provision of accounting, finance and company secretarial services to public listed resource and private companies in Australia and the UK, and in the field of public practice external audit. Christiaan Philippus Els B. Com (Hons), CA, appointed 1 February 2016, resigned 7 July 2017 Mr Els is an associate member of the Chartered Institute of Management Accountants, a member of the Certified Practicing Accountants of Australia and the Chartered Global Management Accountants. Mr Els was appointed as Chief Financial Officer from 3 December 2015. INTERESTS IN SHARES, OPTIONS AND PERFORMANCE RIGHTS OF THE COMPANY As at the date of this report, the interests of the directors in the shares, options and performance rights of Danakali Limited were: Director S I Cornelius P M Donaldson J D Fitzgerald Z Jing R G Connochie A Liebenberg Ordinary Shares Options over Ordinary Shares Performance Rights 9,798,184 2,768,334 258,334 - - - 1,675,000 600,000 1,475,000 100,000 500,000 - 800,000 - - - - - PRINCIPAL ACTIVITIES The principal activity of the Group during the period was advancing the Colluli Potash Project in Eritrea, East Africa. There was no significant change in the nature of the Group’s activities during the financial year ended 31 December 2017. CORPORATE STRUCTURE Danakali Limited is a company limited by shares that is incorporated and domiciled in Australia. Directors’ Report REVIEW OF OPERATIONS PROJECT OVERVIEW The Colluli Potash Project (Colluli, or the Project) is located in the Danakil Depression region of Eritrea, East Africa. Colluli is approximately 177km south-east 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 the Eritrean National Mining Company (ENAMCO) and Danakali with each having 50% ownership of the joint venture company, the Colluli Mining Share 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. In addition, the potassium bearing salts are present in solid form (in contrast with production of SOP from brines). Shallow access to salts in solid form provides Colluli with significant mining, logistics and, in turn, capital and operating cost advantages over 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 predictable production rates due to low reliance on ambient conditions. Shallow mineralisation makes the resource amenable to open cut mining: a proven, high productivity mining method. Open cut mining provides higher resource recoveries relative to underground and solution mining methods, is generally safer, and can be more easily expanded. The Colluli resource comprises three potassium bearing salts in solid form: Sylvinite, Carnallitite and Kainitite. These salts are suitable for high yield, low energy production of Sulphate of Potash (SOP), which is a high-quality potash fertiliser carrying a price premium over the more common Muriate of Potash (MOP). SOP is chlorine free and is commonly applied to high value crops such as fruit, vegetables, nuts, and coffee. Economic resources for primary production of SOP are geologically scarce and there are few current primary producers. The JORC-2012 compliant Mineral Resource for Colluli is estimated at 1.289Bt @ 11% K2O for 260Mt of contained 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. Colluli will be developed to its full potential by adopting the principles of risk management, resource utilisation and modularity, using the first module as a platform for growth. The Colluli FEED modules are: • Module I – 472ktpa SOP production • Module II – additional 472ktpa SOP production commencing in year 6 The massive Colluli Ore Reserve has significant capacity to underpin further expansions and support decades of growth beyond Modules I and II. Colluli has significant diversification potential beyond SOP, including the option to produce additional potash and salt products such as MOP, SOP-M, kieserite (MgSO4.H2O), gypsum (CaSO4.2H2O), magnesium chloride (MgCl2), and rock salt (NaCl). The Colluli SOP Mineral Resource also comprises an 85Mt Kieserite (magnesium sulphate) Mineral Resource (ASX announcement 15 August 2016). Kieserite is a suitable fertiliser for magnesium deficient soils. A 347Mt Rock Salt (sodium chloride) Mineral Resource (ASX announcement 23 September 2015) has also been established at Colluli. Unprocessed Rock Salt can be used for de-icing, processed Rock Salt can be used as table salt. Subsequent to year end, on 29 January 2018, the Company announced it had completed the Front-End Engineering Design (FEED) for Colluli. FEED firmly establishes Colluli as the most progressed, economically attractive, and fundable SOP greenfield development project globally. It provides offtakers and funders with a high level of study detail and accuracy and is the final study stage before project execution. The FEED results reaffirm the outstanding project economics of Colluli. Industry leading capital intensity achieved in the DFS (ASX announcement 30 November 2015) further reduced as a result of lower development capital requirements for Module I and increased annual production rate. This, combined with forecast first quartile operating costs, resulted in a Project Net Present Value (NPV10) of US$902M and Internal Rate of Return (IRR) of 29.9%. The Danakali economic outcomes were an NPV10 of US$439M and IRR of 31.3%. Mining Agreement Executed and Mining Licenses Awarded As announced on 1 February 2017, CMSC entered into a mining agreement (Mining Agreement) with the Eritrean Ministry of Energy and Mines (MoEM) and was awarded mining licenses (Mining Licenses) for the exploitation of mineral resources within the Colluli tenements. DANAKALI LIMITED ABN 56 097 904 302 6 DANAKALI LIMITED ABN 56 097 904 302 Page 29 7 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Directors’ Report The Mining Agreement is applicable to the entire 1.3Bt JORC-2012 compliant Mineral Resource and provides exclusive rights to CMSC to apply for mining licenses to exploit the potassium, magnesium, calcium and sodium salts within the resource, as well as bromine. The award of the Mining Licenses follows the completion of a series of pre-requisites including the completion and submission of the DFS, submission of a comprehensive social and environmental impact assessment and associated management plans, a series of pre and post DFS stakeholder engagements with local and regional communities and stakeholders, and the signing of the Mining Agreement. Front End Engineering Design (FEED) As announced on 9 January 2017, internationally recognised and highly reputable construction and engineering company Fluor, was awarded the contract to conduct the FEED and optimisation work for the Colluli project. Global Potash Solutions (GPS), Elemental Engineering (EE) and Knight Piésold joined the FEED team to optimise and refine the DFS engineering, further refine capital and operating cost estimates and prepare the project for construction. GPS oversaw the metallurgical test program, process flowsheet development and initial optimisation work for Colluli throughout the prefeasibility and definitive feasibility study phases of the project and have worked closely with the Fluor process engineering team and EE to finalise the process, select the plant equipment and develop commissioning procedures. FEED was finalised during the 2017 year, with results announced on 29 January 2018. FEED builds upon the disciplined study execution and project de-risking approach adopted by Danakali and its joint venture partner ENAMCO. FEED has established Colluli as the most progressed SOP greenfield development project globally. 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 provides offtakers with additional confidence on project economics and fundability, which will support finalisation of bankable offtake agreements. FEED is the final study stage before execution of the Project (ASX announcement 29 January 2018). Operational Contracts Operating cost estimates for FEED were supported by competitive bids in the key operating contract areas of mining and power generation. The operational contracts help to firm the Project economics as Colluli advances towards construction, and act as key inputs to support the ongoing funding discussions. Mining – Mining contract technical and commercial evaluation complete Following a comprehensive bidding process for the Colluli mining contract, the technical and commercial compliance process is complete. Participating bidders visited Eritrea, the Port of Massawa, and the future Colluli mine site. A comprehensive review of the Colluli mine plan and selected mining method was also undertaken. Conforming bids have been evaluated and incorporated into the FEED results. The technical and commercial compliance was evaluated and confirmed by AMC Consultants and the FEED mining costs were in line with DFS estimates. The mining bids have been shortlisted to two competitive bids from highly qualified bidders. Commercial negotiations are currently in progress. Power – Finalising negotiations with preferred power provider Inglett and Stubbs International has been appointed as the preferred power provider. EPCM – Evaluations underway, preliminary negotiations expected in March 2018 Quarter Towards the end of the year, Danakali developed an Engineering Procurement Construction & Management (EPCM) enquiry document in consultation with project management consultants Turner & Townsend. The EPCM enquiry document was issued to targeted industry participants seeking competitive bids. The EPCM enquiry period has now closed, and submissions are under evaluation. Danakali is seeking to commence negotiations with the preferred EPCM consultants by March 2018, with the aim of confirming appointments within the June 2018 Quarter. MARKETING AND PROJECT FINANCE UPDATE Off-take The Company is progressing its offtake strategy on behalf of CMSC and is working with several offtakers who continue to express a strong interest in securing a future supply of granular and standard SOP product. Negotiations in the December 2017 Quarter were focused primarily on finalising remaining commercial terms contained in the bankable offtake agreements. Norton Rose Fulbright, who has significant experience in developing potash offtake agreements, continue to support negotiations and associated legal drafting. Negotiations are advancing with several parties close to final binding offtake agreements. Project Financing Danakali and CMSC continues to work with its debt advisor, Endeavour Financial, on the funding solution for the project development. commodity potential of the Project. DANAKALI LIMITED Page 30 ABN 56 097 904 302 8 DANAKALI LIMITED ABN 56 097 904 302 9 The Project is fully permitted and ready to advance into engineering and construction upon securing funding. A Social and Environmental Impact Assessment (SEIA) and associated Social and Environmental Management Plans have been completed to ensure consistency with the Equator Principles. Stakeholder engagements have been completed throughout the study phases, and the Project has strong support from local communities. During the year, independent experts visited Colluli on behalf of potential debt providers. The completion of FEED is a key milestone in advancing the debt funding discussions, it provides potential debt providers with a high level of study detail and accuracy; updated financials; and completion of equipment and supplier lists. Other key debt funding milestones include the finalisation of key operational contracts and the bankable offtake agreements. A site visit was conducted by independent experts on behalf of potential debt providers towards the end of 2017. Meetings were held with the Ministry of Energy and Mines, the Ministry of Land, Water and Environment, and elders and administrators of communities close to Colluli. Visits were made to the key project locations including Colluli, Massawa Port, and Anfile Bay. A Colluli Financial Model has been prepared for potential debt providers which incorporates the FEED results. Kieserite resource defined – in excess of 85 million tonnes In August 2016, the Kieserite content in the Colluli Mineral Resource was quantified by AMC Consultants (refer the Resource and Reserve section of this report). Kieserite (magnesium sulphate monohydrate) is a commonly used, chloride free, multi-nutrient fertiliser with limited primary production centres globally. The Resource contains 18Mt of Kieserite in Measured Resource, 66Mt in Indicated Resource, and 3Mt in Inferred Resource. Table 1: Kieserite contained by Resource Classification Measured Contained Indicated Contained Inferred Contained Kieserite (Mt) Mt Kieserite (Mt) Mt Kieserite (Mt) Total1 Contained Kieserite Kieserite (Mt) % 0 16 2 18 160 303 488 951 0 59 7 66 15 15 5 35 0 3 0 3 Total (Mt) 265 398 626 1,289 0 78 9 87 0.03% 20% 1% 7% Sylvinite Carnallitite Kainitite Total Mt 90 80 133 303 1 Weighted Average Kieserite is suitable for magnesium deficient soils which are common in South East Asia, Africa and Eastern South America. Figure: Distribution of Magnesium deficient soils (Source: CRU Consultants) Metallurgical test work indicates that Kieserite will report to the tailings stream of the planned processing plant. Test work was completed at the Saskatchewan Research Council using salts from the Colluli resource. Preliminary liberation testing indicates the Kieserite can be separated from the tailings salt. The large volume of Kieserite adds to the multi-agri Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Directors’ Report The Mining Agreement is applicable to the entire 1.3Bt JORC-2012 compliant Mineral Resource and provides exclusive rights to CMSC to apply for mining licenses to exploit the potassium, magnesium, calcium and sodium salts within the resource, as well as bromine. The award of the Mining Licenses follows the completion of a series of pre-requisites including the completion and submission of the DFS, submission of a comprehensive social and environmental impact assessment and associated management plans, a series of pre and post DFS stakeholder engagements with local and regional communities and stakeholders, and the signing of the Mining Agreement. Front End Engineering Design (FEED) As announced on 9 January 2017, internationally recognised and highly reputable construction and engineering company Fluor, was awarded the contract to conduct the FEED and optimisation work for the Colluli project. Global Potash Solutions (GPS), Elemental Engineering (EE) and Knight Piésold joined the FEED team to optimise and refine the DFS engineering, further refine capital and operating cost estimates and prepare the project for construction. GPS oversaw the metallurgical test program, process flowsheet development and initial optimisation work for Colluli throughout the prefeasibility and definitive feasibility study phases of the project and have worked closely with the Fluor process engineering team and EE to finalise the process, select the plant equipment and develop commissioning procedures. FEED was finalised during the 2017 year, with results announced on 29 January 2018. FEED builds upon the disciplined study execution and project de-risking approach adopted by Danakali and its joint venture partner ENAMCO. FEED has established Colluli as the most progressed SOP greenfield development project globally. 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 provides offtakers with additional confidence on project economics and fundability, which will support finalisation of bankable offtake agreements. FEED is the final study stage before execution of the Project (ASX announcement 29 January 2018). Operational Contracts Operating cost estimates for FEED were supported by competitive bids in the key operating contract areas of mining and power generation. The operational contracts help to firm the Project economics as Colluli advances towards construction, and act as key inputs to support the ongoing funding discussions. Mining – Mining contract technical and commercial evaluation complete Following a comprehensive bidding process for the Colluli mining contract, the technical and commercial compliance process is complete. Participating bidders visited Eritrea, the Port of Massawa, and the future Colluli mine site. A comprehensive review of the Colluli mine plan and selected mining method was also undertaken. Conforming bids have been evaluated and incorporated into the FEED results. The technical and commercial compliance was evaluated and confirmed by AMC Consultants and the FEED mining costs were in line with DFS estimates. The mining bids have been shortlisted to two competitive bids from highly qualified bidders. Commercial negotiations are currently in progress. Power – Finalising negotiations with preferred power provider Inglett and Stubbs International has been appointed as the preferred power provider. EPCM – Evaluations underway, preliminary negotiations expected in March 2018 Quarter Towards the end of the year, Danakali developed an Engineering Procurement Construction & Management (EPCM) enquiry document in consultation with project management consultants Turner & Townsend. The EPCM enquiry document was issued to targeted industry participants seeking competitive bids. The EPCM enquiry period has now closed, and submissions are under evaluation. Danakali is seeking to commence negotiations with the preferred EPCM consultants by March 2018, with the aim of confirming appointments within the June 2018 Quarter. MARKETING AND PROJECT FINANCE UPDATE Off-take The Company is progressing its offtake strategy on behalf of CMSC and is working with several offtakers who continue to express a strong interest in securing a future supply of granular and standard SOP product. Negotiations in the December 2017 Quarter were focused primarily on finalising remaining commercial terms contained in the bankable offtake agreements. Norton Rose Fulbright, who has significant experience in developing potash offtake agreements, continue to support negotiations and associated legal drafting. Negotiations are advancing with several parties close to final binding offtake agreements. Danakali and CMSC continues to work with its debt advisor, Endeavour Financial, on the funding solution for the project Project Financing development. DANAKALI LIMITED ABN 56 097 904 302 The Project is fully permitted and ready to advance into engineering and construction upon securing funding. A Social and Environmental Impact Assessment (SEIA) and associated Social and Environmental Management Plans have been completed to ensure consistency with the Equator Principles. Stakeholder engagements have been completed throughout the study phases, and the Project has strong support from local communities. During the year, independent experts visited Colluli on behalf of potential debt providers. The completion of FEED is a key milestone in advancing the debt funding discussions, it provides potential debt providers with a high level of study detail and accuracy; updated financials; and completion of equipment and supplier lists. Other key debt funding milestones include the finalisation of key operational contracts and the bankable offtake agreements. A site visit was conducted by independent experts on behalf of potential debt providers towards the end of 2017. Meetings were held with the Ministry of Energy and Mines, the Ministry of Land, Water and Environment, and elders and administrators of communities close to Colluli. Visits were made to the key project locations including Colluli, Massawa Port, and Anfile Bay. A Colluli Financial Model has been prepared for potential debt providers which incorporates the FEED results. Kieserite resource defined – in excess of 85 million tonnes In August 2016, the Kieserite content in the Colluli Mineral Resource was quantified by AMC Consultants (refer the Resource and Reserve section of this report). Kieserite (magnesium sulphate monohydrate) is a commonly used, chloride free, multi-nutrient fertiliser with limited primary production centres globally. The Resource contains 18Mt of Kieserite in Measured Resource, 66Mt in Indicated Resource, and 3Mt in Inferred Resource. Table 1: Kieserite contained by Resource Classification Measured Contained Indicated Contained Kieserite (Mt) Mt 160 0 Kieserite (Mt) Mt 15 0 Inferred Contained Kieserite (Mt) 0 16 2 18 303 488 951 59 7 66 15 5 35 3 0 3 Total1 Contained Kieserite (Mt) 0 78 9 87 Total (Mt) 265 398 626 1,289 Kieserite % 0.03% 20% 1% 7% Sylvinite Carnallitite Kainitite Total Mt 90 80 133 303 1 Weighted Average Kieserite is suitable for magnesium deficient soils which are common in South East Asia, Africa and Eastern South America. Figure: Distribution of Magnesium deficient soils (Source: CRU Consultants) Metallurgical test work indicates that Kieserite will report to the tailings stream of the planned processing plant. Test work was completed at the Saskatchewan Research Council using salts from the Colluli resource. Preliminary liberation testing indicates the Kieserite can be separated from the tailings salt. The large volume of Kieserite adds to the multi-agri commodity potential of the Project. 8 DANAKALI LIMITED ABN 56 097 904 302 Page 31 9 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report CORPORATE Board Changes During the year, the Company made the following changes to its Board: ▪ Mr Robert Connochie was appointed as a non-executive director 6 February 2017; ▪ Mr Andre Liebenberg was appointed as a non-executive director 2 October 2017; ▪ Mr Paul Donaldson transitioned from an executive to non-executive director role 21 December 2017; ▪ Mr Anthony Kiernan resigned as a non-executive director 6 February 2017; and ▪ Mr Liam Cornelius resigned as a non-executive director 17 November 2017. Chief Executive Officer Appointment Mr Danny Goeman was appointed as Chief Executive Officer (CEO) of the Company from 21 December 2017, upon transition of Mr Paul Donaldson from Managing Director to a non-executive director role. Mr Goeman is a highly experienced mining industry professional who joined Danakali in 2016 as Head of Marketing and has since developed the offtake strategy and offtake contract frameworks and led the offtake negotiations on behalf of CMSC. Prior to joining Danakali Mr Goeman worked within Rio Tinto, with leading roles in commodity price negotiations, market analysis, market segmentation, and price forecasting. He has experience across multiple commodities in multiple jurisdictions and has significant customer engagement and international experience. Chief Financial Officer Appointment During the year, the board announced the appointment of Mr Stuart Tarrant as the Company’s new Chief Financial Officer effective 12 June 2017. Mr Tarrant, formerly Head of Finance of Danakali, a fellow of the Association of Chartered Certified Accountants (ACCA) and former accounting executive with both BHP and HWE Mining has extensive experience in the mining industry with core skills in financial modelling, financial systems development, procurement, budgeting, and cost analysis and optimisation. Mr Tarrant has established relationships with Endeavour Financial who are progressing the procurement led funding process for the project financing of the Colluli Sulphate of Potash Project and was responsible for the development and integrity of the Colluli financial model underpinning the prefeasibility and definitive feasibility studies. Head of Corporate Development and External Affairs Appointment Mr William Sandover was appointed as Head of Corporate Development and External Affairs on 12 October 2017. Prior to his appointment, Mr Sandover was an executive director at independent capital markets advisory form, Vesparum Capital, and is a former employee of top tier investment banks including Macquarie and UBS. Mr Sandover has extensive experience in the areas of corporate strategy, equity capital markets, advanced financial modelling and project valuation, mergers and acquisitions, and strategic partnerships. During his career, Mr Sandover 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 and mining, financial services, funds management, and sustainable technology sectors, and possesses skills in the sophisticated analysis of markets, sectors, valuations, and funding sources. Company Secretary Change Effective 7 July 2017, Ms Catherine Grant-Edwards and Ms Melissa Chapman were appointed joint company secretaries of Danakali. Mr Christiaan Els resigned as company secretary of the Company on 7 July 2017. Project Manager Appointment During the year, Mr Tony Harrington was appointed as Project Manager for the construction phase of the Colluli Potash Project. Mr. Harrington has over 37 years’ experience in the mining industry delivering EPC, lump sum and EPCM 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 Africa, West Africa, Southern Africa, China, Continental Europe, UK and Australia. Mr. Harrington has extensive experience in construction and assembly of surface infrastructure, materials handling systems, flotation circuits, pumping systems, tanks, cyclones, liberation circuits, thickeners and tailings storage facilities. He brings significant experience and an excellent track record in working in remote locations in developing jurisdictions. Restructure of Board Committees During the year, the board committees were restructured to support the transition of the Company to Project execution. As 31 December 2017, the committees were made up as follows: Annual General Meeting ▪ Remuneration and Nomination Committee - Mr Liebenberg as Chairman, with Mr Fitzgerald and Mr Donaldson as The Company’s annual general meeting was held on 19 May 2017 (AGM). All resolutions put to the meeting were passed. members; ▪ Audit Committee – Mr Fitzgerald as Chairman, with Mr Liebenberg and Mr Cornelius as members (on 21 December 2017, the former Audit and Risk Committee was consolidated to become the Audit Committee); and Technical and Risk Committee - Mr Donaldson as Chairman, with Mr Cornelius and Mr Connochie as members. ▪ Placement On 23 May 2017, Danakali issued 19,920,645 shares (Placement Shares) to institutional and sophisticated investors in the United Kingdom and Australia to raise gross proceeds of A$12.35 million at an issue price of $0.62 cents per share Sustainable Development Framework Danakali and 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. Therefore, the company implemented a Sustainable Development Framework to govern its Corporate Social Responsibilities (CSR) and Sustainability and is aligned with its Corporate Governance Framework. The policies developed using this framework directly supported the management plans associated with the SEIA and SEMP for the project. DANAKALI LIMITED Page 32 ABN 56 097 904 302 10 DANAKALI LIMITED ABN 56 097 904 302 11 Directors’ Report (Placement). Shares The Placement Shares were issued using the Company’s 15% capacity pursuant to Listing Rule 7.1. During the year, the Company issued the following fully paid ordinary shares: 19,920,645 shares at an issue price of $0.62 each (being the Placement Shares); 1,356,365 shares on exercise of unlisted options at $0.35 each 351,000 shares on exercise of unlisted options at $0.405 each 200,000 shares on exercise of unlisted options at $0.408 each 4,600,000 shares on exercise of unlisted options at $0.278 each 775,000 shares on vesting of performance rights (Class 2: 75,000; Class 4: 700,000) At 31 December 2017, there were a total of 251,475,868 fully paid ordinary shares on issue. Options During the year, the Company issued the following unlisted options: 1,440,000 unlisted options exercisable at $0.94 each expiring 19 May 2020 400,000 unlisted options exercisable at $0.96 each expiring 20 June 2019 The following unlisted options were exercised and converted to shares during the year: 1,356,365 unlisted options exercisable at $0.35 each expiring 30 March 2018 351,000 unlisted options exercisable at $0.405 each expiring 13 May 2018 200,000 unlisted options exercisable at $0.408 each expiring 4 November 2018 4,600,000 unlisted options exercisable at $0.278 each expiring 17 November 2017 The following unlisted options were cancelled during the year: 800,000 unlisted options exercisable at $0.408 each expiring 4 November 2018 550,000 unlisted options exercisable at $0.543 each expiring 7 October 2019 There were no unlisted options that expired during the year. dates. Performance Rights During the year, the Company issued the following performance rights: 100,000 Class 5 performance rights 50,000 Class 6 performance rights 50,000 Class 7 performance rights 100,000 Class 8 performance rights The following performance rights vested and were converted to shares during the year: 75,000 Class 2 performance rights vested and converted to shares 700,000 Class 4 performance rights vested and converted to shares The following performance rights were forfeited during the year: 75,000 Class 2 performance rights were forfeited At 31 December 2017, there were a total of 1,408,000 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 50,000 Class 7 performance rights 100,000 Class 8 performance rights ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ At 31 December 2017, there were a total of 19,195,821 unlisted options on issue at various exercise prices and expiry Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report CORPORATE Board Changes Directors’ Report (Placement). The Placement Shares were issued using the Company’s 15% capacity pursuant to Listing Rule 7.1. During the year, the Company made the following changes to its Board: Shares ▪ Mr Robert Connochie was appointed as a non-executive director 6 February 2017; ▪ Mr Andre Liebenberg was appointed as a non-executive director 2 October 2017; ▪ Mr Paul Donaldson transitioned from an executive to non-executive director role 21 December 2017; ▪ Mr Anthony Kiernan resigned as a non-executive director 6 February 2017; and ▪ Mr Liam Cornelius resigned as a non-executive director 17 November 2017. Chief Executive Officer Appointment Mr Danny Goeman was appointed as Chief Executive Officer (CEO) of the Company from 21 December 2017, upon transition of Mr Paul Donaldson from Managing Director to a non-executive director role. Mr Goeman is a highly experienced mining industry professional who joined Danakali in 2016 as Head of Marketing and has since developed the offtake strategy and offtake contract frameworks and led the offtake negotiations on behalf of CMSC. Prior to joining Danakali Mr Goeman worked within Rio Tinto, with leading roles in commodity price negotiations, market analysis, market segmentation, and price forecasting. He has experience across multiple commodities in multiple jurisdictions and has significant customer engagement and international experience. Chief Financial Officer Appointment During the year, the board announced the appointment of Mr Stuart Tarrant as the Company’s new Chief Financial Officer effective 12 June 2017. Mr Tarrant, formerly Head of Finance of Danakali, a fellow of the Association of Chartered Certified Accountants (ACCA) and former accounting executive with both BHP and HWE Mining has extensive experience in the mining industry with core skills in financial modelling, financial systems development, procurement, budgeting, and cost analysis and optimisation. Mr Tarrant has established relationships with Endeavour Financial who are progressing the procurement led funding process for the project financing of the Colluli Sulphate of Potash Project and was responsible for the development and integrity of the Colluli financial model underpinning the prefeasibility and definitive feasibility studies. Head of Corporate Development and External Affairs Appointment Mr William Sandover was appointed as Head of Corporate Development and External Affairs on 12 October 2017. Prior to his appointment, Mr Sandover was an executive director at independent capital markets advisory form, Vesparum Capital, and is a former employee of top tier investment banks including Macquarie and UBS. Mr Sandover has extensive experience in the areas of corporate strategy, equity capital markets, advanced financial modelling and project valuation, mergers and acquisitions, and strategic partnerships. During his career, Mr Sandover 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 and mining, financial services, funds management, and sustainable technology sectors, and possesses skills in the sophisticated analysis of markets, sectors, valuations, and funding sources. Effective 7 July 2017, Ms Catherine Grant-Edwards and Ms Melissa Chapman were appointed joint company secretaries of Danakali. Mr Christiaan Els resigned as company secretary of the Company on 7 July 2017. Company Secretary Change Project Manager Appointment During the year, Mr Tony Harrington was appointed as Project Manager for the construction phase of the Colluli Potash Project. Mr. Harrington has over 37 years’ experience in the mining industry delivering EPC, lump sum and EPCM 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 Africa, West Africa, Southern Africa, China, Continental Europe, UK and Australia. Mr. Harrington has extensive experience in construction and assembly of surface infrastructure, materials handling systems, flotation circuits, pumping systems, tanks, cyclones, liberation circuits, thickeners and tailings storage facilities. He brings significant experience and an excellent track record in working in remote locations in developing jurisdictions. Restructure of Board Committees During the year, the board committees were restructured to support the transition of the Company to Project execution. As 31 December 2017, the committees were made up as follows: ▪ Audit Committee – Mr Fitzgerald as Chairman, with Mr Liebenberg and Mr Cornelius as members (on 21 December 2017, the former Audit and Risk Committee was consolidated to become the Audit Committee); and ▪ Technical and Risk Committee - Mr Donaldson as Chairman, with Mr Cornelius and Mr Connochie as members. On 23 May 2017, Danakali issued 19,920,645 shares (Placement Shares) to institutional and sophisticated investors in the United Kingdom and Australia to raise gross proceeds of A$12.35 million at an issue price of $0.62 cents per share members; Placement DANAKALI LIMITED ABN 56 097 904 302 During the year, the Company issued the following fully paid ordinary shares: ▪ ▪ ▪ ▪ ▪ ▪ 19,920,645 shares at an issue price of $0.62 each (being the Placement Shares); 1,356,365 shares on exercise of unlisted options at $0.35 each 351,000 shares on exercise of unlisted options at $0.405 each 200,000 shares on exercise of unlisted options at $0.408 each 4,600,000 shares on exercise of unlisted options at $0.278 each 775,000 shares on vesting of performance rights (Class 2: 75,000; Class 4: 700,000) At 31 December 2017, there were a total of 251,475,868 fully paid ordinary shares on issue. Options During the year, the Company issued the following unlisted options: ▪ ▪ 1,440,000 unlisted options exercisable at $0.94 each expiring 19 May 2020 400,000 unlisted options exercisable at $0.96 each expiring 20 June 2019 The following unlisted options were exercised and converted to shares during the year: ▪ ▪ ▪ ▪ 1,356,365 unlisted options exercisable at $0.35 each expiring 30 March 2018 351,000 unlisted options exercisable at $0.405 each expiring 13 May 2018 200,000 unlisted options exercisable at $0.408 each expiring 4 November 2018 4,600,000 unlisted options exercisable at $0.278 each expiring 17 November 2017 The following unlisted options were cancelled during the year: ▪ ▪ 800,000 unlisted options exercisable at $0.408 each expiring 4 November 2018 550,000 unlisted options exercisable at $0.543 each expiring 7 October 2019 There were no unlisted options that expired during the year. At 31 December 2017, there were a total of 19,195,821 unlisted options on issue at various exercise prices and expiry dates. Performance Rights During the year, the Company issued the following performance rights: ▪ ▪ ▪ ▪ 100,000 Class 5 performance rights 50,000 Class 6 performance rights 50,000 Class 7 performance rights 100,000 Class 8 performance rights The following performance rights vested and were converted to shares during the year: ▪ ▪ 75,000 Class 2 performance rights vested and converted to shares 700,000 Class 4 performance rights vested and converted to shares The following performance rights were forfeited during the year: ▪ 75,000 Class 2 performance rights were forfeited At 31 December 2017, there were a total of 1,408,000 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 50,000 Class 7 performance rights 100,000 Class 8 performance rights Annual General Meeting ▪ Remuneration and Nomination Committee - Mr Liebenberg as Chairman, with Mr Fitzgerald and Mr Donaldson as The Company’s annual general meeting was held on 19 May 2017 (AGM). All resolutions put to the meeting were passed. Sustainable Development Framework Danakali and 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. Therefore, the company implemented a Sustainable Development Framework to govern its Corporate Social Responsibilities (CSR) and Sustainability and is aligned with its Corporate Governance Framework. The policies developed using this framework directly supported the management plans associated with the SEIA and SEMP for the project. 10 DANAKALI LIMITED ABN 56 097 904 302 Page 33 11 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report The following policies were approved during 2017: • • • • • DNK Human Rights Policy DNK Health and Safety Policy DNK Environmental Policy DNK Community Policy DNK Anti-Corruption Policy This framework and policies were endorsed and adopted by joint venture partner, CMSC. RESERVE AND RESOURCE OVERVIEW Colluli has a JORC-2012 compliant resource of 1.289 billion tonnes as shown in Table 2 as at 31 December 2016. Apart from the inclusion of Kieserite as discussed earlier in this report, there have been no changes to the Mineral Resource since 25 February 2015. The Colluli JORC-2012 compliant mineral resource estimate as at 31 December 2016 is as follows: Table 2: Colluli Mineral Resource Estimate, 25 February 2015, with Kieserite added Rock Unit Sylvinite Upper Carnallitite Lower Carnallitite Kainitite Total Tonnes Mt 265 51 347 626 1,289 Density t/m3 2.2 2.1 2.1 2.1 2.1 K2O Equiv. % 12% 12% 7% 12% 11% Kieserite % 0.03% 3% 22% 1% 7% Within the JORC-2012 compliant, 1.289 billion tonnes, Mineral Resource Estimate, the JORC-2012 compliant Ore Reserve Estimate for Colluli’s potassium sulphate potash fertiliser is approximately 1.1 billion tonnes comprising 287 million tonnes of Proved and 827 million tonnes of Probable Ore Reserve and is shown below in Table 3. The Ore Reserve was updated in line with FEED and this update is included below (ASX announcement 19 February 2018). The Colluli JORC-2012 compliant Ore Reserve estimate by potash mineral as at 29 January 2018 is as follows: Finalise negotiations with preferred power provider Inglett & Stubbs International Table 3: JORC-2012 Colluli Potassium Sulphate Ore Reserve as at 29 January 2018 Proved Probable Total Occurrence Sylvinite (KCl.NaCl) Carnallitite (KCl.MgCl2.H2O) Kainitite (KCl.MgSO4.H2O) Total Mt 77 77 131 285 K2O Equiv % 15.0% Mt 173 K2O Equiv % 12.1% 6.9% 279 7.8% Mt 250 356 K2O Equiv % K2SO4 Equiv % K2SO4 Equiv Mt1 FINANCE REVIEW 13.0% 7.6% 11.8% 11.3% 363 815 11.2% 494 11.4% 10.3% 1,100 10.5% 18.5 205 1 Equivalent K2SO4 (SOP) calculated by multiplying %K2O by 1.85 In addition to potassium sulphate, substantial quantities of rock salt exist. A JORC-2012 compliant Rock Salt Mineral Resource Estimate of over 300 million tonnes has been completed for the area considered for mining in the DFS as shown in Table 4. There have been no changes to the Mineral Resource estimate since 23 September 2015. As at 31 December 2016, the JORC-2012 compliant Rock Salt Mineral Resource is as follows: Table 4: JORC 2012 Colluli Rock Salt Mineral Resource as at 23 September 2015 Classification Tonnes (Mt) Measured Indicated Inferred Total SAFETY 28 180 139 347 NaCl 97.2 96.6 97.2 96.9 K 0.05 0.07 0.05 0.06 Mg 0.05 0.06 0.05 0.05 CaSO4 Insolubles 2.2 2.3 1.8 2.1 0.23 0.24 0.25 0.24 Danakali is committed to ensuring all work activities are carried out safely with all practical measures taken to remove risks to health, safety and welfare of workers, contractors, authorised visitors, and anyone else who may be affected by the Group’s activities. Since the Company commenced exploration in 2010, no injuries have been reported. This safety performance, along with a strong safety culture, bodes well for the company as it moves into the construction and production phases at Colluli. DANAKALI LIMITED Page 34 ABN 56 097 904 302 12 DANAKALI LIMITED ABN 56 097 904 302 13 Directors’ Report ENVIRONMENT The Group is subject to environmental regulation in respect to its exploration and development activities. Danakali aims to ensure the appropriate standard of environmental care is achieved, and in doing so, that it is aware of and is in compliance with relevant environmental legislation. There were no breaches of environmental legislation for the period under review. EVENTS OCCURRING AFTER THE BALANCE DATE On 29 January 2018, the Company announced the results of the FEED phase for the Colluli Potash Project. On 31 January 2018 the Company released a presentation detailing the FEED results. On 19 February, the Company released an updated JORC-2012 Colluli Potassium Sulphate Ore Reserve. Subsequent to balance date up to the reporting date, the Company issued the following fully paid ordinary shares: ▪ ▪ 400,000 shares on exercise of unlisted options at $0.405 each 775,000 shares on exercise of unlisted options at $0.35 each Subsequent to balance date up to the reporting date, the Company issued 25,000 shares on the vesting of performance No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future rights. financial years. ACTIVITIES PLANNED FOR 2018 The following key activities are scheduled over the coming year: • Progress negotiations to final binding offtake agreements Finalise negotiations with shortlisted EPCM contract bidders Finalise negotiations with shortlisted mining contract bidders • Dual listing on the London Stock Exchange Finalise arrangements with commercial lenders The Group recorded a net loss after tax of $6,839,936 for the financial year to 31 December 2017 compared to a loss of $4,925,558 for the financial year to 31 December 2016. As the Group is still in the exploration and development stage, revenue streams mainly relate to interest earned on investing of surplus funds from capital raisings. The net losses after tax reflect the Groups’ exploration and development expenditure on the Colluli Potash Project and ongoing administration costs. The Groups’ net assets increased by 19.2% compared to the net assets as at 31 December 2016, which is consistent with the increase in cash balance due to the successful equity raises during 2017 and the net increase in the investment and loan to the Colluli Mining Share Company. Total consolidated cash on hand at the end of the financial year was $15,559,980 (31 December 2016: $10,904,760). Operating activities utilised $1,279,679 (31 December 2016: $1,670,534 utilised) of net cash flows. Net cash outflow from investing activities of $7,721,815 (31 December 2016: $2,955,454) was primarily in relation to expenditure made to advance the Colluli Project in relation to: Execution of Mining Agreement and award of Mining Licenses for the Colluli project Completion of the FEED Advancing off-take agreement negotiations Advancing financing negotiations Advancing key operational contracts Net cash inflow from financing activities of $13,656,714 (31 December 2016: $12,774,407) was due to the placement of shares and the exercise of options to fund the ongoing exploration and development work to advance the project. 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. • • • • • • • • • Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report The following policies were approved during 2017: • • • • • DNK Human Rights Policy DNK Health and Safety Policy DNK Environmental Policy DNK Community Policy DNK Anti-Corruption Policy This framework and policies were endorsed and adopted by joint venture partner, CMSC. RESERVE AND RESOURCE OVERVIEW Colluli has a JORC-2012 compliant resource of 1.289 billion tonnes as shown in Table 2 as at 31 December 2016. Apart from the inclusion of Kieserite as discussed earlier in this report, there have been no changes to the Mineral Resource since 25 February 2015. The Colluli JORC-2012 compliant mineral resource estimate as at 31 December 2016 is as follows: Table 2: Colluli Mineral Resource Estimate, 25 February 2015, with Kieserite added Rock Unit Sylvinite Upper Carnallitite Lower Carnallitite Kainitite Total Tonnes Mt 265 51 347 626 1,289 Density t/m3 2.2 2.1 2.1 2.1 2.1 K2O Equiv. % 12% 12% 7% 12% 11% Kieserite % 0.03% 3% 22% 1% 7% Within the JORC-2012 compliant, 1.289 billion tonnes, Mineral Resource Estimate, the JORC-2012 compliant Ore Reserve Estimate for Colluli’s potassium sulphate potash fertiliser is approximately 1.1 billion tonnes comprising 287 million tonnes of Proved and 827 million tonnes of Probable Ore Reserve and is shown below in Table 3. The Ore Reserve was updated in line with FEED and this update is included below (ASX announcement 19 February 2018). The Colluli JORC-2012 compliant Ore Reserve estimate by potash mineral as at 29 January 2018 is as follows: Table 3: JORC-2012 Colluli Potassium Sulphate Ore Reserve as at 29 January 2018 Proved Probable Total Occurrence Sylvinite (KCl.NaCl) Carnallitite (KCl.MgCl2.H2O) Kainitite (KCl.MgSO4.H2O) Total Mt 77 77 131 285 K2O Equiv % 15.0% 11.8% 11.3% Mt 173 363 815 1 Equivalent K2SO4 (SOP) calculated by multiplying %K2O by 1.85 6.9% 279 7.8% K2O Equiv % 12.1% Mt 250 356 13.0% 7.6% 11.2% 494 11.4% 10.3% 1,100 10.5% 18.5 205 In addition to potassium sulphate, substantial quantities of rock salt exist. A JORC-2012 compliant Rock Salt Mineral Resource Estimate of over 300 million tonnes has been completed for the area considered for mining in the DFS as shown in Table 4. There have been no changes to the Mineral Resource estimate since 23 September 2015. As at 31 December 2016, the JORC-2012 compliant Rock Salt Mineral Resource is as follows: Table 4: JORC 2012 Colluli Rock Salt Mineral Resource as at 23 September 2015 Classification Tonnes (Mt) CaSO4 Insolubles 28 180 139 347 NaCl 97.2 96.6 97.2 96.9 K 0.05 0.07 0.05 0.06 Mg 0.05 0.06 0.05 0.05 2.2 2.3 1.8 2.1 0.23 0.24 0.25 0.24 Danakali is committed to ensuring all work activities are carried out safely with all practical measures taken to remove risks to health, safety and welfare of workers, contractors, authorised visitors, and anyone else who may be affected by the Since the Company commenced exploration in 2010, no injuries have been reported. This safety performance, along with a strong safety culture, bodes well for the company as it moves into the construction and production phases at Colluli. Measured Indicated Inferred Total SAFETY Group’s activities. DANAKALI LIMITED ABN 56 097 904 302 Directors’ Report ENVIRONMENT The Group is subject to environmental regulation in respect to its exploration and development activities. Danakali aims to ensure the appropriate standard of environmental care is achieved, and in doing so, that it is aware of and is in compliance with relevant environmental legislation. There were no breaches of environmental legislation for the period under review. EVENTS OCCURRING AFTER THE BALANCE DATE On 29 January 2018, the Company announced the results of the FEED phase for the Colluli Potash Project. On 31 January 2018 the Company released a presentation detailing the FEED results. On 19 February, the Company released an updated JORC-2012 Colluli Potassium Sulphate Ore Reserve. Subsequent to balance date up to the reporting date, the Company issued the following fully paid ordinary shares: ▪ ▪ 400,000 shares on exercise of unlisted options at $0.405 each 775,000 shares on exercise of unlisted options at $0.35 each Subsequent to balance date up to the reporting date, the Company issued 25,000 shares on the vesting of performance rights. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. ACTIVITIES PLANNED FOR 2018 The following key activities are scheduled over the coming year: Finalise negotiations with shortlisted EPCM contract bidders Finalise negotiations with shortlisted mining contract bidders Finalise negotiations with preferred power provider Inglett & Stubbs International • Progress negotiations to final binding offtake agreements • • • • Dual listing on the London Stock Exchange • Finalise arrangements with commercial lenders K2O Equiv % K2SO4 Equiv % K2SO4 Equiv Mt1 FINANCE REVIEW The Group recorded a net loss after tax of $6,839,936 for the financial year to 31 December 2017 compared to a loss of $4,925,558 for the financial year to 31 December 2016. As the Group is still in the exploration and development stage, revenue streams mainly relate to interest earned on investing of surplus funds from capital raisings. The net losses after tax reflect the Groups’ exploration and development expenditure on the Colluli Potash Project and ongoing administration costs. The Groups’ net assets increased by 19.2% compared to the net assets as at 31 December 2016, which is consistent with the increase in cash balance due to the successful equity raises during 2017 and the net increase in the investment and loan to the Colluli Mining Share Company. Total consolidated cash on hand at the end of the financial year was $15,559,980 (31 December 2016: $10,904,760). Operating activities utilised $1,279,679 (31 December 2016: $1,670,534 utilised) of net cash flows. Net cash outflow from investing activities of $7,721,815 (31 December 2016: $2,955,454) was primarily in relation to expenditure made to advance the Colluli Project in relation to: • • • • • Execution of Mining Agreement and award of Mining Licenses for the Colluli project Completion of the FEED Advancing off-take agreement negotiations Advancing financing negotiations Advancing key operational contracts Net cash inflow from financing activities of $13,656,714 (31 December 2016: $12,774,407) was due to the placement of shares and the exercise of options to fund the ongoing exploration and development work to advance the project. 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. 12 DANAKALI LIMITED ABN 56 097 904 302 Page 35 13 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report DEVELOPMENTS AND EXPECTED RESULTS Directors’ Report OPTIONS Details of important developments occurring in this financial year have been covered in the Review of Operations section of the Directors’ Report. The Group will continue to invest in the Colluli Potash Project to advance activities in the exploration, evaluation and development of the project with the objective of developing a significant mining operation. Any significant information or data will be released to the market and the shareholders pursuant to the Continuous Disclosure rules as and when they come to hand. At the date of this report, unissued ordinary shares in respect of which options are outstanding are as follows: Balance at the beginning of the year Movements of share options during the financial year ended 31 December 2017: Number of options 25,213,186 DIVIDENDS No dividends were paid or declared during the financial year to 31 December 2017. No recommendation for payment of dividends has been made. DIRECTORS’ MEETINGS The number of meetings of the Company’s Board of Directors held during the financial year ended 31 December 2017 and the number of meetings attended by each Director were: Director S I Cornelius P M Donaldson J D Fitzgerald J Zhang R Connochie A Liebenberg L R Cornelius A W Kiernan Total Directors Meetings 9 9 9 9 9 4 8 - Total Audit and Risk Committee Meetings 2 - 2 - 2 - - - Total Audit and Risk Committee Meetings Attended 2 - 2 - 2 - - - Total Remuneration and Nomination Committee Meetings 2 - 3 - - - 3 1 Total Remuneration and Nomination Committee Meetings Attended 2 - 3 - - - 3 1 Total Directors Meetings Attended 9 9 9 6 9 4 8 - There were no Technical and Risk Committee meetings held during the year. Exercised, exercisable at $0.278 on or before 17 November 2017 Exercised, exercisable at $0.408 on or before 4 November 2018 Exercised, exercisable at $0.405 on or before 13 May 2018 Exercised, exercisable at $0.350 on or before 30 March 2018 Cancelled, exercisable at $0.408, on or before 4 November 2018 Cancelled, exercisable at $0.543, on or before 7 October 2019 Issued, exercisable at $0.940, on or before 19 May 2020 Issued, exercisable at $0.960, on or before 20 June 2019 Share options outstanding at 31 December 2017 Movements of share options during period since the financial year ended 31 December 2017: Exercised, exercisable at $0.405, on or before 13 May 2018 Exercised, exercisable at $0.350, on or before 13 May 2018 Exercised, exercisable at $0.350, on or before 30 March 2018 Total number of share options outstanding as at the date of this report Exercise price Number of options Expiry date 30 March 2018 13 May 2018 13 May 2018 29 May 2018 31 May 2018 23 June 2018 4 November 2018 31 December 2018 8 August 2019 7 October 2019 19 May 2020 20 June 2019 $0.350 $0.350 $0.405 $0.527 $0.550 $0.450 $0.550 $0.550 $0.558 $0.543 $0.940 $0.960 Total number of share options outstanding at the date of this report No option holder has any right under the option to participate in any share issue of the Company or any other entity. No options were granted to key management personnel of the Company since the end of the financial year. PERFORMANCE RIGHTS Details of performance rights over unissued shares in Danakali Ltd as at the date of this report are set out below: (4,600,000) (200,000) (351,000) (1,356,365) (800,000) (550,000) 1,440,000 400,000 19,195,821 (400,000) (100,000) (675,000) 18,020,821 8,981,821 700,000 1,949,000 750,000 600,000 200,000 750,000 1,000,000 1,000,000 250,000 1,440,000 400,000 18,020,821 Number of rights 1,958,000 300,000 (775,000) (75,000) 1,408,000 (25,000) 1,383,000 Balance at the beginning of the year Movements of performance rights during the year Issued Vested and Exercised (a) Forfeited (b) Performance rights outstanding at 31 December 2017 Movements since the financial year ended 31 December 2017: Total number of performance rights as at the date of this report Vested Note: DANAKALI LIMITED Page 36 ABN 56 097 904 302 (a) Performance rights vested upon the grant of the mining lease. (b) Performance rights forfeited upon the resignation of non-executive director, Anthony Kiernan on 6 February 2017. No performance rights holder has any right to participate in any other share issue of the company or any other entity. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS An indemnity agreement has been entered into with each of the directors and company secretary of the Company named earlier in this report. Under the agreements, the Company has agreed to indemnify those officers against any claim or for Indemnification DANAKALI LIMITED ABN 56 097 904 302 14 15 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report DEVELOPMENTS AND EXPECTED RESULTS Details of important developments occurring in this financial year have been covered in the Review of Operations section of the Directors’ Report. The Group will continue to invest in the Colluli Potash Project to advance activities in the exploration, evaluation and development of the project with the objective of developing a significant mining operation. Any significant information or data will be released to the market and the shareholders pursuant to the Continuous Disclosure rules as and when they come to hand. No dividends were paid or declared during the financial year to 31 December 2017. No recommendation for payment of DIVIDENDS dividends has been made. DIRECTORS’ MEETINGS The number of meetings of the Company’s Board of Directors held during the financial year ended 31 December 2017 and the number of meetings attended by each Director were: Total Directors Meetings Total Directors Meetings Attended Total Audit and Risk Remuneration Audit and Risk Committee and Nomination Committee Meetings Meetings Attended Committee Meetings Total Total Total Remuneration and Nomination Committee Meetings Attended Director S I Cornelius P M Donaldson J D Fitzgerald J Zhang R Connochie A Liebenberg L R Cornelius A W Kiernan 9 9 9 9 9 4 8 - 9 9 9 6 9 4 8 - 2 - 2 - 2 - - - 2 - 2 - 2 - - - 2 - 3 - - - 3 1 2 - 3 - - - 3 1 There were no Technical and Risk Committee meetings held during the year. Directors’ Report OPTIONS At the date of this report, unissued ordinary shares in respect of which options are outstanding are as follows: Balance at the beginning of the year Movements of share options during the financial year ended 31 December 2017: Number of options 25,213,186 Exercised, exercisable at $0.278 on or before 17 November 2017 Exercised, exercisable at $0.408 on or before 4 November 2018 Exercised, exercisable at $0.405 on or before 13 May 2018 Exercised, exercisable at $0.350 on or before 30 March 2018 Cancelled, exercisable at $0.408, on or before 4 November 2018 Cancelled, exercisable at $0.543, on or before 7 October 2019 Issued, exercisable at $0.940, on or before 19 May 2020 Issued, exercisable at $0.960, on or before 20 June 2019 Share options outstanding at 31 December 2017 Movements of share options during period since the financial year ended 31 December 2017: Exercised, exercisable at $0.405, on or before 13 May 2018 Exercised, exercisable at $0.350, on or before 13 May 2018 Exercised, exercisable at $0.350, on or before 30 March 2018 Total number of share options outstanding as at the date of this report (4,600,000) (200,000) (351,000) (1,356,365) (800,000) (550,000) 1,440,000 400,000 19,195,821 (400,000) (100,000) (675,000) 18,020,821 Expiry date 30 March 2018 13 May 2018 13 May 2018 29 May 2018 31 May 2018 23 June 2018 4 November 2018 31 December 2018 8 August 2019 7 October 2019 19 May 2020 20 June 2019 Exercise price $0.350 $0.350 $0.405 $0.527 $0.550 $0.450 $0.550 $0.550 $0.558 $0.543 $0.940 $0.960 Total number of share options outstanding at the date of this report Number of options 8,981,821 700,000 1,949,000 750,000 600,000 200,000 750,000 1,000,000 1,000,000 250,000 1,440,000 400,000 18,020,821 No option holder has any right under the option to participate in any share issue of the Company or any other entity. No options were granted to key management personnel of the Company since the end of the financial year. PERFORMANCE RIGHTS Details of performance rights over unissued shares in Danakali Ltd as at the date of this report are set out below: Balance at the beginning of the year Movements of performance rights during the year Issued Vested and Exercised (a) Forfeited (b) Performance rights outstanding at 31 December 2017 Movements since the financial year ended 31 December 2017: Vested Total number of performance rights as at the date of this report Note: Number of rights 1,958,000 300,000 (775,000) (75,000) 1,408,000 (25,000) 1,383,000 (a) Performance rights vested upon the grant of the mining lease. (b) Performance rights forfeited upon the resignation of non-executive director, Anthony Kiernan on 6 February 2017. No performance rights holder has any right to participate in any other share issue of the company or any other entity. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS Indemnification An indemnity agreement has been entered into with each of the directors and company secretary of the Company named earlier in this report. Under the agreements, the Company has agreed to indemnify those officers against any claim or for DANAKALI LIMITED ABN 56 097 904 302 14 DANAKALI LIMITED ABN 56 097 904 302 Page 37 15 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report any expense or cost which may arise as a result of work performed in their respective capacities to the extent permitted by law. There is no monetary limit to the extent of this indemnity. Insurance During the period, the Company paid an insurance premium in respect of Directors’ and Officers’ insurance. The premiums relate to costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome, and other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain a personal advantage. Premiums totalling $35,625 (2016: $8,000) were paid in respect of directors’ and officers’ liability cover. The insurance policies outlined above do not contain details of the premiums paid in respect of individual officers of the Company. INDEMNIFICATION OF AUDITORS To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst and Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst and Young during or since the financial year. AUDIT COMMITTEE The Audit and Risk Committee (consolidated during the year to become the Audit Committee) has a documented charter, approved by the Board. All members are non-executive directors. The committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Group. The members of the Audit Committee are: • Mr John Fitzgerald - Chairman • Mr Seamus Cornelius - Member • Mr Andre Liebenberg - Member The Audit and Risk Committee met twice during the year and the committee members’ attendance record is disclosed in the table of Directors’ meetings in section of the Directors’ Report. NON-AUDIT SERVICES The Board has considered the non-audit services provided during the financial year by the auditor and is satisfied that the provision of those non-audit services is compatible with, and did not compromise, the auditor’s independence requirements of the Corporations Act 2001. All non-audit services provided during the financial year were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Board to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. During the period, Ernst and Young, the Company’s auditors, performed the following services in addition to their statutory duties: • Preparation and lodgement of income tax returns. • Corporate Advisory Services. (a) Audit services Ernst and Young (b) Non-audit services Ernst and Young CORPORATE GOVERNANCE 2017 $ 2016 $ 41,391 41,391 6,000 6,000 33,621 33,621 33,103 33,103 The Company’s corporate governance statement can be found at the following URL: http://www.danakali.com.au/our- business/corporate-governance. Directors’ Report PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings. No proceedings have been brought or intervened in or on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. AUDITOR’S INDEPENDENCE DECLARATION separately in this report. REMUNERATION REPORT (AUDITED) A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out The Remuneration Report outlines the director and executive remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 (Cth) and its Regulations. For the purposes of this report, Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Company. For the purposes of this report, the term ‘Executive’ includes the Chief Executive Officer and senior executives of the Group. The Key Management Personnel of Danakali Ltd and the Group during the financial year to 31 December 2017 were: Non-Executive Chairman Non-Executive Director (Transitioned from Managing Director and Chief Executive Officer to Non- Directors S I Cornelius P M Donaldson J D Fitzgerald J Zhang R Connochie A Liebenberg A W Kiernan L R Cornelius Executive Director 21 December 2017) Non-Executive Director Non-Executive Director Non-Executive Director (Appointed 6 February 2017) Non-Executive Director (Appointed 2 October 2017) Non-Executive Director (Resigned 6 February 2017) Non-Executive Director (Resigned 17 November 2017) Named Executives D Goeman S Tarrant M Chapman C P Els Chief Executive Officer (Appointed 21 December 2017) Chief Financial Officer (Appointed 12 June 2017) C Grant-Edwards Joint Company Secretary (Appointed 7 July 2017) Joint Company Secretary (Appointed 7 July 2017) Chief Financial Officer (Resigned 12 June 2017) and Company Secretary (Resigned 7 July 2017) All of the above persons were key management personnel during the financial year to 31 December 2017 unless otherwise stated. The information provided in this remuneration report has been audited as required by section 308 (3C) of the Corporations Act 2001. Key Elements of Key Management Personnel / Executive Remuneration Strategy The remuneration strategy for Danakali Ltd is designed to provide rewards that achieve the following: attract, retain, motivate and reward executives; reward executives for Company and individual performance against targets set by reference to appropriate benchmarks; link reward with the strategic goals and performance of the Company; provide remuneration that is competitive by market standards; align executive interests with those of the Company’s shareholders; and comply with applicable legal requirements and appropriate standards of governance. • • • • • • The Company is satisfied that its remuneration framework reflects current business needs, shareholder views and contemporary market practice and is appropriate to attract, motivate, retain and reward employees. DANAKALI LIMITED Page 38 ABN 56 097 904 302 16 DANAKALI LIMITED ABN 56 097 904 302 17 Danakali Annual Report 2017DANAKALI LIMITED any expense or cost which may arise as a result of work performed in their respective capacities to the extent permitted by PROCEEDINGS ON BEHALF OF THE COMPANY Directors’ Report No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings. No proceedings have been brought or intervened in or on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out separately in this report. REMUNERATION REPORT (AUDITED) The Remuneration Report outlines the director and executive remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 (Cth) and its Regulations. For the purposes of this report, Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Company. For the purposes of this report, the term ‘Executive’ includes the Chief Executive Officer and senior executives of the Group. The Key Management Personnel of Danakali Ltd and the Group during the financial year to 31 December 2017 were: Directors S I Cornelius P M Donaldson J D Fitzgerald J Zhang R Connochie A Liebenberg A W Kiernan L R Cornelius Named Executives Non-Executive Chairman Non-Executive Director (Transitioned from Managing Director and Chief Executive Officer to Non- Executive Director 21 December 2017) Non-Executive Director Non-Executive Director Non-Executive Director (Appointed 6 February 2017) Non-Executive Director (Appointed 2 October 2017) Non-Executive Director (Resigned 6 February 2017) Non-Executive Director (Resigned 17 November 2017) D Goeman S Tarrant C Grant-Edwards M Chapman C P Els Chief Executive Officer (Appointed 21 December 2017) Chief Financial Officer (Appointed 12 June 2017) Joint Company Secretary (Appointed 7 July 2017) Joint Company Secretary (Appointed 7 July 2017) Chief Financial Officer (Resigned 12 June 2017) and Company Secretary (Resigned 7 July 2017) All of the above persons were key management personnel during the financial year to 31 December 2017 unless otherwise stated. The information provided in this remuneration report has been audited as required by section 308 (3C) of the Corporations Act 2001. Key Elements of Key Management Personnel / Executive Remuneration Strategy The remuneration strategy for Danakali Ltd is designed to provide rewards that achieve the following: • • • • • • attract, retain, motivate and reward executives; reward executives for Company and individual performance against targets set by reference to appropriate benchmarks; link reward with the strategic goals and performance of the Company; provide remuneration that is competitive by market standards; align executive interests with those of the Company’s shareholders; and comply with applicable legal requirements and appropriate standards of governance. The Company is satisfied that its remuneration framework reflects current business needs, shareholder views and contemporary market practice and is appropriate to attract, motivate, retain and reward employees. Directors’ Report law. There is no monetary limit to the extent of this indemnity. Insurance During the period, the Company paid an insurance premium in respect of Directors’ and Officers’ insurance. The premiums relate to costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome, and other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain a personal advantage. Premiums totalling $35,625 (2016: $8,000) were paid in respect of directors’ and officers’ liability cover. The insurance policies outlined above do not contain details of the premiums paid in respect of individual officers of the Company. INDEMNIFICATION OF AUDITORS To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst and Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst and Young during or since the financial year. AUDIT COMMITTEE The Audit and Risk Committee (consolidated during the year to become the Audit Committee) has a documented charter, approved by the Board. All members are non-executive directors. The committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Group. The members of the Audit Committee are: • Mr John Fitzgerald - Chairman • Mr Seamus Cornelius - Member • Mr Andre Liebenberg - Member The Audit and Risk Committee met twice during the year and the committee members’ attendance record is disclosed in the table of Directors’ meetings in section of the Directors’ Report. NON-AUDIT SERVICES of the Corporations Act 2001. The Board has considered the non-audit services provided during the financial year by the auditor and is satisfied that the provision of those non-audit services is compatible with, and did not compromise, the auditor’s independence requirements All non-audit services provided during the financial year were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Board to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. During the period, Ernst and Young, the Company’s auditors, performed the following services in addition to their statutory duties: • Preparation and lodgement of income tax returns. • Corporate Advisory Services. (a) Audit services Ernst and Young (b) Non-audit services Ernst and Young CORPORATE GOVERNANCE business/corporate-governance. The Company’s corporate governance statement can be found at the following URL: http://www.danakali.com.au/our- 2017 $ 2016 $ 41,391 41,391 6,000 6,000 33,621 33,621 33,103 33,103 DANAKALI LIMITED ABN 56 097 904 302 16 DANAKALI LIMITED ABN 56 097 904 302 Page 39 17 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Directors’ Report A summary of the key elements of the current remuneration arrangement is as follows: Remuneration of Non-Executive Directors and Company’s achievement Performance Based Short Term Incentive (STI) • Cash bonus Provide reward to executives for of the Group individual performance targets linked to the strategic objectives. Link to Performance Executive performance and remuneration packages are reviewed at least annually by the Board and Remuneration and Nomination Committee. The review process includes consideration of the individual’s performance in addition to the overall performance of the Group. Award of STI linked directly to achievement of KPI’s and performance targets. Remuneration Component Fixed Remuneration Item Purpose • Base salary • Superannuation contributions • Other benefits Provide competitive remuneration with reference to the role and responsibilities, market and experience, to attract high calibre people. Fees and payments to non-executive Directors reflect the demands which are made on, and the responsibilities of the directors. Non-executive Directors are remunerated with both cash salary and annual option grants to enable the company to preserve cash reserves and to align the Directors interests to those of the shareholders. The Board views this approach to be reasonable relative to the stage of development of its flagship project. Non-executive directors’ fees and payments are reviewed annually by the Board. The Board at times receives advice from independent remuneration consultants to ensure non-executive Directors fees and payments are appropriate and in line with the market. No advice was received during the period. The general principles of non-executive Directors compensation are: Non-executive Directors are paid a base fee ($40,000 per annum) prior to any statutory superannuation payments; Additional fees are paid to non-executive Directors who serve on the board sub-committees; Under the current remuneration structure and subject to shareholder approval, an annual grant of Options is made; Any options granted and approved have a term of at least 3 years and will be struck at significant premium to the 30-day VWAP. This is typically 140% of the 30 day VWAP; The amount of options proposed for each non-executive director is proportional to the equivalent underlying cash fees; and Adjustments may be made in the event that a specific non-executive Director’s contribution warrants an adjustment. Such adjustments are at the recommendation of the board. Chairman’s fees are determined independently to the fees of non-executive directors based on comparative roles in the external market and the specific requirements that the Company has of the Chairman. The Chairman is not present at any of the discussions relating to the determination of his own remuneration. Fees for the Chairman and non-executive directors are determined within an aggregate directors’ fee pool limit of $400,000 as approved by shareholders on 17 November 2014. The disclosed Chairman and non-executive directors’ fees are inclusive of committee fees. Remuneration of Key Management Personnel The Company’s remuneration and reward framework is designed to ensure reward structures are aligned with shareholders’ interest by: being market competitive to attract and retain high calibre individuals; rewarding high individual performance; Company; and ensuring that long term incentives are linked to shareholder value. recognising the contribution of each key management personnel to the contributed growth and success of the To achieve these objectives, the remuneration of key management personnel may comprise a fixed salary component and an ‘at risk’ variable component linked to performance of the individual and the Company as a whole. Fixed remuneration comprises base salary, superannuation contributions and other defined benefits. ‘At risk’ variable remuneration comprises both short term and long-term incentives. The remuneration and reward framework for key management personnel may consist of the following areas: • • • • • • • • • • • i) ii) iii) Fixed Remuneration Variable Short-Term Incentives Variable Long-Term Incentives i) Fixed Remuneration The combination of these would comprise the key management personnel’s total remuneration. The fixed remuneration for each senior executive is influenced by the nature and responsibilities of each role and knowledge, skills and experience required for each position. Fixed remuneration provides a base level of remuneration which is market competitive and comprises a base salary and statutory superannuation. It is structured as a total employment cost package, which may be delivered as a combination of cash and prescribed non-financial benefits at the executives’ discretion. Key management personnel are offered a competitive base salary that comprises the fixed component of pay and rewards. External remuneration consultants may provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. No external advice was taken this period. Base salary for key management personnel is reviewed annually to ensure the executives’ pay is competitive with the market. The pay of key management personnel is also reviewed on promotion. There is no guaranteed pay increase included in any key management personnel’s contract. Performance Based: Long Term Incentive (LTI) • Shares • Options • Performance Rights Plan Provide reward to executives for their continued service and their contribution to achieving corporate objectives set by the Board to ensure the long-term growth of the Company. Award of LTI linked directly to strategic achievement Company objectives. of The Remuneration Report has been set out under the following headings: a) Decision Making Authority for Remuneration b) Principles Used to Determine the Nature and Amount of Remuneration c) Voting and Comments Made at the Last Annual General Meeting d) Details of Remuneration e) Service Agreements f) Details of Share Based Compensation g) Equity Instruments Held by Key Management Personnel h) i) Other Transactions with Key Management Personnel j) Additional Information Loans to Key Management Personnel a) Decision Making Authority for Remuneration The Company’s remuneration policy and strategies are overseen by the Remuneration and Nomination Committee on behalf of the Board. The Remuneration and Nomination Committee is responsible for making recommendations to the Board on all aspects of remuneration arrangements for key management personnel including: • • • • • the Company’s remuneration policy and framework; the remuneration arrangements for the Chief Executive Officer and other senior executives; the terms and conditions of long term incentives and short-term incentives for the Chief Executive Officer and other senior executives; the terms and conditions of employee incentive schemes; and the appropriate remuneration to be paid to non-executive Directors. The Remuneration and Nomination Committee Charter is approved by the Board and is published on the Company’s website. Remuneration levels of the Directors and Key Management Personnel are set by reference to other similar sized mining and exploration companies with similar risk profiles and are set to attract and retain executives capable of managing the Group’s operations. Remuneration levels for the Chief Executive Officer and key management personnel are determined by the Board based upon recommendations from the Remuneration and Nomination Committee. Remuneration of non-executive directors is determined by the Board within the maximum levels approved by the shareholders from time to time. b) Principles Used to Determine the Nature and Amount of Remuneration The Company’s remuneration practices are designed to attract, retain, motivate and reward high calibre people capable of delivering the strategic objectives of the Company. The Company’s Key Management Personnel remuneration framework aligns their remuneration with the achievement of strategic objectives and the creation of value for shareholders and conforms with market practice for delivery of reward. The Remuneration and Nomination Committee ensures that the remuneration of Key Management Personnel is competitive and reasonable, acceptable to shareholders and aligns remuneration with performance. The structure and level of remuneration for key management personnel is conducted annually by the Remuneration and Nomination Committee relative to the Company’s circumstances, size, nature of business and performance. DANAKALI LIMITED Page 40 ABN 56 097 904 302 18 DANAKALI LIMITED ABN 56 097 904 302 19 Danakali Annual Report 2017DANAKALI LIMITED A summary of the key elements of the current remuneration arrangement is as follows: Remuneration of Non-Executive Directors Directors’ Report Fees and payments to non-executive Directors reflect the demands which are made on, and the responsibilities of the directors. Non-executive Directors are remunerated with both cash salary and annual option grants to enable the company to preserve cash reserves and to align the Directors interests to those of the shareholders. The Board views this approach to be reasonable relative to the stage of development of its flagship project. Non-executive directors’ fees and payments are reviewed annually by the Board. The Board at times receives advice from independent remuneration consultants to ensure non-executive Directors fees and payments are appropriate and in line with the market. No advice was received during the period. The general principles of non-executive Directors compensation are: • • • • • • Non-executive Directors are paid a base fee ($40,000 per annum) prior to any statutory superannuation payments; Additional fees are paid to non-executive Directors who serve on the board sub-committees; Under the current remuneration structure and subject to shareholder approval, an annual grant of Options is made; Any options granted and approved have a term of at least 3 years and will be struck at significant premium to the 30-day VWAP. This is typically 140% of the 30 day VWAP; The amount of options proposed for each non-executive director is proportional to the equivalent underlying cash fees; and Adjustments may be made in the event that a specific non-executive Director’s contribution warrants an adjustment. Such adjustments are at the recommendation of the board. Chairman’s fees are determined independently to the fees of non-executive directors based on comparative roles in the external market and the specific requirements that the Company has of the Chairman. • The Chairman is not present at any of the discussions relating to the determination of his own remuneration. Fees for the Chairman and non-executive directors are determined within an aggregate directors’ fee pool limit of $400,000 as approved by shareholders on 17 November 2014. The disclosed Chairman and non-executive directors’ fees are inclusive of committee fees. Remuneration of Key Management Personnel The Company’s remuneration and reward framework is designed to ensure reward structures are aligned with shareholders’ interest by: • • • • being market competitive to attract and retain high calibre individuals; rewarding high individual performance; recognising the contribution of each key management personnel to the contributed growth and success of the Company; and ensuring that long term incentives are linked to shareholder value. To achieve these objectives, the remuneration of key management personnel may comprise a fixed salary component and an ‘at risk’ variable component linked to performance of the individual and the Company as a whole. Fixed remuneration comprises base salary, superannuation contributions and other defined benefits. ‘At risk’ variable remuneration comprises both short term and long-term incentives. The remuneration and reward framework for key management personnel may consist of the following areas: i) ii) iii) Fixed Remuneration Variable Short-Term Incentives Variable Long-Term Incentives The combination of these would comprise the key management personnel’s total remuneration. i) Fixed Remuneration The fixed remuneration for each senior executive is influenced by the nature and responsibilities of each role and knowledge, skills and experience required for each position. Fixed remuneration provides a base level of remuneration which is market competitive and comprises a base salary and statutory superannuation. It is structured as a total employment cost package, which may be delivered as a combination of cash and prescribed non-financial benefits at the executives’ discretion. Key management personnel are offered a competitive base salary that comprises the fixed component of pay and rewards. External remuneration consultants may provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. No external advice was taken this period. Base salary for key management personnel is reviewed annually to ensure the executives’ pay is competitive with the market. The pay of key management personnel is also reviewed on promotion. There is no guaranteed pay increase included in any key management personnel’s contract. Directors’ Report Remuneration Component Fixed Remuneration Item Purpose Link to Performance • Base salary • Superannuation contributions • Other benefits Provide competitive Executive performance and remuneration with reference to remuneration packages are the role and responsibilities, reviewed at least annually by market and experience, to the Board and Remuneration attract high calibre people. and Nomination Committee. The review process includes consideration of the individual’s performance in addition to the overall performance of the Group. Performance Based Short Term Incentive (STI) • Cash bonus Provide reward to executives Award of STI linked directly to for the individual achievement of achievement of KPI’s and and Group performance targets. Performance Based: Long Term Incentive (LTI) • Shares • Options • Performance Rights Plan Provide reward to executives Award of LTI linked directly to for their continued service and achievement of strategic their contribution to achieving Company objectives. performance targets linked to the Company’s strategic objectives. corporate objectives set by the Board to ensure the long-term growth of the Company. The Remuneration Report has been set out under the following headings: a) Decision Making Authority for Remuneration b) Principles Used to Determine the Nature and Amount of Remuneration c) Voting and Comments Made at the Last Annual General Meeting d) Details of Remuneration e) Service Agreements f) Details of Share Based Compensation g) Equity Instruments Held by Key Management Personnel h) Loans to Key Management Personnel i) Other Transactions with Key Management Personnel j) Additional Information a) Decision Making Authority for Remuneration The Company’s remuneration policy and strategies are overseen by the Remuneration and Nomination Committee on behalf of the Board. The Remuneration and Nomination Committee is responsible for making recommendations to the Board on all aspects of remuneration arrangements for key management personnel including: the Company’s remuneration policy and framework; the remuneration arrangements for the Chief Executive Officer and other senior executives; the terms and conditions of long term incentives and short-term incentives for the Chief Executive Officer and other senior executives; the terms and conditions of employee incentive schemes; and the appropriate remuneration to be paid to non-executive Directors. • • • • • The Remuneration and Nomination Committee Charter is approved by the Board and is published on the Company’s website. Remuneration levels of the Directors and Key Management Personnel are set by reference to other similar sized mining and exploration companies with similar risk profiles and are set to attract and retain executives capable of managing the Group’s operations. Remuneration levels for the Chief Executive Officer and key management personnel are determined by the Board based upon recommendations from the Remuneration and Nomination Committee. Remuneration of non-executive directors is determined by the Board within the maximum levels approved by the shareholders from time to time. b) Principles Used to Determine the Nature and Amount of Remuneration The Company’s remuneration practices are designed to attract, retain, motivate and reward high calibre people capable of delivering the strategic objectives of the Company. The Company’s Key Management Personnel remuneration framework aligns their remuneration with the achievement of strategic objectives and the creation of value for shareholders and conforms with market practice for delivery of reward. The Remuneration and Nomination Committee ensures that the remuneration of Key Management Personnel is competitive and reasonable, acceptable to shareholders and aligns remuneration with performance. The structure and level of remuneration for key management personnel is conducted annually by the Remuneration and Nomination Committee relative to the Company’s circumstances, size, nature of business and performance. DANAKALI LIMITED ABN 56 097 904 302 18 DANAKALI LIMITED ABN 56 097 904 302 Page 41 19 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report ii) Variable Remuneration – Short Term Incentives (STI) The Danakali Ltd Short-Term Incentive Scheme applies to executives in the Company and is designed to link any STI payment with the achievement by each Key Management Personnel of specified key performance indicators (KPI’s) which are in turn linked to the Company’s strategic objectives and targets. A maximum of up to 50% of the fixed remuneration can be payable under the STI and the Board has the discretion to reduce or suspend any bonus payments where Company circumstances render it appropriate. Given the current phase of Danakali’s life cycle, the Board determined that the LTI is a more appropriate incentive measure to align KMP performance with company objectives. In reference to this, no KPI’s were set and no STI’s granted in the current period. iii) Variable Remuneration – Long Term Incentives (LTI) Long term incentives have been provided to directors and employees through the issue of options and performance rights. The Danakali Ltd Performance Rights Plan (PRP) was re-approved by shareholders at the general meeting held 17 November 2014. The PRP provides incentives, which promote the long-term performance and growth of the Company. The performance conditions were chosen to strengthen the links between the Company objectives and the role performed by its Directors and employees. The PRP is designed to increase the range of potential incentives available to Directors and employees and to recognise their contribution to the Company’s success. Under the PRP, performance rights are granted over ordinary shares in the Company on an annual basis. The vesting conditions in respect of performance rights issued to KMP under the PRP that are outstanding at 31 December 2017 are as follows: Class 4: • 800,000 upon commencement of construction of the production facility. 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: • 10,000 upon market announcement of a binding offtake agreement to support debt funding of the project; • 10,000 upon market announcement on completion of FEED; • 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 form a strategic investor. Details of options issued to key management personnel can be found in section f(i) below. Details of performance rights issued to key management personnel can be found in section f(ii) below. Further performance rights details can be found in Note 22. All performance rights will automatically expire on the earlier of the expiry date or the date the holder ceases to be an employee of the Company, unless the Board determines to vary the expiry date in the event the holder ceased to be an employee because of retirement, redundancy, death or total and permanent disability and such other cases the Board may determine. Performance rights granted under the PRP will carry no dividend or voting rights. When the vesting conditions have been met, each performance right will be converted into one ordinary share. c) Voting and Comments Made at the Last Annual General Meeting The Company received approximately 95% of ‘yes’ votes on its Remuneration Report for the financial year ending 31 December 2016 and received no specific feedback on its Remuneration Report at the Annual General Meeting or throughout the period. d) Details of Remuneration Details of the remuneration of the directors and other key management personnel of Danakali Ltd are set out in the following table. DANAKALI LIMITED Page 42 ABN 56 097 904 302 20 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report ii) Variable Remuneration – Short Term Incentives (STI) The Danakali Ltd Short-Term Incentive Scheme applies to executives in the Company and is designed to link any STI payment with the achievement by each Key Management Personnel of specified key performance indicators (KPI’s) which are in turn linked to the Company’s strategic objectives and targets. A maximum of up to 50% of the fixed remuneration can be payable under the STI and the Board has the discretion to reduce or suspend any bonus payments where Company circumstances render it appropriate. Given the current phase of Danakali’s life cycle, the Board determined that the LTI is a more appropriate incentive measure to align KMP performance with company objectives. In reference to this, no KPI’s were set and no STI’s granted in the current period. iii) Variable Remuneration – Long Term Incentives (LTI) Long term incentives have been provided to directors and employees through the issue of options and performance rights. The Danakali Ltd Performance Rights Plan (PRP) was re-approved by shareholders at the general meeting held 17 November 2014. The PRP provides incentives, which promote the long-term performance and growth of the Company. The performance conditions were chosen to strengthen the links between the Company objectives and the role performed by its Directors and employees. The PRP is designed to increase the range of potential incentives available to Directors and employees and to recognise their contribution to the Company’s success. Under the PRP, performance rights are granted over ordinary shares in the Company on an annual basis. The vesting conditions in respect of performance rights issued to KMP under the PRP that are outstanding at 31 December 2017 are as follows: • 800,000 upon commencement of construction of the production facility. • 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. • 10,000 upon market announcement of a binding offtake agreement to support debt funding of the project; • 10,000 upon market announcement on completion of FEED; • 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 form a strategic investor. Details of options issued to key management personnel can be found in section f(i) below. Details of performance rights issued to key management personnel can be found in section f(ii) below. Further performance rights details can be found in Note 22. All performance rights will automatically expire on the earlier of the expiry date or the date the holder ceases to be an employee of the Company, unless the Board determines to vary the expiry date in the event the holder ceased to be an employee because of retirement, redundancy, death or total and permanent disability and such other cases the Board may determine. Performance rights granted under the PRP will carry no dividend or voting rights. When the vesting conditions have been met, each performance right will be converted into one ordinary share. c) Voting and Comments Made at the Last Annual General Meeting The Company received approximately 95% of ‘yes’ votes on its Remuneration Report for the financial year ending 31 December 2016 and received no specific feedback on its Remuneration Report at the Annual General Meeting or Class 4: Class 6: Class 7: Details of the remuneration of the directors and other key management personnel of Danakali Ltd are set out in the following throughout the period. d) Details of Remuneration table. DANAKALI LIMITED ABN 56 097 904 302 % $ e c n a m r o f r e P s t h g R i $ s n o i t p O $ s e r a h S $ e c i v r e S g n o L ) l ( e v a e L - r e p u S n o i t a u n n a l a u n n A ) k ( e v a e L y r a l a S s e e F d n a $ $ $ $ s n o i t p O e g a t n e c r e p l a t o t f o n o i t a r e n u m e r l a t o T ) j ( I T L s t n e m y a P d e s a B e r a h S m r e T g n o L s t i f e n e B - t s o P t n e m y o p m E l m r e T - t r o h S o t r a e Y l a i c n a n F i 7 1 0 2 r e b m e c e D 1 3 : 7 1 0 2 r e b m e c e D 1 3 o t r a e y l a i c n a n i f e h t r o f y n a p m o C e h t f o l e n n o s r e p t n e m e g a n a m y e K t r o p e R ’ s r o t c e r i D - 1 4 5 4 3 3 2 7 - 4 4 - 3 5 2 - - - 5 1 ) 2 8 ( 0 8 6 , 1 6 9 4 , 9 4 1 8 5 2 , 2 1 1 8 5 2 , 1 6 8 6 1 , 1 4 1 2 2 6 , 3 1 4 7 2 , 8 8 5 0 7 , 0 1 - - - - - - 0 5 0 , 7 0 0 5 , 4 - 4 3 7 , 0 6 2 1 6 , 0 5 5 4 2 , 0 2 4 2 2 , 1 0 1 - 5 6 4 , 8 3 - 5 9 2 , 0 7 7 0 0 8 , 4 9 3 5 4 2 , 0 2 0 0 1 , 1 0 4 3 3 4 , 8 0 2 0 0 0 , 9 0 0 0 , 9 7 0 1 , 1 9 - - - - 3 1 5 , 9 4 7 9 3 , 7 6 0 , 2 3 6 8 , 5 5 4 - - - 0 3 3 , 9 9 ) 1 9 6 , 8 7 ( 4 6 1 , 2 1 3 - - - - - - - - - - - - - - - - - - - - - - - - 6 4 1 8 4 3 , 5 - - - 8 3 5 0 1 7 , 3 - - - - - - - - 4 3 5 , 1 2 6 7 , 8 8 8 9 2 , 6 5 3 1 0 , 1 4 4 4 9 , 9 3 2 2 6 , 3 1 9 4 0 , 9 3 7 6 6 , 5 ) 7 1 9 , 5 2 ( 2 5 4 , 9 2 5 3 2 , 4 1 8 4 , 7 4 3 - - 3 3 5 , 6 7 1 4 , 2 - - 5 1 7 , 2 1 3 2 0 , 4 2 ) 3 0 4 , 5 ( ) 0 7 3 , 2 2 ( 7 3 6 , 3 1 9 6 5 , 9 8 2 4 9 , 9 6 3 3 , 8 1 - - - 3 1 5 , 2 3 0 0 0 , 9 0 0 0 , 9 8 7 8 , 2 5 2 6 4 8 , 3 3 1 4 6 5 , 1 6 1 8 5 6 , 9 9 1 , 1 s r o t c e r i D e v i t u c e x E - n o N ) a ( l n o s d a n o D P s u i l e n r o C S ) b ( ) c ( i e h c o n n o C R g r e b n e b e L A i ) d ( s u i l e n r o C L ) e ( n a n r e K A i l d a r e g z t i F J g n a h Z J t n e m e g a n a M y e K r e h t O s r o t c e r i D e v i t u c e x E ) a ( l n o s d a n o D P ) h ( s d r a w d E - t n a r G C ) h ( n a m p a h C M ) f ( n a m e o G D ) g ( t n a r r a T S l e n n o s r e P ) i ( l s E C L A T O T : e t o N i d a p e r e w 6 3 5 , 5 0 1 $ f o n o i t i s n a r t f o e t a d t a l n o s d a n o D r M o t i g n w o s t n e m e l t i t n e e v a e l l a u n n A . 7 1 0 2 r e b m e c e D 1 2 r o t c e r i D e v i t u c e x E - n o N o t r o t c e r i D e v i t u c e x E f o l e o r m o r f d e n o i t i s n a r t l n o s d a n o D r M ) a ( . 8 1 0 2 y r a u n a J n i t u o , s t h g i r e c n a m r o f r e p 1 l s s a C 0 0 0 , 0 5 i d e n a t e r s u i l e n r o C r M n o i t a n g s e r i t A . 0 7 . 0 $ s a w n o i t a n g s e r i f o e t a d e h t n o e c i r p e r a h s e h T . 7 1 0 2 r e b m e v o N 7 1 r o t c e r i D e v i t u c e x E - n o N s a d e n g s e r i s u i l e n r o C L . 7 1 0 2 y r a u r b e F 6 r o t c e r i D e v i t u c e x E - n o N d e t i n o p p a i s a w e h c o n n o C . 7 1 0 2 r e b o t c O 2 r o t c e r i D e v i t u c e x E - n o N d e t i n o p p a s a w g r e b n e b e L i r M r M r M ) b ( ) c ( ) d ( 0 3 g n i r i p x e 5 3 . 0 $ t a l i e b a s c r e x e n o i t p o d e t s i l n u 0 0 0 , 0 0 5 d n a 0 2 0 2 y a M 9 1 g n i r i p x e 4 9 . 0 $ t a l i e b a s c r e x e s n o i t p o d e t s i l n u 0 0 0 , 0 9 1 , 8 1 0 2 y a M 3 1 g n i r i p x e 5 0 4 0 $ . t a l i e b a s c r e x e s n o i t p o d e t s i l n u 0 0 0 , 0 0 4 0 0 0 , 0 0 4 , s t h g i r e c n a m r o f r e p 2 s s a C 0 0 0 , 5 7 d e n a t e r n a n r e K i i l r M n o i t a n g s e r i t A . 5 4 7 . 0 $ s a w n o i t a n g s e r i f o e t a d e h t n o e c i r p e r a h s e h T . 7 1 0 2 y r a u r b e F 6 r o t c e r i D e v i t u c e x E - n o N s a d e n g s e r n a n r e K i i r M ) e ( . n o i t a n g s e r i f o e t a d e h t t a d e s i t r o m a y l l u f n e e b d a h s t h g i r e c n a m r o f r e p d n a s n o i t p o ’ s s u i l e n r o C r M f o e u a v l e h T . 8 1 0 2 h c r a M 1 2 7 1 g n i r i p x e 8 7 2 . 0 $ t a l i e b a s c r e x e n o i t p o d e t s i l n u 0 0 0 , 0 0 3 , 1 d n a 8 1 0 2 y a M 3 1 g n i r i p x e 5 3 . 0 $ t a l i e b a s c r e x e s n o i t p o d e t s i l n u 0 0 0 , 0 5 , 8 1 0 2 y a M 3 1 g n i r i p x e 5 0 4 . 0 $ t a l i e b a s c r e x e s n o i t p o d e t s i l n u . n o i t a n g s e r i f o e t a d e h t t a d e s i t r o m a y l l u f n e e b d a h s t h g i r e c n a m r o f r e p d n a s n o i t p o ’ s n a n r e K i r M f o l e u a v e h T . 7 1 0 2 r e b m e v o N . 7 1 0 2 r e b m e c e D 1 2 r e c i f f O e v i t u c e x E f i e h C d e t i n o p p a s a w n a m e o G r M . 7 1 0 2 e n u J 2 1 r e c i f f O l i a c n a n F i f i e h C d e t i n o p p a s a w t n a r r a T r M ) f ( ) g ( D E T M L I I I L A K A N A D 2 0 3 4 0 9 7 9 0 6 5 N B A 20 Page 43 Danakali Annual Report 2017DANAKALI LIMITED e b l y n o l l i w s t h g i r e c n a m r o f r e p f o s e u a v l d e d r o c e r e h T . e c i r p i e s c r e x e n o i t p o e h t s d e e c x e e c i r p e r a h s ’ s y n a p m o C e h t t n e v e e h t n i ’ s P M K e h t y b d e s i l a e r e b l y n o l l i w s n o i t p o f o s e u a v l d e d r o c e r e h T l . s r e d o h e r a h s r o f e u a v l r e h t r u f e t a e r c o t d e t c e p x e s i i h c h w , s e v i t c e b o j d e t a t s s t i i s e v e h c a y n a p m o C e h t t n e v e e h t n i ’ s P M K e h t y b d e s i l a e r . r a e y e h t g n i r u d s t n e m e v o m o t s r e f e r l e b a t i s h t n i d e d u c n l i t n u o m a e v a e l i e c v r e s g n o L . r a e y e h t g n i r u d s t n e m e v o m o t s r e f e r e b a l t i s h t n i d e d u c n l i t n u o m a e v a e l l a u n n A . d e l l e c n a c e r e w n o i t a n g s e r i t a l s E r M y b l d e h s n o i t p o e h T . 7 1 0 2 y u J l 7 y r a t e r c e S y n a p m o C d n a 7 1 0 2 e n u J 2 1 n o r e c i f f O l i a c n a n F i f i e h C s a d e n g s e r i l s E r M i . s s a b h t g n e l ) i ( ) j ( ) k ( ) l ( - s m r a n a n o e r a x i r t a l l e B y b d e g r a h c s e e F . x i r t a l l e B h g u o r h t i d e d v o r p e r a i s e c v r e s l a i r a t e r c e s y n a p m o C . 7 1 0 2 l y u J 7 y r a t e r c e S y n a p m o C t n o i j i d e t n o p p a e r e w n a m p a h C s M d n a s d r a w d E - t n a r G s M ) h ( t r o p e R ’ s r o t c e r i D Page 44 : 6 1 0 2 r e b m e c e D 1 3 o t r a e y l a i c n a n i f e h t r o f y n a p m o C e h t f o l e n n o s r e p t n e m e g a n a m y e K 0 7 2 3 5 4 0 4 - 8 - - 3 2 3 2 2 2 6 , 0 3 2 9 3 3 , 3 3 1 1 6 9 , 4 9 7 8 5 , 5 0 1 6 5 5 , 1 2 - - - 4 1 3 , 6 0 1 8 , 7 2 - 0 2 3 , 2 4 0 2 3 , 2 4 0 2 3 , 2 4 8 1 0 , 2 6 1 7 0 1 , 4 9 7 0 4 7 , 1 3 3 0 0 9 , 2 5 0 5 2 , 5 4 1 8 , 8 6 9 3 6 , 8 4 4 - - - - - 1 8 8 , 2 2 1 5 7 8 , 2 0 9 , 1 4 6 8 , 5 6 3 9 5 7 , 4 6 4 - - - - - - - - - - s n o i t p O e g a t n e c r e p l a t o t f o n o i t a r e n u m e r % $ l a t o T ) d ( I T L s t n e m y a P d e s a B e r a h S e c n a m r o f r e P s t h g R i $ s n o i t p O $ s e r a h S $ - - - - - - 4 8 4 , 5 9 1 0 , 4 9 8 4 , 5 - $ - - - - - 4 0 6 , 8 6 5 2 7 , 7 5 8 0 3 , 2 4 8 7 7 , 7 5 6 5 5 , 1 2 $ m r e T g n o L s t i f e n e B - t s o P t n e m y o p m E l m r e T - t r o h S e c i v r e S g n o L ) f ( e v a e L - r e p u S n o i t a u n n a l a u n n A ) e ( e v a e L y r a l a S s e e F d n a 8 8 3 , 6 0 5 2 , 3 3 9 2 8 , 9 1 0 0 0 , 0 5 3 3 0 4 , 5 9 9 1 , 6 2 6 5 1 , 9 1 - - - - 1 9 7 , 1 1 1 4 4 , 4 7 - - 5 8 9 , 8 3 0 5 2 , 5 4 1 8 , 8 6 0 0 0 , 5 7 2 5 3 0 , 7 4 9 o t r a e Y l a i c n a n F i 6 1 0 2 r e b m e c e D 1 3 s r o t c e r i D e v i t u c e x E - n o N l e n n o s r e P t n e m e g a n a M s r o t c e r i D e v i t u c e x E l n o s d a n o D P y e K r e h t O ) b ( t s u J D A ) c ( t n a r r a T S l s E C L A T O T : e t o N s u i l e n r o C S s u i l e n r o C L l d a r e g z t i F J ) a ( g n a h Z J n a n r e K A i . e v a e l i e c v r e s g n o l d n a e v a e l l a u n n a f o i n o s u c n l i e h t o t e u d r a e y e h t g n i r u d d e g n a h c s a h l e b a t i s h T e b l y n o l l i w s t h g i r e c n a m r o f r e p f o s e u a v l d e d r o c e r e h T . e c i r p e s i c r e x e n o i t p o e h t s d e e c x e e c i r p e r a h s ’ s y n a p m o C e h t t n e v e e h t n i ’ s P M K e h t y b d e s i l a e r e b l y n o l l i w s n o i t p o f o s e u a v l d e d r o c e r e h T . 6 1 0 2 l i r p A 2 2 d e d n e t n e m e g n a r r a e h T i . s s a b h t g n e l - s m r a n a n o e r a s r a M y b d e g r a h c s e e F . d t L y t P g n i t l u s n o C s r a M h g u o r h t i s e c v r e s i s h i d e d v o r p t n a r r a T r M l . s r e d o h e r a h s r o f e u a v l r e h t r u f e t a e r c o t d e t c e p x e s i i h c h w , s e v i t c e b o j d e t a t s s t i i s e v e h c a y n a p m o C e h t t n e v e e h t n i ’ s P M K e h t y b d e s i l a e r . r a e y e h t g n i r u d s t n e m e v o m o t s r e f e r l e b a t i s h t n i d e d u c n l i t n u o m a e v a e l i e c v r e s g n o L . r a e y e h t g n i r u d s t n e m e v o m o t s r e f e r e b a l t i s h t n i d e d u c n l i t n u o m a e v a e l l a u n n A . 6 1 0 2 e n u J 7 1 n o r o t c e r i d e v i t u c e x e - n o n a d e t i n o p p a s a w g n a h Z s M . 6 1 0 2 y r a u r b e F 1 n o y r a t e r c e s y n a p m o c s a d e n g s e r i t s u J s M ) a ( ) b ( ) c ( ) d ( ) e ( ) f ( 2 2 Directors’ Report The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Financial Year to 31 December 2017 Fixed Remuneration At risk – STI At risk - LTI Non-Executive Directors Name S Cornelius P Donaldson J Fitzgerald J Zhang R Connochie A Liebenberg L Cornelius A Kiernan Executive Directors P Donaldson Other Key Management Personnel D Goeman S Tarrant C Grant-Edwards M Chapman C Els e) Service Agreements D Goeman, Chief Executive Officer: • Appointed 21 December 2017 • No set term of agreement. 59% 100% 55% 67% 28% 100% 48% 58% 54% 76% 76% 100% 100% 182% - - - - - - - - - - - - - - 41% - 45% 33% 72% - 52% 42% 46% 24% 24% - - (82%) Remuneration and other terms of employment for the executive managers are formalised in employment contracts. Other major provisions of the agreements relating to remuneration are set out below. • Base salary of $330,000 per annum plus statutory superannuation • Notice period of six months, required to be given by either party for termination. S Tarrant, Chief Financial Officer • Appointed 12 June 2017 • Agreement expiry date 31 August 2018 • Base salary of $240,000 per annum plus statutory superannuation • Notice period of three months, required to be given by either party for termination. C Grant-Edwards and M Chapman, Joint Company Secretary Ms Melissa Chapman and Ms Catherine Grant-Edwards were appointed as Joint Company Secretary on 22 November 2017. Ms Chapman and Ms Grant-Edwards are directors of Bellatrix Corporate Pty Ltd (Bellatrix), a company that provides company secretarial and accounting services to a number of ASX listed company. Pursuant to an agreement, Bellatrix is entitled to receive $36,000 per annum for the provision of company secretarial services to the Company. In addition, Bellatrix also provides accounting services to the Company for an additional fee on an arms-length basis. f) Details of Share Based Compensation (i) Options set out in the following table: The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are as Vesting and first exercise date 19 May 2017 (a) Expiry date Number of Exercise Options price 19 May 2020 1,440,000 $0.940 $0.202 Value per option at grant date Vested and exercisable % 100% 1,440,000 Grant date 19 May 2017 Total Options Note: to the options. out in the following table. DANAKALI LIMITED ABN 56 097 904 302 2 0 3 4 0 9 7 9 0 6 5 N B A (a) The options were issued in recognition of skill and expertise brought to the Company and therefore, there were no conditions attached Details of options over ordinary shares in the Company, provided as remuneration to key management personnel are set Options will automatically expire on the earlier of the expiry date or the date the holder ceases to be an employee of the Company, unless the Board determines to vary the expiry date in the event the holder ceased to be an employee because of retirement, redundancy, death or total and permanent disability and such other cases the Board may determine. 23 D E T M L I I I L A K A N A D Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Name Non-Executive Directors S Cornelius P Donaldson J Fitzgerald J Zhang R Connochie A Liebenberg L Cornelius A Kiernan Executive Directors P Donaldson Other Key Management Personnel D Goeman S Tarrant C Grant-Edwards M Chapman C Els e) Service Agreements Financial Year to 31 December 2017 Fixed Remuneration At risk – STI At risk - LTI 59% 100% 55% 67% 28% 100% 48% 58% 54% 76% 76% 100% 100% 182% - - - - - - - - - - - - - - 41% - 45% 33% 72% - 52% 42% 46% 24% 24% - - (82%) Remuneration and other terms of employment for the executive managers are formalised in employment contracts. Other major provisions of the agreements relating to remuneration are set out below. D Goeman, Chief Executive Officer: • Appointed 21 December 2017 • No set term of agreement. • Base salary of $330,000 per annum plus statutory superannuation • Notice period of six months, required to be given by either party for termination. S Tarrant, Chief Financial Officer • Appointed 12 June 2017 • Agreement expiry date 31 August 2018 • Base salary of $240,000 per annum plus statutory superannuation • Notice period of three months, required to be given by either party for termination. C Grant-Edwards and M Chapman, Joint Company Secretary Ms Melissa Chapman and Ms Catherine Grant-Edwards were appointed as Joint Company Secretary on 22 November 2017. Ms Chapman and Ms Grant-Edwards are directors of Bellatrix Corporate Pty Ltd (Bellatrix), a company that provides company secretarial and accounting services to a number of ASX listed company. Pursuant to an agreement, Bellatrix is entitled to receive $36,000 per annum for the provision of company secretarial services to the Company. In addition, Bellatrix also provides accounting services to the Company for an additional fee on an arms-length basis. f) Details of Share Based Compensation (i) Options The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are as set out in the following table: Grant date 19 May 2017 Total Options Vesting and first exercise date 19 May 2017 (a) Expiry date 19 May 2020 Number of Options 1,440,000 1,440,000 Exercise price $0.940 Value per option at grant date $0.202 Vested and exercisable % 100% Note: (a) The options were issued in recognition of skill and expertise brought to the Company and therefore, there were no conditions attached to the options. Details of options over ordinary shares in the Company, provided as remuneration to key management personnel are set out in the following table. Options will automatically expire on the earlier of the expiry date or the date the holder ceases to be an employee of the Company, unless the Board determines to vary the expiry date in the event the holder ceased to be an employee because of retirement, redundancy, death or total and permanent disability and such other cases the Board may determine. DANAKALI LIMITED ABN 56 097 904 302 Page 45 23 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Directors’ Report When exercisable, each option is convertible into one ordinary share. Further information on the options is set out in note 22. Year in which options vest 2017 2017 2017 2017 2017 2017 2017 2017 2017 Year of grant 2015 2015 2015 2017 2017 2017 2017 2017 2017 Number of options granted 200,000 300,000 300,000 300,000 100,000 250,000 190,000 100,000 500,000 2,240,000 Value of options at grant date $25,270 $37,800 $37,800 $60,734 $20,245 $50,612 $38,465 $20,245 $101,224 Number of options vested during the period - - - 300,000 100,000 250,000 190,000 100,000 500,000 1,440,000 Vested and exercisable - - - 100% 100% 100% 100% 100% 100% Number of options forfeited during the period 200,000 300,000 300,000 - - - - - - 800,000 Name C P Els C P Els C P Els S I Cornelius P M Donaldson J D Fitzgerald L Cornelius Z Jing R Connochie Total Options 3,000,000 options held by key management personnel were exercised during the year, raising $898,100 for working capital purposes. Name S I Cornelius L Cornelius P M Donaldson C P Els Total Options Number of options exercised 1,300,000 1,000,000 200,000 500,000 3,000,000 Amount Paid $361,400 $278,000 $55,600 $203,100 $898,100 Fair Value $942,550 $700,000 $140,000 $399,500 $2,182,050 (ii) Performance Rights During the financial year, the following performance rights were granted to key management personnel. Name Class Number Date of Issue S Tarrant S Tarrant 20 June 2017 15 November 2017 Class 6 Class 7 50,000 50,000 Fair Value per Right at 31 December 2017 $0.715 $0.715 Expiry Date None None The terms and conditions of each grant of Performance Rights to key personnel in the current or a future reporting period are as follows: Performance rights granted Number of performance rights vested Name A W Kiernan S Tarrant S Tarrant L R Cornelius P M Donaldson Year of grant 2013 2017 2017 2013 2014 Class Class 2 Class 6 Class 7 Class 1 Class 4 Number 225,000 50,000 50,000 100,000 2,450,000 In prior periods 75,000 - - 50,000 950,000 In current period 75,000 - - - 700,000 Performance rights cancelled 75,000 - - - - Total Unvested - 100% 100% 50%¹ 33% The performance rights on issue to key management personnel, as set out above, vest, subject to the following vesting conditions: 300,000 upon completion of a Prefeasibility Study and the release of the study results to market (vested March 650,000 upon completion of a Definitive Feasibility Study and release of study results to market (vested November 700,000 upon awarding of the Colluli mining licence (vested February 2017); and 800,000 upon commencement of construction of the production facility. 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. 10,000 upon market announcement of a binding offtake agreement to support debt funding of the project; 10,000 upon market announcement on completion of FEED; 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 form a strategic investor. During the year ended 31 December 2017, a total of 75,000 performance rights held by A Kiernan (Class 2) were forfeited g) Equity Instruments Held by Key Management Personnel No shares were granted as remuneration during the year ended 31 December 2017. The number of shares in the Company held during the financial period by each director of Danakali Ltd and other key management personnel of the Group, including their personally related parties, are set out in the following tables. Financial Year to Balance at Granted as Received Received on On market Other 31 December 2017 31 December compensatio conversion of purchases/ 2016 n on exercise of remuneration options performance rights (sales) Balance at 31 December 2017 8,493,046 1,203,128 15,682,041 258,334 1,300,000 1,000,000 5,138 9,798,184 75,000 (1,278,128) (16,682,041) 258,334 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 110,000 500,000 (365,000) (245,000) 218,434 218,434 27,564,883 3,000,000 775,000 (359,862) (17,986,735) 12,993,286 P M Donaldson 1,818,334 200,000 700,000 2,718,334 Class 4: 2015); 2015); • • • • • • • • • • • Class 6: Class 7: during the year. (i) Shares Shares Directors S I Cornelius A W Kiernan (a) L R Cornelius (b) J D Fitzgerald J Zhang R Connochie (c) A Liebenberg (d) Other Key Management Personnel D Goeman (e) C P Els (f) S Tarrant (g) C Grant-Edwards(h) M Chapman (h) TOTAL Note: (ii) Options DANAKALI LIMITED ABN 56 097 904 302 (a) (b) (c) (d) (e) (f) (g) (h) Upon his resignation on 6 February 2017, Mr Kiernan held 1,278,128 shares Upon his resignation on 17 November 2017, Mr L Cornelius held 16,682,041 shares Appointed 6 February 2017 Appointed 2 October 2017 Appointed 21 December 2017 Upon his resignation on 7 July 2017, Mr C Els held 245,000 shares Upon his appointment on 12 June 2017, Mr Tarrant held 218,434 shares Appointed 7 July 2017 DANAKALI LIMITED Page 46 ABN 56 097 904 302 24 25 75,000 upon signing of the ENAMCO agreements for the Colluli Potash Project (vested November 2014); 75,000 upon granting of a Mining License for the Colluli Potash Project (vested February 2017); and 75,000 upon completion of securing finance for the development of the Colluli Potash Project (forfeited 6 February 2017). 308,000 upon completion of a Feasibility Study for the Colluli Potash Project (vested November 2015); and 308,000 upon completion of securing finance for the development of the Colluli Potash Project Class 1: • • Class 2: • • • Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Directors’ Report • Class 4: • 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. Number of Value of Number of options Vested Number of options options at grant date vested during and forfeited during the period exercisable the period • • • 300,000 upon completion of a Prefeasibility Study and the release of the study results to market (vested March 2015); 650,000 upon completion of a Definitive Feasibility Study and release of study results to market (vested November 2015); 700,000 upon awarding of the Colluli mining licence (vested February 2017); and 800,000 upon commencement of construction of the production facility. When exercisable, each option is convertible into one ordinary share. Further information on the options is set out in note $25,270 $37,800 $37,800 $60,734 $20,245 $50,612 $38,465 $20,245 $101,224 - - - 300,000 100,000 250,000 190,000 100,000 500,000 - - - 100% 100% 100% 100% 100% 100% 200,000 300,000 300,000 - - - - - - 3,000,000 options held by key management personnel were exercised during the year, raising $898,100 for working capital 2,240,000 1,440,000 800,000 22. Name C P Els C P Els C P Els S I Cornelius P M Donaldson J D Fitzgerald L Cornelius Z Jing R Connochie Total Options purposes. Year in which options vest 2017 2017 2017 2017 2017 2017 2017 2017 2017 Year of grant 2015 2015 2015 2017 2017 2017 2017 2017 2017 options granted 200,000 300,000 300,000 300,000 100,000 250,000 190,000 100,000 500,000 Number of Amount Fair Value Name options exercised Paid S I Cornelius 1,300,000 $361,400 L Cornelius 1,000,000 $278,000 P M Donaldson C P Els 200,000 500,000 Total Options 3,000,000 $55,600 $203,100 $898,100 $942,550 $700,000 $140,000 $399,500 $2,182,050 (ii) Performance Rights During the financial year, the following performance rights were granted to key management personnel. Name Class Number at 31 December Expiry Date Date of Issue Fair Value per Right S Tarrant S Tarrant 20 June 2017 15 November 2017 Class 6 Class 7 50,000 50,000 2017 $0.715 $0.715 None None The terms and conditions of each grant of Performance Rights to key personnel in the current or a future reporting period are as follows: Performance rights Number of performance Performance granted rights vested Name A W Kiernan S Tarrant S Tarrant L R Cornelius P M Donaldson Year of grant 2013 2017 2017 2013 2014 Class Class 2 Class 6 Class 7 Class 1 Class 4 Number 225,000 50,000 50,000 100,000 2,450,000 In prior periods 75,000 In current period 75,000 - - 50,000 950,000 - - - 700,000 rights cancelled 75,000 - - - - Total Unvested - 100% 100% 50%¹ 33% Class 7: • • • • 10,000 upon market announcement of a binding offtake agreement to support debt funding of the project; 10,000 upon market announcement on completion of FEED; 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 form a strategic investor. During the year ended 31 December 2017, a total of 75,000 performance rights held by A Kiernan (Class 2) were forfeited during the year. g) Equity Instruments Held by Key Management Personnel (i) Shares No shares were granted as remuneration during the year ended 31 December 2017. The number of shares in the Company held during the financial period by each director of Danakali Ltd and other key management personnel of the Group, including their personally related parties, are set out in the following tables. Financial Year to 31 December 2017 Balance at 31 December 2016 Granted as compensatio n Shares Directors S I Cornelius A W Kiernan (a) L R Cornelius (b) J D Fitzgerald J Zhang R Connochie (c) A Liebenberg (d) P M Donaldson Other Key Management Personnel D Goeman (e) C P Els (f) S Tarrant (g) C Grant-Edwards(h) M Chapman (h) 8,493,046 1,203,128 15,682,041 258,334 - - - 1,818,334 - 110,000 - - The performance rights on issue to key management personnel, as set out above, vest, subject to the following vesting TOTAL 27,564,883 - - - - - - - - - - - - - Received on exercise of remuneration options Received on conversion of performance rights On market purchases/ (sales) Other Balance at 31 December 2017 1,300,000 - 5,138 - 9,798,184 - 75,000 1,000,000 - - - - - - - - - 200,000 700,000 - - - - - - - (1,278,128) (16,682,041) - - - - - - - 258,334 - - - 2,718,334 - 500,000 - - - - - - - (365,000) - - (245,000) 218,434 - - 218,434 - - - 3,000,000 775,000 (359,862) (17,986,735) 12,993,286 conditions: Class 1: Class 2: • • • • • 2017). DANAKALI LIMITED ABN 56 097 904 302 308,000 upon completion of a Feasibility Study for the Colluli Potash Project (vested November 2015); and 308,000 upon completion of securing finance for the development of the Colluli Potash Project 75,000 upon signing of the ENAMCO agreements for the Colluli Potash Project (vested November 2014); 75,000 upon granting of a Mining License for the Colluli Potash Project (vested February 2017); and 75,000 upon completion of securing finance for the development of the Colluli Potash Project (forfeited 6 February Note: (a) (b) (c) (d) (e) (f) (g) (h) Upon his resignation on 6 February 2017, Mr Kiernan held 1,278,128 shares Upon his resignation on 17 November 2017, Mr L Cornelius held 16,682,041 shares Appointed 6 February 2017 Appointed 2 October 2017 Appointed 21 December 2017 Upon his resignation on 7 July 2017, Mr C Els held 245,000 shares Upon his appointment on 12 June 2017, Mr Tarrant held 218,434 shares Appointed 7 July 2017 (ii) Options DANAKALI LIMITED ABN 56 097 904 302 24 Page 47 25 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report During the financial year to 31 December 2017, the Company issued 1,440,000 options over unissued ordinary shares in the Company to Key Management Personnel. The numbers of options over ordinary shares in the Company held during the financial period by each director of Danakali Ltd and other Key Management Personnel of the Group, including their personally related parties, are set out in the following tables. Financial Year to 31 December 2017 Balance at 31 December 2016 Granted Exercised Expired / Cancelled Other Balance at 31 December 2017 Vested and exercisable Unvested Directors S I Cornelius A W Kiernan (a) L R Cornelius (b) J D Fitzgerald J Zhang R Connochie (c) A Liebenberg (d) P M Donaldson (e) Other Management Personnel D Goeman (f) C P Els (g) S Tarrant (h) C Grant-Edwards (i) M Chapman (i) TOTAL Note: 2,675,000 1,750,000 1,900,000 1,225,000 - - - 300,000 (1,300,000) - 190,000 250,000 100,000 500,000 - - (1,000,000) - - - - 1,550,000 100,000 (200,000) - - - - - - - - - 1,675,000 1,675,000 (1,750,000) (1,090,000) - - - - - - - - (800,000) 1,475,000 100,000 1,475,000 100,000 500,000 - 650,000 500,000 - 650,000 - - - - - - - - - 1,300,000 - - - - - - - - - - 1,000,000 1,000,000 900,000 100,000 j) Additional Information (500,000) (800,000) - - - - - - - - - - - - - - - - - - - - - - 10,400,000 1,440,000 (3,000,000) (800,000) (2,640,000) 5,400,000 5,300,000 100,000 (a) Upon his resignation on 6 February 2017, Mr Kiernan held 1,750,000 options (b) Upon his resignation on 17 November 2017, Mr L Cornelius held 1,090,000 options (c) Appointed 6 February 2017 (d) Appointed 2 October 2017 (e) During the year, Mr Donaldson sold 800,000 unlisted options exercisable at $0.278 expiring 17 November 2017 via off market transfers for $177,600 consideration (f) Upon his appointment on 21 December 2017, Mr Goeman held 1,000,000 options (g) Resigned 7 July 2017 (h) Appointed 12 June 2017 (i) (j) Options granted refer to remuneration options issued to directors, as approved at the Annual General Meeting of the Company Appointed 7 July 2017 held 19 May 2017. The unlisted options are exercisable at $0.94 each expiring 19 May 2020. (iii) Performance Rights held by Key Management Personnel A total of 100,000 performance rights were granted as remuneration to Key Management Personnel during the year ended 31 December 2017 (31 December 2016: nil). Movements in Performance Rights held by Key Management Personnel are as set out in the following table: Financial Year to 31 December 2017 Performance Rights Balance At 31 December 2016 Granted as Remuneration Vested during the period Cancelled Other Balance at 31 December 2017 Directors S I Cornelius A W Kiernan (a) L R Cornelius (b) J D Fitzgerald J Zhang R Connochie (c) A Liebenberg (d) P M Donaldson DANAKALI LIMITED Page 48 ABN 56 097 904 302 - 150,000 50,000 - - - - 1,500,000 - - - - - - - - - (75,000) - - - - - (700,000) - (75,000) - - - - - - - - (50,000) - - - - - - - - - - - - 800,000 26 Directors’ Report Other Key Management Personnel D Goeman (e) C P Els (f) S Tarrant (g) C Grant-Edwards (h) M Chapman (h) TOTAL Note: (a) Resigned 6 February 2017 (c) Appointed 6 February 2017 (d) Appointed 2 October 2017 (e) Appointed 21 December 2017 (f) Resigned 7 July 2017 (g) Appointed 12 June 2017 - - - - - 100,000 - - - - - - - - - - - - - - - - - - - - 100,000 - - - - 1,700,000 100,000 (775,000) (75,000) 900,000 (b) Upon his resignation on 17 November 2017, Mr L Cornelius held 50,000 performance rights h) Loans to Key Management Personnel There were no loans to key management personnel during the period. i) Other Transactions with Key Management Personnel There were no other transactions with key management personnel during the period. The remuneration structure has been set up with the objective of attracting and retaining the highest calibre staff who contribute to the success of the Company’s performance and individual rewards. The remuneration policies seek a balance between the interests of stakeholders and competitive market remuneration levels. The overall level of key management personnel compensation takes into account the performance of the Group over a number of years and the stage of activities the Company is engaged in. During the period, there was a high level of development activity, project permitting and generally progressing the Colluli Potash Project. The remuneration paid during the period is commercially reasonable for an exploration and development stage mining company. Company performance is measured against a comparable list of companies operating in the same market segment. There was no increase in key management personnel compensation during the period. The Group is still in the exploration and development stage and revenue streams only relate to interest earned on investing surplus funds from capital raisings. The net losses after tax reflect the ongoing costs of the Group’s exploration programs and development on the Colluli Potash Project. The table below shows the performance of the Group over the last 5 31 Dec 2017 31 Dec 2016 31 Dec 2015 31 Dec 2014 (a) 30 Jun 2014 (2.85) $0.715 (2.35) $0.48 (4.01) $0.29 2.18 $0.19 0.16 $0.15 ($6,839,936) ($4,925,558) ($6,792,685) $2,999,972 $3,355,983 (a) 31 December 2014 was a six-month transitional period while adjusting to a December year end. As at the date of this report, the Company is in the process of reviewing its remuneration framework to ensure it reflects current business needs, shareholder views and contemporary market practice and remains appropriate to attract, motivate, retain and reward employees. - - END OF REMUNERATION REPORT - - Signed in accordance with a resolution of the directors. reporting periods: Financial Year Basic EPS (Cents) Share Price (Loss)/ Income for the period Note: Seamus Cornelius CHAIRMAN Perth, 22 March 2018 DANAKALI LIMITED ABN 56 097 904 302 27 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Report Directors’ Report 1,300,000 (500,000) (800,000) During the financial year to 31 December 2017, the Company issued 1,440,000 options over unissued ordinary shares in the Company to Key Management Personnel. The numbers of options over ordinary shares in the Company held during the financial period by each director of Danakali Ltd and other Key Management Personnel of the Group, including their personally related parties, are set out in the following tables. 31 December 31 December 2017 2016 Financial Year to Balance at Granted Exercised Other Balance at Vested Unvested Expired / Cancelled 31 December and 2017 exercisable 300,000 (1,300,000) - 1,675,000 1,675,000 2,675,000 1,750,000 1,900,000 1,225,000 190,000 (1,000,000) 250,000 100,000 500,000 (1,750,000) (1,090,000) 1,475,000 1,475,000 100,000 500,000 100,000 500,000 P M Donaldson (e) 1,550,000 100,000 (200,000) (800,000) 650,000 650,000 Directors S I Cornelius A W Kiernan (a) L R Cornelius (b) J D Fitzgerald J Zhang R Connochie (c) A Liebenberg (d) Other Management Personnel D Goeman (f) C P Els (g) S Tarrant (h) C Grant-Edwards (i) M Chapman (i) TOTAL Note: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 10,400,000 1,440,000 (3,000,000) (800,000) (2,640,000) 5,400,000 5,300,000 100,000 (a) Upon his resignation on 6 February 2017, Mr Kiernan held 1,750,000 options (b) Upon his resignation on 17 November 2017, Mr L Cornelius held 1,090,000 options (e) During the year, Mr Donaldson sold 800,000 unlisted options exercisable at $0.278 expiring 17 November 2017 via off market transfers for $177,600 consideration (f) Upon his appointment on 21 December 2017, Mr Goeman held 1,000,000 options (c) Appointed 6 February 2017 (d) Appointed 2 October 2017 (g) Resigned 7 July 2017 (h) Appointed 12 June 2017 (i) Appointed 7 July 2017 (j) Options granted refer to remuneration options issued to directors, as approved at the Annual General Meeting of the Company held 19 May 2017. The unlisted options are exercisable at $0.94 each expiring 19 May 2020. (iii) Performance Rights held by Key Management Personnel A total of 100,000 performance rights were granted as remuneration to Key Management Personnel during the year ended 31 December 2017 (31 December 2016: nil). Movements in Performance Rights held by Key Management Personnel are as set out in the following table: Financial Year to 31 December 2017 Performance Rights Balance At 31 December 2016 Granted as Vested Remuneration during the period Cancelled Other Balance at 31 December 2017 150,000 50,000 - - - - - (75,000) (75,000) (50,000) - - - - - - - - - - - - - - 1,500,000 (700,000) 800,000 Directors S I Cornelius A W Kiernan (a) L R Cornelius (b) J D Fitzgerald J Zhang R Connochie (c) A Liebenberg (d) P M Donaldson DANAKALI LIMITED ABN 56 097 904 302 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Other Key Management Personnel D Goeman (e) C P Els (f) S Tarrant (g) C Grant-Edwards (h) M Chapman (h) TOTAL Note: - - - - - 1,700,000 - - 100,000 - - 100,000 - - - - - (775,000) - - - - - (75,000) - - - - - - - - 100,000 - - 900,000 (a) Resigned 6 February 2017 (b) Upon his resignation on 17 November 2017, Mr L Cornelius held 50,000 performance rights (c) Appointed 6 February 2017 (d) Appointed 2 October 2017 (e) Appointed 21 December 2017 (f) Resigned 7 July 2017 (g) Appointed 12 June 2017 h) Loans to Key Management Personnel There were no loans to key management personnel during the period. i) Other Transactions with Key Management Personnel There were no other transactions with key management personnel during the period. 1,000,000 1,000,000 900,000 100,000 j) Additional Information The remuneration structure has been set up with the objective of attracting and retaining the highest calibre staff who contribute to the success of the Company’s performance and individual rewards. The remuneration policies seek a balance between the interests of stakeholders and competitive market remuneration levels. The overall level of key management personnel compensation takes into account the performance of the Group over a number of years and the stage of activities the Company is engaged in. During the period, there was a high level of development activity, project permitting and generally progressing the Colluli Potash Project. The remuneration paid during the period is commercially reasonable for an exploration and development stage mining company. Company performance is measured against a comparable list of companies operating in the same market segment. There was no increase in key management personnel compensation during the period. The Group is still in the exploration and development stage and revenue streams only relate to interest earned on investing surplus funds from capital raisings. The net losses after tax reflect the ongoing costs of the Group’s exploration programs and development on the Colluli Potash Project. The table below shows the performance of the Group over the last 5 reporting periods: Financial Year Basic EPS (Cents) 31 Dec 2017 (2.85) 31 Dec 2016 (2.35) 31 Dec 2015 (4.01) 31 Dec 2014 (a) 2.18 Share Price $0.715 $0.48 $0.29 $0.19 30 Jun 2014 0.16 $0.15 (Loss)/ Income for the period ($6,839,936) ($4,925,558) ($6,792,685) $2,999,972 $3,355,983 Note: (a) 31 December 2014 was a six-month transitional period while adjusting to a December year end. As at the date of this report, the Company is in the process of reviewing its remuneration framework to ensure it reflects current business needs, shareholder views and contemporary market practice and remains appropriate to attract, motivate, retain and reward employees. - - END OF REMUNERATION REPORT - - Signed in accordance with a resolution of the directors. Seamus Cornelius CHAIRMAN Perth, 22 March 2018 26 DANAKALI LIMITED ABN 56 097 904 302 Page 49 27 Danakali Annual Report 2017DANAKALI LIMITED Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Auditor's Independence Declaration to the Directors of Danakali Limited As lead auditor for the audit of Danakali Limited for the financial year ended 31 December 2017, I declare to the best of my knowledge and belief, there have been: Auditor's Independence Declaration to the Directors of Danakali Limited no contraventions of the auditor independence requirements of the Corporations Act 2001 in a) As lead auditor for the audit of Danakali Limited for the financial year ended 31 December 2017, I declare relation to the audit; and to the best of my knowledge and belief, there have been: b) a) no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and This declaration is in respect of Danakali Limited and the entities it controlled during the financial year. b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Danakali Limited and the entities it controlled during the financial year. Ernst & Young Ernst & Young Gavin Buckingham Partner 22 March 2018 Gavin Buckingham Partner 22 March 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page 50 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DNK:031 GB:EH:DNK:031 Danakali Annual Report 2017DANAKALI LIMITED Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Auditor's Independence Declaration to the Directors of Danakali Limited As lead auditor for the audit of Danakali Limited for the financial year ended 31 December 2017, I declare to the best of my knowledge and belief, there have been: Auditor's Independence Declaration to the Directors of Danakali Limited a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in As lead auditor for the audit of Danakali Limited for the financial year ended 31 December 2017, I declare relation to the audit; and to the best of my knowledge and belief, there have been: no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and This declaration is in respect of Danakali Limited and the entities it controlled during the financial year. no contraventions of any applicable code of professional conduct in relation to the audit. b) a) b) This declaration is in respect of Danakali Limited and the entities it controlled during the financial year. Ernst & Young Ernst & Young Gavin Buckingham Partner 22 March 2018 Gavin Buckingham Partner 22 March 2018 DANAKALI LTD FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DNK:031 GB:EH:DNK:031 Page 51 Danakali Annual Report 2017DANAKALI LIMITED Consolidated Statement of Profit or Loss and Other Comprehensive Income FOR THE YEAR ENDED 31 DECEMBER 2017 Consolidated Statement of Financial Position AS AT 31 DECEMBER 2017 Notes 2017 $ 2016 $ REVENUE Interest income Accretion relating to the unwinding of discount on joint venture loan 4 10 221,189 1,362,780 109,537 1,554,925 OTHER INCOME Foreign exchange (loss)/gain Sundry EXPENSES Depreciation expense Administration expenses Loss on disposal of fixed asset Share based payment expense Loss on re-measurement of loan to joint venture carried at amortised cost Share of net loss of joint venture LOSS BEFORE INCOME TAX Income tax expense LOSS FOR THE YEAR (423,601) 4,218 224,230 - (3,588) (1,684,367) - (988,573) (216,909) (5,111,085) (6,839,936) (10,131) (1,999,782) (1,483) (1,290,347) (2,812,064) (700,443) (4,925,558) - - (6,839,936) (4,925,558) 5 22 10 10 7 OTHER COMPREHENSIVE INCOME Items that may be reclassified to profit or loss in subsequent periods Share of foreign currency translation reserve relating to equity accounted investment OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 10,14 (933,753) (933,753) 269,925 269,925 TOTAL COMPREHENSIVE LOSS FOR THE YEAR (7,773,689) (4,655,633) Earnings per share for loss attributable to the ordinary equity holders of the Company: Basic loss per share (cents per share) Diluted loss per share (cents per share) 17 17 (2.85) (2.85) (2.35) (2.35) The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. CURRENT ASSETS Cash Trade and other receivables Prepayments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Investment in joint venture Plant and equipment TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY Notes 2017 $ 2016 $ 6 8 8 10 9 11 12 12 13 14 15 15,559,980 10,904,760 174,321 50,094 93,985 25,101 15,784,395 11,023,846 12,216,952 13,811,946 15,110 26,044,008 9,519,503 13,502,312 7,920 23,029,735 41,828,403 34,053,581 1,097,087 166,219 1,263,306 210,742 134,701 345,443 27,811 27,811 42,450 42,450 1,291,117 387,893 40,537,286 33,665,688 75,415,034 12,521,599 (47,399,347) 40,537,286 61,758,320 12,466,779 (40,559,411) 33,665,688 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes DANAKALI LIMITED Page 52 ABN 56 097 904 302 31 DANAKALI LIMITED ABN 56 097 904 302 32 Danakali Annual Report 2017DANAKALI LIMITED Consolidated Statement of Profit or Loss and Other Comprehensive Income FOR THE YEAR ENDED 31 DECEMBER 2017 Notes 2017 $ 2016 $ REVENUE Interest income Accretion relating to the unwinding of discount on joint venture loan 4 10 221,189 1,362,780 109,537 1,554,925 OTHER INCOME Foreign exchange (loss)/gain Sundry EXPENSES Depreciation expense Administration expenses Loss on disposal of fixed asset Share based payment expense Share of net loss of joint venture LOSS BEFORE INCOME TAX Income tax expense LOSS FOR THE YEAR Loss on re-measurement of loan to joint venture carried at amortised cost (423,601) 4,218 224,230 - (3,588) (10,131) (1,684,367) (1,999,782) (988,573) (216,909) (5,111,085) (6,839,936) - - (1,483) (1,290,347) (2,812,064) (700,443) (4,925,558) - (6,839,936) (4,925,558) 5 22 10 10 7 OTHER COMPREHENSIVE INCOME Items that may be reclassified to profit or loss in subsequent periods Share of foreign currency translation reserve relating to equity accounted investment OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 10,14 (933,753) (933,753) 269,925 269,925 TOTAL COMPREHENSIVE LOSS FOR THE YEAR (7,773,689) (4,655,633) Earnings per share for loss attributable to the ordinary equity holders of the Company: Basic loss per share (cents per share) Diluted loss per share (cents per share) 17 17 (2.85) (2.85) (2.35) (2.35) The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. Consolidated Statement of Financial Position AS AT 31 DECEMBER 2017 CURRENT ASSETS Cash Trade and other receivables Prepayments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Investment in joint venture Plant and equipment TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY Notes 2017 $ 2016 $ 6 8 8 10 9 11 12 12 13 14 15 15,559,980 174,321 50,094 15,784,395 12,216,952 13,811,946 15,110 26,044,008 10,904,760 93,985 25,101 11,023,846 9,519,503 13,502,312 7,920 23,029,735 41,828,403 34,053,581 1,097,087 166,219 1,263,306 210,742 134,701 345,443 27,811 27,811 42,450 42,450 1,291,117 387,893 40,537,286 33,665,688 75,415,034 12,521,599 (47,399,347) 40,537,286 61,758,320 12,466,779 (40,559,411) 33,665,688 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes DANAKALI LIMITED ABN 56 097 904 302 31 DANAKALI LIMITED ABN 56 097 904 302 Page 53 32 Danakali Annual Report 2017DANAKALI LIMITED y t i u q E l a t o T $ s e s s o L $ l n o i t a s n a r T $ l d e t a u m u c c A y c n e r r u C n g e r o F i d e s a B e r a h S s t n e m y a P $ l a t i p a C d e u s s I $ s e t o N s e v r e s e R y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C 7 1 0 2 R E B M E C E D 1 3 D E D N E R A E Y E H T R O F , 8 8 6 5 6 6 3 3 , ) 1 1 4 , 9 5 5 0 4 ( , 3 4 2 9 3 0 , , 2 6 3 5 , 7 2 4 , 0 1 0 2 3 , 8 5 7 , 1 6 7 1 0 2 Y R A U N A J 1 T A E C N A L A B ) 3 5 7 3 3 9 ( , - , ) 6 3 9 3 9 8 6 ( , , ) 6 3 9 3 9 8 6 ( , , ) 9 8 6 3 7 7 7 ( , , 3 8 0 8 2 3 4 1 , 3 7 5 , 8 8 9 ) 9 6 3 1 7 6 ( , , 6 8 2 7 3 5 0 4 , - - - , ) 6 3 9 3 9 8 6 ( , - - - - ) 3 5 7 , 3 3 9 ( ) 3 5 7 , 3 3 9 ( ) 7 4 3 , 9 9 3 7 4 ( , 0 9 4 , 5 0 1 , 1 - - - - - 3 7 5 , 8 8 9 9 0 1 , 6 1 4 , 1 1 - - - - ) 9 6 3 , 1 7 6 ( 3 8 0 , 8 2 3 , 4 1 4 3 0 , 5 1 4 , 5 7 , 7 6 5 6 5 2 4 2 , ) 3 5 8 , 3 3 6 5 3 ( , 8 1 3 9 6 7 , , 1 9 8 1 , 7 3 1 , 9 3 1 9 , 3 8 9 , 8 4 5 2 9 , 9 6 2 ) 8 5 5 5 2 9 , , 4 ( ) 3 3 6 5 5 6 , , 4 ( ) 8 5 5 5 2 9 , , 4 ( - - ) 8 5 5 5 2 9 , , 4 ( 5 2 9 , 9 6 2 5 2 9 , 9 6 2 ) 7 5 2 6 8 5 ( , , 4 6 6 0 6 3 3 1 , , 7 4 3 0 9 2 1 , , 8 8 6 5 6 6 3 3 , - - - - - - ) 1 1 4 , 9 5 5 0 4 ( , 3 4 2 9 3 0 , , 2 - - - - - 7 4 3 , 0 9 2 , 1 6 3 5 , 7 2 4 , 0 1 - - - - ) 7 5 2 , 6 8 5 ( 4 6 6 , 0 6 3 , 3 1 0 2 3 , 8 5 7 , 1 6 3 3 Consolidated Statement of Cash Flows FOR THE YEAR ENDED 31 DECEMBER 2017 CASH FLOWS FROM OPERATING ACTIVITIES Interest received Realised foreign exchange gain Payments to suppliers and employees NET CASH OUTFLOW FROM OPERATING ACTIVITIES 16 CASH FLOWS FROM INVESTING ACTIVITIES Funding of joint venture Payments for plant and equipment NET CASH OUTFLOW FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issues of ordinary shares Costs of capital raised NET CASH INFLOW FROM FINANCING ACTIVITIES NET INCREASE / (DECREASE) IN CASH Cash at the beginning of the financial year CASH AT THE END OF THE YEAR Notes 2017 $ 2016 $ 231,693 71,924 (1,583,296) (1,279,679) 104,964 169,987 (1,945,485) (1,670,534) (7,711,037) (10,778) (7,721,815) (2,952,332) (3,122) (2,955,454) 14,328,083 (671,369) 13,656,714 4,655,220 10,904,760 15,559,980 13,360,664 (586,257) 12,774,407 8,148,419 2,756,341 10,904,760 6 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. . s e o n t i g n y n a p m o c c a e h t h t i w n o j i t c n u n o c n i d a e r l e b d u o h s y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C e v o b a e h T 4 1 3 1 3 1 4 1 4 1 3 1 3 1 4 1 : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T d e u s s i s e r a h S d o i r e p e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i i e v s n e h e r p m o c r e h O t d o i r e p e h t r o f s s o L d e u s s i s t h g i r e c n a m r o f r e p d n a s n o i t p O 7 1 0 2 R E B M E C E D 1 3 T A E C N A L A B d e s a r i l a t i p a c f o s t s o C : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T d e u s s i s e r a h S d o i r e p e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i i e v s n e h e r p m o c r e h O t d o i r e p e h t r o f s s o L 6 1 0 2 Y R A U N A J 1 T A E C N A L A B d e u s s i s t h g i r e c n a m r o f r e p d n a s n o i t p O 6 1 0 2 R E B M E C E D 1 3 T A E C N A L A B d e s a r i l a t i p a c f o s t s o C D E T M L I I I L A K A N A D 2 0 3 4 0 9 7 9 0 6 5 N B A Page 54 DANAKALI LIMITED ABN 56 097 904 302 34 Danakali Annual Report 2017DANAKALI LIMITED Consolidated Statement of Cash Flows FOR THE YEAR ENDED 31 DECEMBER 2017 Notes 2017 $ 2016 $ CASH FLOWS FROM OPERATING ACTIVITIES Interest received Realised foreign exchange gain Payments to suppliers and employees NET CASH OUTFLOW FROM OPERATING ACTIVITIES 16 CASH FLOWS FROM INVESTING ACTIVITIES Funding of joint venture Payments for plant and equipment NET CASH OUTFLOW FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issues of ordinary shares Costs of capital raised NET CASH INFLOW FROM FINANCING ACTIVITIES NET INCREASE / (DECREASE) IN CASH Cash at the beginning of the financial year CASH AT THE END OF THE YEAR 231,693 71,924 (1,583,296) (1,279,679) 104,964 169,987 (1,945,485) (1,670,534) (7,711,037) (10,778) (7,721,815) (2,952,332) (3,122) (2,955,454) 14,328,083 (671,369) 13,656,714 4,655,220 10,904,760 15,559,980 13,360,664 (586,257) 12,774,407 8,148,419 2,756,341 10,904,760 6 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. DANAKALI LIMITED ABN 56 097 904 302 Page 55 34 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 1. GENERAL INFORMATION Danakali Ltd (‘Danakali or the ‘Company’) is a for profit company limited by shares, incorporated and domiciled in Australia, and whose shares are publicly traded on the Australian Securities Exchange (ASX). The consolidated financial Report of the Group as at, and for the year ended 31 December 2017 comprises the Company and its subsidiaries (together referred to as the ‘Group’). The address of the registered office is Level 1, Churchill Court, 234 Churchill Avenue, Subiaco, WA, 6008. The financial statements are presented in the Australian currency. The financial report of Danakali for the year ended 31 December 2017 was authorised for issue by the Directors on 21 March 2018. The directors have the power to amend and reissue the financial statements. The nature of the operations and principal activities of the consolidated entity are described in the Directors’ Report. 2. BASIS OF PREPARATION The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Australian Accounting Interpretations and the Corporations Act 2001. The consolidated financial statements of the Danakali Ltd Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These financial statements have been prepared under the historical cost convention. (a) Principles of consolidation Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the full Board of Directors. (c) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Danakali's functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. (iii) Foreign operations The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; income and expenses for each statement of comprehensive income are translated at average exchange rates (unless that is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is reclassified to profit or loss, as part of the gain or loss on sale where applicable. DANAKALI LIMITED Page 56 ABN 56 097 904 302 Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial (d) Revenue recognition assets. (e) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised, or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (f) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset’s useful life and the lease term. Leases where a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. (g) Impairment of assets not be recoverable. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are consolidated at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. For Consolidated Statement of Cash Flows presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes Receivables are recognised and carried at original invoice amount less an allowance for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off as (h) Cash and cash equivalents in value, and bank overdrafts. (i) Trade and other receivables incurred. DANAKALI LIMITED ABN 56 097 904 302 35 36 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 1. GENERAL INFORMATION (d) Revenue recognition Danakali Ltd (‘Danakali or the ‘Company’) is a for profit company limited by shares, incorporated and domiciled in Australia, and whose shares are publicly traded on the Australian Securities Exchange (ASX). The consolidated financial Report of the Group as at, and for the year ended 31 December 2017 comprises the Company and its subsidiaries (together referred to as the ‘Group’). The address of the registered office is Level 1, Churchill Court, 234 Churchill Avenue, Subiaco, WA, 6008. The financial statements are presented in the Australian currency. The financial report of Danakali for the year ended 31 December 2017 was authorised for issue by the Directors on 21 March 2018. The directors have the power to amend and reissue the financial statements. The nature of the operations and principal activities of the consolidated entity are described in the Directors’ Report. 2. BASIS OF PREPARATION The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Australian Accounting Interpretations and the Corporations Act 2001. The consolidated financial statements of the Danakali Ltd Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These financial statements have been prepared under the historical cost convention. (a) Principles of consolidation Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the full Board of Directors. (c) Foreign currency translation (i) Functional and presentation currency (ii) Transactions and balances recognised in profit or loss. (iii) Foreign operations Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Danakali's functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; income and expenses for each statement of comprehensive income are translated at average exchange rates (unless that is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is reclassified to profit or loss, as part of the gain or loss on sale where applicable. Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial assets. (e) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised, or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (f) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset’s useful life and the lease term. Leases where a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. (g) Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are consolidated at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (h) Cash and cash equivalents For Consolidated Statement of Cash Flows presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value, and bank overdrafts. (i) Trade and other receivables Receivables are recognised and carried at original invoice amount less an allowance for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off as incurred. DANAKALI LIMITED ABN 56 097 904 302 35 DANAKALI LIMITED ABN 56 097 904 302 Page 57 36 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 (j) Investments and other financial assets Classification The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at each reporting date. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are measured at amortised cost and are included in trade and other receivables in the statement of financial position. (k) Investment in joint venture A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group’s investment in a joint venture is accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The statement of profit or loss reflects the Group’s share of the results of operations of the joint venture. Any change in other comprehensive income of those investees is presented as part of the Group’s other comprehensive income. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Group’s share of profit or loss of a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture. The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, then recognises the loss as ‘Share of profit of the equity accounted investment’ in profit or loss. Upon loss of joint control over a joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the joint venture upon loss of joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. (l) Plant and equipment All plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is de-recognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Depreciation of plant and equipment is calculated using the straight-line basis so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. ordinary shares. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 2(g)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group’s policy to transfer the amounts included in other reserves in respect of those assets to retained earnings. DANAKALI LIMITED Page 58 ABN 56 097 904 302 37 38 Acquired exploration and evaluation costs are capitalised. Ongoing exploration and evaluation costs are expensed in the (m) Exploration and evaluation costs period they are incurred. (n) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial period which are unpaid. The amounts are unsecured, non-interest bearing and are paid on normal commercial terms. (o) Employee benefits (i) Wages and salaries, annual leave and long service leave Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. (ii) Share-based payments transactions’) refer to note 22. The Group provides benefits to employees (including directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for options or rights over shares (‘equity-settled The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value of options is determined by an internal valuation using a Black-Scholes option pricing model. The fair value of performance rights determined by consideration of the Company’s share price at the grant date. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of options or rights that, in the opinion of the directors of the Company, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. were a modification of the original award. (p) Issued capital (q) Earnings per share (i) Basic earnings per share (ii) Diluted earnings per share Basic earnings per share is calculated by dividing the profit or loss attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial period, adjusted for bonus elements in ordinary shares issued during the period. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after-income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential (r) Critical accounting judgements, estimates and assumptions The preparation of these financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are: DANAKALI LIMITED ABN 56 097 904 302 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 (j) Investments and other financial assets Classification The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at each reporting date. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are measured at amortised cost and are included in trade and other receivables in the statement of financial position. (k) Investment in joint venture A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group’s investment in a joint venture is accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The statement of profit or loss reflects the Group’s share of the results of operations of the joint venture. Any change in other comprehensive income of those investees is presented as part of the Group’s other comprehensive income. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Group’s share of profit or loss of a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture. The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, then recognises the loss as ‘Share of profit of the equity accounted investment’ in profit or loss. Upon loss of joint control over a joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the joint venture upon loss of joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. (l) Plant and equipment attributable to the acquisition of the items. All plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is de-recognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Depreciation of plant and equipment is calculated using the straight-line basis so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. (m) Exploration and evaluation costs Acquired exploration and evaluation costs are capitalised. Ongoing exploration and evaluation costs are expensed in the period they are incurred. (n) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial period which are unpaid. The amounts are unsecured, non-interest bearing and are paid on normal commercial terms. (o) Employee benefits (i) Wages and salaries, annual leave and long service leave Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. (ii) Share-based payments The Group provides benefits to employees (including directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for options or rights over shares (‘equity-settled transactions’) refer to note 22. The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value of options is determined by an internal valuation using a Black-Scholes option pricing model. The fair value of performance rights determined by consideration of the Company’s share price at the grant date. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of options or rights that, in the opinion of the directors of the Company, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award. (p) Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (q) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit or loss attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial period, adjusted for bonus elements in ordinary shares issued during the period. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after-income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater (r) Critical accounting judgements, estimates and assumptions than its estimated recoverable amount (note 2(g)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group’s policy to transfer the amounts included in other reserves in respect of those assets to retained earnings. The preparation of these financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are: DANAKALI LIMITED ABN 56 097 904 302 37 DANAKALI LIMITED ABN 56 097 904 302 Page 59 38 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 (i) Impairment The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. The major assets are tested for impairment when there is objective evidence of impairment. As at 31 December 2017 the Group assessed that, no indicator of impairment existed (31 December 2016: Nil). (ii) Interest in Joint Arrangement and measurement of loan receivable The Group accounts for its 50% interest in CMSC as a joint venture using the equity method. Danakali holds 3 of 5 CMSC Board seats, however in reference to certain material decisions which are reserved for Majority Shareholder approval it has been determined that the interest in CMSC is more appropriately classified as an interest in a joint venture and has been accounted for using the equity method. These shareholder voting rights are considered to be substantive rights particularly in the early stages of the project development. The assumptions applied in accounting for the loan to the joint venture includes determining the timing of cash receipts and the discount rate applied. At 31 December 2017 a discount rate of 25% was applied, which is consistent with previous years. The timing of cash receipts has been adjusted according to management’s best estimate and it is currently estimated that receipts commence in the December 2020 quarter. Further context is detailed in note 10. (iii) Share based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of options is determined by an internal valuation using a Black-Scholes option pricing model, using the assumptions detailed in note 22. The fair value of performance rights is determined by the share price at the date of valuation and consideration of the probability of the vesting condition being met. (s) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case, it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the Consolidated Statement of Financial Position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (t) Government grants Government grants are recognised where there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant relates to an asset, it is recognised as income in equal amounts over the expected useful life of the related asset. (u) Application of new accounting standards All new accounting standards or amendments applicable to the Group and effective at 1 January 2017 have been adopted. The adoption of these new and amended standards and interpretations did not result in any significant changes to the Group’s accounting policies. The following relevant standards and interpretations have been applied for the first time for the year ended 31 December 2017: Reference Title Summary AASB 2016-1 AASB 2016-2 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 This Standard amends AASB 112 Income Taxes (July 2004) and AASB 112 Income Taxes (August 2015) to clarify the requirements on recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value. This Standard amends AASB 107 Statement of Cash Flows (August 2015) to require entities preparing financial statements in accordance with Tier 1 reporting requirements to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Reference Title Summary Annual Annual Improvements to This amending standard addresses the following: Improvements IFRS Standards 2014– 2016 Cycle to IFRS Standards 2014–2016 Cycle • • • IFRS 12 Disclosure of Interests in Other Entities Clarification of the scope of the Standard (effective date 1 January 2017) IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters (effective date 1 January 2018) IAS 28 Investments in Associates and Joint Ventures - Measuring an associate or joint venture at fair value. (effective date 1 January 2018) (v) New accounting standards and interpretations not yet effective Australian Accounting Standards that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting year ended 31 December 2017 are outlined in the table below. The potential effect of these Standards is yet to be fully determined. Reference Title Summary Application date of standard* for Group AASB 9 Financial Instruments AASB 9 (December 2014) is a new standard which 1 January 2018 1 January 2018 replaces AASB 139. This new version supersedes AASB 9 issued in December 2009 (as amended) and AASB 9 (issued in December 2010) and includes a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially- reformed approach to hedge accounting. AASB 9 is effective for annual periods beginning on or after 1 January 2018. However, the Standard is available for early adoption. The own credit changes can be early adopted in isolation without otherwise changing the accounting for financial instruments. Classification and measurement AASB 9 includes requirements for a simpler approach for classification and measurement of financial assets compared with the requirements of AASB 139. There are also some changes made in relation to financial liabilities. The main changes are described below. Financial assets a) Financial assets that are debt instruments will be classified based on (1) the objective of the entity's business model for managing the financial assets; (2) the characteristics of the contractual cash flows give rise to cash flows that are solely payments of principle and interest (“SPPI test”). b) Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. Financial liabilities Changes introduced by AASB 9 in respect of financial liabilities are limited to the measurement DANAKALI LIMITED Page 60 ABN 56 097 904 302 39 DANAKALI LIMITED ABN 56 097 904 302 40 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 (i) Impairment December 2016: Nil). The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. The major assets are tested for impairment when there is objective evidence of impairment. As at 31 December 2017 the Group assessed that, no indicator of impairment existed (31 (ii) Interest in Joint Arrangement and measurement of loan receivable The Group accounts for its 50% interest in CMSC as a joint venture using the equity method. Danakali holds 3 of 5 CMSC Board seats, however in reference to certain material decisions which are reserved for Majority Shareholder approval it has been determined that the interest in CMSC is more appropriately classified as an interest in a joint venture and has been accounted for using the equity method. These shareholder voting rights are considered to be substantive rights particularly in the early stages of the project development. The assumptions applied in accounting for the loan to the joint venture includes determining the timing of cash receipts and the discount rate applied. At 31 December 2017 a discount rate of 25% was applied, which is consistent with previous years. The timing of cash receipts has been adjusted according to management’s best estimate and it is currently estimated that receipts commence in the December 2020 quarter. Further context is detailed in note 10. (iii) Share based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of options is determined by an internal valuation using a Black-Scholes option pricing model, using the assumptions detailed in note 22. The fair value of performance rights is determined by the share price at the date of valuation and consideration of the probability of the vesting condition being met. (s) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case, it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the Consolidated Statement of Financial Position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (t) Government grants Government grants are recognised where there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant relates to an asset, it is recognised as income in equal amounts over the expected useful life of the related asset. (u) Application of new accounting standards All new accounting standards or amendments applicable to the Group and effective at 1 January 2017 have been adopted. The adoption of these new and amended standards and interpretations did not result in any significant changes to the The following relevant standards and interpretations have been applied for the first time for the year ended 31 December Group’s accounting policies. 2017: Reference Title Summary AASB 2016-1 Amendments to Australian This Standard amends AASB 112 Income Taxes (July 2004) and AASB 112 Income Taxes (August 2015) to clarify the requirements on recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value. Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses AASB 2016-2 Amendments to Australian This Standard amends AASB 107 Statement of Cash Flows (August 2015) to require Accounting Standards – entities preparing financial statements in accordance with Tier 1 reporting requirements Disclosure Initiative: to provide disclosures that enable users of financial statements to evaluate changes in Amendments to AASB 107 liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Reference Title Summary Annual Improvements to IFRS Standards 2014–2016 Cycle Annual Improvements to IFRS Standards 2014– 2016 Cycle This amending standard addresses the following: • IFRS 12 Disclosure of Interests in Other Entities Clarification of the scope of the Standard (effective date 1 January 2017) • • IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters (effective date 1 January 2018) IAS 28 Investments in Associates and Joint Ventures - Measuring an associate or joint venture at fair value. (effective date 1 January 2018) (v) New accounting standards and interpretations not yet effective Australian Accounting Standards that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting year ended 31 December 2017 are outlined in the table below. The potential effect of these Standards is yet to be fully determined. Application date of standard* for Group 1 January 2018 1 January 2018 Reference Title Summary AASB 9 Financial Instruments AASB 9 (December 2014) is a new standard which replaces AASB 139. This new version supersedes AASB 9 issued in December 2009 (as amended) and AASB 9 (issued in December 2010) and includes a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially- reformed approach to hedge accounting. AASB 9 is effective for annual periods beginning on or after 1 January 2018. However, the Standard is available for early adoption. The own credit changes can be early adopted in isolation without otherwise changing the accounting for financial instruments. Classification and measurement AASB 9 includes requirements for a simpler approach for classification and measurement of financial assets compared with the requirements of AASB 139. There are also some changes made in relation to financial liabilities. The main changes are described below. Financial assets a) Financial assets that are debt instruments will be classified based on (1) the objective of the entity's business model for managing the financial assets; (2) the characteristics of the contractual cash flows give rise to cash flows that are solely payments of principle and interest (“SPPI test”). b) Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. Financial liabilities Changes introduced by AASB 9 in respect of financial liabilities are limited to the measurement DANAKALI LIMITED ABN 56 097 904 302 39 DANAKALI LIMITED ABN 56 097 904 302 Page 61 40 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Reference Title Summary Application date of standard* for Group Reference Title Summary Application date of standard* for Group of liabilities designated at fair value through profit or loss (FVPL) using the fair value option. Where the fair value option is used for financial liabilities, the change in fair value is to be accounted for as follows: • The change attributable to changes in credit risk are presented in other comprehensive income (OCI) • The remaining change is presented in profit or loss AASB 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains or losses attributable to changes in the entity’s own credit risk would be recognised in OCI. These amounts recognised in OCI are not recycled to profit or loss if the liability is ever repurchased at a discount. Impairment The final version of AASB 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. Hedge accounting Amendments to AASB 9 (December 2009 and 2010 editions and AASB 2013-9) issued in December 2013 included the new hedge accounting requirements, including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures. Consequential amendments were also made to other standards as a result of AASB 9. Danakali assessment In assessing the classification and measurement of the Loan to Colluli Mining Share Company (see note 8) under AASB 9, management is in the process of determining whether the current policy of carrying the loan at amortised cost will be appropriate. Should the loan fail the SSPI test due to the non-recourse nature of the loan, it will be classified as a financial asset at fair value through profit and loss. AASB 15 Revenue from Contracts with Customers replaces the existing revenue recognition standards AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations (Interpretation 13 Customer Loyalty Programmes, Interpretation 15 Agreements for the Construction of Real Estate, Interpretation 18 Transfers of Assets from Customers, Interpretation 131 Revenue—Barter Transactions Involving Advertising Services and Interpretation 1042 Subscriber Acquisition Costs in the Telecommunications Industry). AASB 15 incorporates the requirements of IFRS 15 Revenue from Contracts with Customers issued by the International Accounting Standards Board (IASB) and developed jointly with the US Financial Accounting Standards Board (FASB). AASB 15 specifies the accounting treatment for revenue arising from contracts with customers (except for contracts within the scope of other accounting standards such as leases or financial AASB 15 Revenue from Contracts with Customers AASB 2014-10 Amendments to Australian The amendments clarify that a full gain or loss is 1 January 2022 1 January 2022 Accounting Standards – Sale or Contribution of Assets between an recognised when a transfer to an associate or joint venture involves a business as defined in AASB 3 Business Combinations. Any gain or loss resulting Investor and its Associate from the sale or contribution of assets that does or Joint Venture 1 January 2018 1 January 2018 AASB 16 Leases The key features of AASB 16 are as follows: 1 January 2019 1 January 2019 instruments). The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: a) Step 1: Identify the contract(s) with a customer b) Step 2: Identify the performance obligations in the contract c) Step 3: Determine the transaction price d) Step 4: Allocate the transaction price to the performance obligations in the contract e) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation AASB 2015-8 amended the AASB 15 effective date so it is now effective for annual reporting periods commencing on or after 1 January 2018. Early application is permitted. AASB 2014-5 incorporates the consequential amendments to a number Australian Accounting Standards (including Interpretations) arising from the issuance of AASB 15. AASB 2016-3 Amendments to Australian Accounting Standards – Clarifications to AASB 15 amends AASB 15 to clarify the requirements on identifying performance obligations, principal versus agent considerations and the timing of recognising revenue from granting a licence and provides further practical expedients on transition to AASB 15. not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. AASB 2015-10 deferred the mandatory effective date (application date) of AASB 2014-10 so that the amendments were required to be applied for annual reporting periods beginning on or after 1 January 2018 instead of 1 January 2016. AASB 2017-5 further defers the effective date of the amendments made in AASB 2014-10 to periods beginning on or after 1 January 2022. Lessee accounting • Lessees are required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. • Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. • AASB 16 contains disclosure requirements for lessees. Lessor accounting • AASB 16 substantially carries forward the lessor accounting requirements in AASB 117. DANAKALI LIMITED Page 62 ABN 56 097 904 302 41 DANAKALI LIMITED ABN 56 097 904 302 42 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Reference Title Summary Reference Title Summary Application date of standard* for Group Application date of standard* for Group of liabilities designated at fair value through profit or loss (FVPL) using the fair value option. Where the fair value option is used for financial liabilities, the change in fair value is to be accounted for as follows: • The change attributable to changes in credit risk are presented in other comprehensive • The remaining change is presented in profit or income (OCI) loss AASB 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains or losses attributable to changes in the entity’s own credit risk would be recognised in OCI. These amounts recognised in OCI are not recycled to profit or loss if the liability is ever repurchased at a discount. Impairment The final version of AASB 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. Hedge accounting Amendments to AASB 9 (December 2009 and 2010 editions and AASB 2013-9) issued in December 2013 included the new hedge accounting requirements, including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures. Consequential amendments were also made to other standards as a result of AASB 9. Danakali assessment In assessing the classification and measurement of the Loan to Colluli Mining Share Company (see note 8) under AASB 9, management is in the process of determining whether the current policy of carrying the loan at amortised cost will be appropriate. Should the loan fail the SSPI test due to the non-recourse nature of the loan, it will be classified as a financial asset at fair value through profit and loss. replaces the existing revenue recognition standards AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations (Interpretation 13 Customer Loyalty Programmes, Interpretation 15 Agreements for the Construction of Real Estate, Interpretation 18 Transfers of Assets from Customers, Interpretation 131 Revenue—Barter Transactions Involving Advertising Services and Interpretation 1042 Subscriber Acquisition Costs in the Telecommunications Industry). AASB 15 incorporates the requirements of IFRS 15 Revenue from Contracts with Customers issued by the International Accounting Standards Board (IASB) and developed jointly with the US Financial Accounting Standards Board (FASB). AASB 15 specifies the accounting treatment for revenue arising from contracts with customers (except for contracts within the scope of other accounting standards such as leases or financial instruments). The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: a) Step 1: Identify the contract(s) with a customer b) Step 2: Identify the performance obligations in the contract c) Step 3: Determine the transaction price d) Step 4: Allocate the transaction price to the performance obligations in the contract e) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation AASB 2015-8 amended the AASB 15 effective date so it is now effective for annual reporting periods commencing on or after 1 January 2018. Early application is permitted. AASB 2014-5 incorporates the consequential amendments to a number Australian Accounting Standards (including Interpretations) arising from the issuance of AASB 15. AASB 2016-3 Amendments to Australian Accounting Standards – Clarifications to AASB 15 amends AASB 15 to clarify the requirements on identifying performance obligations, principal versus agent considerations and the timing of recognising revenue from granting a licence and provides further practical expedients on transition to AASB 15. The amendments clarify that a full gain or loss is recognised when a transfer to an associate or joint venture involves a business as defined in AASB 3 Business Combinations. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. AASB 2015-10 deferred the mandatory effective date (application date) of AASB 2014-10 so that the amendments were required to be applied for annual reporting periods beginning on or after 1 January 2018 instead of 1 January 2016. AASB 2017-5 further defers the effective date of the amendments made in AASB 2014-10 to periods beginning on or after 1 January 2022. 1 January 2022 1 January 2022 AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture AASB 16 Leases The key features of AASB 16 are as follows: 1 January 2019 1 January 2019 Lessee accounting • Lessees are required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. • Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. • AASB 16 contains disclosure requirements for lessees. Lessor accounting • AASB 16 substantially carries forward the lessor accounting requirements in AASB 117. AASB 15 Revenue from Contracts with Customers AASB 15 Revenue from Contracts with Customers 1 January 2018 1 January 2018 DANAKALI LIMITED ABN 56 097 904 302 41 DANAKALI LIMITED ABN 56 097 904 302 Page 63 42 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Reference Title Summary Application date of standard* for Group Reference Title Summary Application date of standard* for Group Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. • AASB 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure, particularly to residual value risk. AASB 16 supersedes: a) AASB 117 Leases b) Interpretation 4 Determining whether an Arrangement contains a Lease c) SIC-15 Operating Leases—Incentives d) SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease The new standard will be effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, AASB 15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as AASB 16. This standard amends AASB 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for: • The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments • Share-based payment transactions with a net settlement feature for withholding tax obligations • A modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash- settled to equity-settled The Interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transaction for each payment or receipt of advance consideration. The Interpretation clarifies the application of the recognition and measurement criteria in AASB 112 Income Taxes when there is uncertainty over income tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • The assumptions an entity makes about the examination of tax treatments by taxation authorities • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances. 1 January 2018 1 January 2018 1 January 2018 1 January 2018 1 January 2019 1 January 2019 AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share- based Payment Transactions AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration Uncertainty over Income Tax Treatments AASB Interpretation 23, and relevant amending standards AASB 2017-7 Amendments to Australian This Standard amends AASB 128 Investments in 1 January 2019 1 January 2019 Accounting Standards – Associates and Joint Ventures to clarify that an Long-term Interests in Associates and Joint Ventures Not yet issued Annual Improvements to The amendments clarify certain requirements in: 1 January 2019 1 January 2019 by the AASB IFRS Standards 2015- 2017 Cycle entity is required to account for long-term interests in an associate or joint venture, which in substance form part of the net investment in the associate or joint venture but to which the equity method is not applied, using AASB 9 Financial Instruments before applying the loss allocation and impairment requirements in AASB 128. • IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - previously held interest in a joint operation • IAS 12 Income Taxes - income tax consequences of payments on financial instruments classified as equity • IAS 23 Borrowing Costs - borrowing costs eligible for capitalisation. 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. The Group’s non-current assets are geographically located in Eritrea. 4. REVENUE Interest 5. EXPENSES Depreciation Employee Benefits 6. CASH Cash at bank and in hand Profit /(loss) before income tax includes the following specific expenses: Lease payments relating to operating leases Share based payment expense 221,189 109,537 2017 $ 2017 $ 2016 $ 2016 $ 144,152 988,573 3,588 1,535,460 116,691 1,290,347 10,131 1,181,957 2017 $ 2016 $ 15,559,980 10,904,760 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. DANAKALI LIMITED Page 64 ABN 56 097 904 302 43 DANAKALI LIMITED ABN 56 097 904 302 44 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Reference Title Summary Reference Title Summary Application date of standard* for Group AASB 2017-7 Amendments to Australian Accounting Standards – Long-term Interests in Associates and Joint Ventures This Standard amends AASB 128 Investments in Associates and Joint Ventures to clarify that an entity is required to account for long-term interests in an associate or joint venture, which in substance form part of the net investment in the associate or joint venture but to which the equity method is not applied, using AASB 9 Financial Instruments before applying the loss allocation and impairment requirements in AASB 128. Application date of standard* for Group 1 January 2019 1 January 2019 Not yet issued by the AASB Annual Improvements to IFRS Standards 2015- 2017 Cycle The amendments clarify certain requirements in: 1 January 2019 1 January 2019 • • • IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - previously held interest in a joint operation IAS 12 Income Taxes - income tax consequences of payments on financial instruments classified as equity IAS 23 Borrowing Costs - borrowing costs eligible for capitalisation. 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. The Group’s non-current assets are geographically located in Eritrea. 4. REVENUE Interest 5. EXPENSES Profit /(loss) before income tax includes the following specific expenses: Lease payments relating to operating leases Share based payment expense Depreciation Employee Benefits 6. CASH Cash at bank and in hand 2017 $ 2016 $ 221,189 109,537 2017 $ 2016 $ 144,152 988,573 3,588 1,535,460 116,691 1,290,347 10,131 1,181,957 2017 $ 2016 $ 15,559,980 10,904,760 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. • AASB 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure, particularly to residual value risk. AASB 16 supersedes: a) AASB 117 Leases b) Interpretation 4 Determining whether an Arrangement contains a Lease c) SIC-15 Operating Leases—Incentives d) SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease The new standard will be effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, AASB 15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as AASB 16. • The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments • Share-based payment transactions with a net settlement feature for withholding tax obligations • A modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash- settled to equity-settled the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transaction for each payment or receipt of advance consideration. Income Taxes when there is uncertainty over income tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • The assumptions an entity makes about the examination of tax treatments by taxation authorities • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances. AASB 2016-5 Amendments to Australian This standard amends AASB 2 Share-based 1 January 2018 1 January 2018 Accounting Standards – Payment, clarifying how to account for certain Classification and types of share-based payment transactions. The Measurement of Share- amendments provide requirements on the based Payment Transactions accounting for: AASB Foreign Currency The Interpretation clarifies that in determining the 1 January 2018 1 January 2018 Interpretation Transactions and Advance spot exchange rate to use on initial recognition of 22 Consideration AASB Uncertainty over Income The Interpretation clarifies the application of the 1 January 2019 1 January 2019 Interpretation Tax Treatments recognition and measurement criteria in AASB 112 23, and relevant amending standards DANAKALI LIMITED ABN 56 097 904 302 43 DANAKALI LIMITED ABN 56 097 904 302 Page 65 44 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 7. INCOME TAX (a) Income tax recognised in profit or loss Current tax Deferred tax Total tax benefit/(expense) 2017 $ 2016 $ - - - - - - (b) Reconciliation of income tax expense to prima facie tax payable Loss before income tax expense (6,839,936) (4,925,558) Prima facie tax benefit at the Australian tax rate of 27.5% (2016: 30%) (1,880,982) (1,477,667) 9. PLANT AND EQUIPMENT from third party secured lenders, under which CMSC may enter into in order to fund the Project Development Capital. For accounting purposes, the value of the loan has been discounted by applying an effective interest rate of 25%. During the year ended 31 December 2017, the repayment profile of the receivable was updated to consider the results generated by the completion of the Front-End Engineering Design (“FEED”) on 29 January 2018 and timing of the completion of construction. This resulted in a loss on the re-measurement of the loan amounting to $216,909 (see note 10). During the year ended 31 December 2016 the repayment profile of the receivable was updated to consider the results generated by the completion of the definitive feasibility study on 30 November 2015 and timing of the completion of construction. This resulted in a loss on the re-measurement of the loan amounting to $2,812,064 (see note 10). The undiscounted underlying loan balance at 31 December 2017 is $27,176,517 (31 December 2016: $24,993,066). Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share-based payments Share of net loss of equity accounted associate Accretion relating to the unwinding of discount on joint venture loan Movements in unrecognised temporary differences and tax effect of current year tax losses: Income tax expense/(benefit) 271,858 1,405,548 (315,115) 518,691 - 387,104 210,133 (466,478) 1,346,908 - (c) Deferred Income Tax Deferred income tax at 31 December relates to the following: Deferred Tax Liabilities: Interest receivable Deferred Tax Assets: Provision for employee entitlements Accrued expenditure s.40-880 expenditure Revenue tax losses Deferred tax assets not brought to account as realisation is not probable Statement of Financial Position 2017 $ 2016 $ Statement of Comprehensive Income 2016 2017 $ $ - (3,151) 3,151 (1,372) 53,358 12,309 270,029 4,248,669 53,145 6,600 182,609 4,660,393 (4,584,365) - (4,899,596) - 213 5,709 87,420 (411,724) 315,231 - 18,805 600 182,286 699,581 (899,900) - 8. TRADE AND OTHER RECEIVABLES Current Net GST receivable Accrued interest Other receivables Other receivables Security bonds Non-Current Loan to Colluli Mining Share Company 2017 $ 2016 $ 112,705 - 75 2,291 59,250 174,321 28,546 10,504 652 2,283 52,000 93,985 12,216,952 12,216,952 9,519,503 9,519,503 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 Plant and equipment Gross carrying value – at cost Accumulated depreciation Net book amount Plant and equipment Opening net book amount 1 January Additions Disposals Depreciation charge Closing net book amount 31 December 2017 $ 2016 $ 58,437 (43,327) 15,110 7,920 10,778 - (3,588) 15,110 47,659 (39,739) 7,920 16,412 3,122 (1,483) (10,131) 7,920 10. INVESTMENT IN JOINT VENTURE The Group has an interest in the following joint arrangement: Project Activities Equity Interest Carrying Value 2017 % 2016 % 2017 $ 2016 $ Colluli Potash Mineral Exploration 50 50 13,811,946 13,502,312 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 the Shareholders Agreement entered into with the Eritrean National Mining Corporation (“ENAMCO”) and executed in November 2013. 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. Under the terms of the Shareholders Agreement, at the date of incorporation of CMSC, consideration for the acquisition of shares in CMSC equated to half of the allowable historical exploration costs transferred to CMSC by STB Eritrea Pty Ltd, a wholly owned subsidiary of Danakali Limited. The balance of the allowable historic exploration costs transferred to CMSC are recoverable via a shareholder loan account (see note 8). 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 31 December 2017. Reconciliation of movement in investments accounted for using the equity method: Opening carrying amount at 1 January Additional investment during the year Share of net losses for the year Other comprehensive income for the year Closing carrying amount at 31 December 2017 $ 2016 $ 13,502,312 6,354,472 (5,111,085) (933,753) 13,811,946 12,064,742 1,868,088 (700,443) 269,925 13,502,312 DANAKALI LIMITED Page 66 ABN 56 097 904 302 45 DANAKALI LIMITED ABN 56 097 904 302 46 Danakali Annual Report 2017DANAKALI LIMITED 7. INCOME TAX (a) Income tax recognised in profit or loss Current tax Deferred tax Total tax benefit/(expense) 2017 $ 2016 $ - - - - - - (b) Reconciliation of income tax expense to prima facie tax payable Loss before income tax expense (6,839,936) (4,925,558) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share-based payments Share of net loss of equity accounted associate Accretion relating to the unwinding of discount on joint venture loan Movements in unrecognised temporary differences and tax effect of current year tax losses: Income tax expense/(benefit) 271,858 1,405,548 (315,115) 518,691 - 387,104 210,133 (466,478) 1,346,908 - Statement of Financial Position 2017 $ 2016 $ Statement of Comprehensive Income 2017 $ 2016 $ - (3,151) 3,151 (1,372) (c) Deferred Income Tax Deferred income tax at 31 December relates to the following: Deferred Tax Liabilities: Interest receivable Deferred Tax Assets: Accrued expenditure s.40-880 expenditure Revenue tax losses Provision for employee entitlements Deferred tax assets not brought to account as realisation is not probable 53,358 12,309 270,029 4,248,669 53,145 6,600 182,609 4,660,393 (4,584,365) (4,899,596) - - 8. TRADE AND OTHER RECEIVABLES Current Net GST receivable Accrued interest Other receivables Other receivables Security bonds Non-Current Loan to Colluli Mining Share Company 213 5,709 87,420 (411,724) 315,231 - 112,705 - 75 2,291 59,250 174,321 18,805 600 182,286 699,581 (899,900) - 28,546 10,504 652 2,283 52,000 93,985 2017 $ 2016 $ 12,216,952 12,216,952 9,519,503 9,519,503 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Prima facie tax benefit at the Australian tax rate of 27.5% (2016: 30%) (1,880,982) (1,477,667) 9. PLANT AND EQUIPMENT from third party secured lenders, under which CMSC may enter into in order to fund the Project Development Capital. For accounting purposes, the value of the loan has been discounted by applying an effective interest rate of 25%. During the year ended 31 December 2017, the repayment profile of the receivable was updated to consider the results generated by the completion of the Front-End Engineering Design (“FEED”) on 29 January 2018 and timing of the completion of construction. This resulted in a loss on the re-measurement of the loan amounting to $216,909 (see note 10). During the year ended 31 December 2016 the repayment profile of the receivable was updated to consider the results generated by the completion of the definitive feasibility study on 30 November 2015 and timing of the completion of construction. This resulted in a loss on the re-measurement of the loan amounting to $2,812,064 (see note 10). The undiscounted underlying loan balance at 31 December 2017 is $27,176,517 (31 December 2016: $24,993,066). Plant and equipment Gross carrying value – at cost Accumulated depreciation Net book amount Plant and equipment Opening net book amount 1 January Additions Disposals Depreciation charge Closing net book amount 31 December 2017 $ 2016 $ 58,437 (43,327) 15,110 7,920 10,778 - (3,588) 15,110 47,659 (39,739) 7,920 16,412 3,122 (1,483) (10,131) 7,920 10. INVESTMENT IN JOINT VENTURE The Group has an interest in the following joint arrangement: Project Activities Equity Interest Carrying Value 2017 % 2016 % 2017 $ 2016 $ Colluli Potash Mineral Exploration 50 50 13,811,946 13,502,312 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 the Shareholders Agreement entered into with the Eritrean National Mining Corporation (“ENAMCO”) and executed in November 2013. 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. Under the terms of the Shareholders Agreement, at the date of incorporation of CMSC, consideration for the acquisition of shares in CMSC equated to half of the allowable historical exploration costs transferred to CMSC by STB Eritrea Pty Ltd, a wholly owned subsidiary of Danakali Limited. The balance of the allowable historic exploration costs transferred to CMSC are recoverable via a shareholder loan account (see note 8). 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 31 December 2017. Reconciliation of movement in investments accounted for using the equity method: Opening carrying amount at 1 January Additional investment during the year Share of net losses for the year Other comprehensive income for the year Closing carrying amount at 31 December 2017 $ 2016 $ 13,502,312 6,354,472 (5,111,085) (933,753) 13,811,946 12,064,742 1,868,088 (700,443) 269,925 13,502,312 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 DANAKALI LIMITED ABN 56 097 904 302 45 DANAKALI LIMITED ABN 56 097 904 302 Page 67 46 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 INVESTMENT IN JOINT VENTURE (Cont’d) 10. Summarised financial information of joint venture: Financial position (Aligned to Danakali accounting policies) Current Assets: Cash Other current assets Non-current assets Fixed Assets Mineral Property Current liabilities Trade & other payables and provisions Non-current liabilities Loan from Danakali Ltd NET ASSETS Group’s share of net assets Reconciliation of Equity Investment: Group’s share of net assets Share of initial contribution on establishment of the Joint Venture not recognised by Danakali Outside shareholder interest in equity contributions by Danakali Carrying amount at the end of the period Financial performance Interest expense relating to the unwinding of discount Gain on re-measurement of loan Exploration and evaluation expenditure TOTAL COMPREHENSIVE LOSS FOR THE YEAR 2017 $ 2016 $ 43,901 83,582 127,483 108,727 27,610,315 27,719,042 (250,832) (250,832) 26,653 90,123 116,776 99,346 30,500,729 30,600,075 (151,648) (151,648) (12,216,952) (12,216,952) (9,519,503) (9,519,503) 15,378,741 21,045,700 7,689,371 10,522,850 7,689,371 10,522,850 (4,305,107) (4,305,107) 10,427,682 13,811,946 7,284,569 13,502,312 2017 $ 2016 $ (1,362,780) 216,909 (9,076,298) (10,222,169) (1,554,925) 2,812,064 (2,658,024) (1,400,885) Group’s share of total loss for the year (5,111,085) (700,443) During the year ended 31 December 2017 no dividends were paid or declared (2016: Nil). There were no material commitments or contingencies within Colluli Mining Share Company for the financial periods above. During the year ended 31 December 2017, the repayment profile of the receivable was updated to consider the results generated by the completion of the Front-End Engineering Design (“FEED”) on 29 January 2018 and timing of the completion of construction. This resulted in a gain on the re-measurement of the loan amounting to $216,909. During the year ended 31 December 2016, the repayment profile of the loan was changed to consider the results generated by the completion of the definitive feasibility study on 30 November 2015 and timing of the completion of construction. This resulted in a gain on the re-measurement of the loan amounting to $2,812,064. DANAKALI LIMITED Page 68 ABN 56 097 904 302 47 DANAKALI LIMITED ABN 56 097 904 302 11. TRADE AND OTHER PAYABLES Trade payables Accrued expenses Other payables 12. PROVISIONS Current Employee entitlements Non-Current Employee entitlements 2017 $ 925,470 103,453 68,164 1,097,087 2016 $ 132,827 42,125 35,790 210,742 2017 $ 2016 $ 166,219 134,701 27,811 194,030 42,450 177,151 Employee entitlements relate to the balance of annual leave and long service leave accrued by the Group’s employees. Recognition and measurement criteria have been disclosed in note 2. 13. ISSUED CAPITAL Balance at the beginning of the year 224,494,677 61,758,320 175,772,167 48,983,913  Issued at $0.278 per share on option exercise 4,600,000 1,278,800 400,000 111,200 (a) Share capital Ordinary shares fully paid Total issued capital (b) Movements in ordinary share capital Issued during the year:  Issued at $0.220 per share  Issued at $0.330 per share  Issued at $0.340 per share on option exercise  Issued at $0.350 per share on option exercise  Issued at $0.405 per share on option exercise  Issued at $0.408 per share on option exercise  Issued at $0.620 per share  Costs of capital raised 2017 2016 Number of shares $ Number of shares $ 251,697,687 75,415,034 224,494,677 61,758,320 251,697,687 75,415,034 224,494,677 61,758,320 - - - 24,870,464 5,471,548 20,200,000 6,666,000 2,630,000 622,046 894,200 217,716 1,356,365 351,000 200,000 474,728 142,155 81,600 19,920,645 12,350,800 - - - - - - - - -  Issued on vesting of performance rights 775,000 Balance at the end of the year 251,697,687 75,415,034 224,494,677 61,758,320 - (671,369) (586,257) (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. - - - - 48 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 10. INVESTMENT IN JOINT VENTURE (Cont’d) Summarised financial information of joint venture: Financial position (Aligned to Danakali accounting policies) Current Assets: Cash Other current assets Non-current assets Fixed Assets Mineral Property Current liabilities Non-current liabilities Loan from Danakali Ltd NET ASSETS Group’s share of net assets Trade & other payables and provisions Reconciliation of Equity Investment: Group’s share of net assets Share of initial contribution on establishment of the Joint Venture not recognised by Danakali Outside shareholder interest in equity contributions by Danakali Carrying amount at the end of the period Financial performance Interest expense relating to the unwinding of discount Gain on re-measurement of loan Exploration and evaluation expenditure TOTAL COMPREHENSIVE LOSS FOR THE YEAR 2017 $ 2016 $ 43,901 83,582 127,483 108,727 27,610,315 27,719,042 (250,832) (250,832) 26,653 90,123 116,776 99,346 30,500,729 30,600,075 (151,648) (151,648) (12,216,952) (12,216,952) (9,519,503) (9,519,503) 15,378,741 21,045,700 7,689,371 10,522,850 7,689,371 10,522,850 (4,305,107) (4,305,107) 10,427,682 13,811,946 7,284,569 13,502,312 2017 $ 2016 $ (1,362,780) 216,909 (9,076,298) (10,222,169) (1,554,925) 2,812,064 (2,658,024) (1,400,885) Group’s share of total loss for the year (5,111,085) (700,443) During the year ended 31 December 2017 no dividends were paid or declared (2016: Nil). There were no material commitments or contingencies within Colluli Mining Share Company for the financial periods above. During the year ended 31 December 2017, the repayment profile of the receivable was updated to consider the results generated by the completion of the Front-End Engineering Design (“FEED”) on 29 January 2018 and timing of the completion of construction. This resulted in a gain on the re-measurement of the loan amounting to $216,909. During the year ended 31 December 2016, the repayment profile of the loan was changed to consider the results generated by the completion of the definitive feasibility study on 30 November 2015 and timing of the completion of construction. This resulted in a gain on the re-measurement of the loan amounting to $2,812,064. 11. TRADE AND OTHER PAYABLES Trade payables Accrued expenses Other payables 12. PROVISIONS Current Employee entitlements Non-Current Employee entitlements 2017 $ 925,470 103,453 68,164 1,097,087 2016 $ 132,827 42,125 35,790 210,742 2017 $ 2016 $ 166,219 134,701 27,811 194,030 42,450 177,151 Employee entitlements relate to the balance of annual leave and long service leave accrued by the Group’s employees. Recognition and measurement criteria have been disclosed in note 2. 13. ISSUED CAPITAL (a) Share capital Ordinary shares fully paid Total issued capital (b) Movements in ordinary share capital 2017 2016 Number of shares $ Number of shares $ 251,697,687 75,415,034 224,494,677 61,758,320 251,697,687 75,415,034 224,494,677 61,758,320 Balance at the beginning of the year 224,494,677 61,758,320 175,772,167 48,983,913 Issued during the year:  Issued at $0.220 per share  Issued at $0.278 per share on option exercise  Issued at $0.330 per share  Issued at $0.340 per share on option exercise  Issued at $0.350 per share on option exercise  Issued at $0.405 per share on option exercise  Issued at $0.408 per share on option exercise  Issued at $0.620 per share  Costs of capital raised  Issued on vesting of performance rights - - 24,870,464 5,471,548 4,600,000 1,278,800 400,000 111,200 - - 1,356,365 351,000 200,000 - - 474,728 142,155 81,600 19,920,645 12,350,800 - (671,369) 775,000 - 20,200,000 6,666,000 2,630,000 622,046 894,200 217,716 - - - - - - - - (586,257) - Balance at the end of the year 251,697,687 75,415,034 224,494,677 61,758,320 (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. DANAKALI LIMITED ABN 56 097 904 302 47 DANAKALI LIMITED ABN 56 097 904 302 Page 69 48 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 13. ISSUED CAPITAL (Cont’d) 15. ACCUMULATED LOSSES (d) Movements in options on issue Balance at beginning of the year Issued during the year:  Exercisable at $0.350, on or before 30 March 2018  Exercisable at $0.350, on or before 13 May 2018  Exercisable at $0.405, on or before 13 May 2018  Exercisable at $0.450, on or before 23 June 2018  Exercisable at $0.550, on or before 4 November 2018  Exercisable at $0.550, on or before 31 December 2018  Exercisable at $0.558, on or before 8 August 2019  Exercisable at $0.543, on or before 7 October 2018  Exercisable at $0.940, on or before 19 May 2020  Exercisable at $0.960, on or before 20 June 2019 Exercised, cancelled or expired during the year:  Expired, exercisable at $0.599, on or before 31 January 2016  Expired, exercisable at $0.649, on or before 31 January 2016  Expired, exercisable at $0.949, on or before 31 January 2016  Exercised, exercisable at $0.278 on or before 17 November 2017  Exercised, exercisable at $0.340 on or before 29 November 2016  Expired, exercisable at $0.340, on or before 29 November 2016  Exercised, exercisable at $0.350 on or before 30 March 2018  Exercised, exercisable at $0.350 on or before 13 May 2018  Exercised, exercisable at $0.408 on or before 4 November 2018  Cancelled, exercisable at $0.408 on or before 4 November 2018  Cancelled, exercisable at $0.543 on or before 7 October 2019 Balance at end of the year 14. RESERVES (a) Reserves Share-based payments reserve Balance at beginning of the year Employee and contractor share options and performance rights (note 22) Balance at end of the year Foreign currency translation reserve Balance at beginning of the year Currency translation differences arising during the year/ period Balance at end of the year Total reserves (b) Nature and purpose of reserves 2017 Options 2016 Options 25,213,186 16,350,000 - - - - - - - - 1,440,000 400,000 - - - (4,600,000) - - (1,356,365) (351,000) (200,000) (800,000) (550,000) 19,195,821 11,635,232 800,000 2,700,000 200,000 750,000 1,000,000 1,000,000 800,000 - - (700,000) (1,000,000) (1,300,000) (400,000) (2,630,000) (3,370,000) (622,046) - - - - 25,213,186 2017 $ 2016 $ 10,427,536 988,573 11,416,109 2,039,243 (933,753) 1,105,490 9,137,189 1,290,347 10,427,536 1,769,318 269,925 2,039,243 12,521,599 12,466,779 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. Balance at beginning of the year Loss for the year Balance at end of the year 16. STATEMENT OF CASH FLOWS (a) Reconciliation of net loss after income tax to net cash outflow from Accretion relating to the unwinding of discount on joint venture loan Loss on re-measurement of loan to joint venture carried at amortised cost operating activities Net loss for the year Non-Cash Items: Depreciation of plant and equipment Loss of disposal of plant and equipment Share-based payment expense Share of net loss of associate Foreign exchange loss/(gain) Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in trade and other payables Increase/(decrease) in provisions Net cash outflow from operating activities (b) Funding of joint venture operations 2017 $ (40,559,411) (6,839,936) (47,399,347) 2016 $ (35,633,853) (4,925,558) (40,559,411) 2017 $ 2016 $ (6,839,936) (4,925,558) 3,588 - 988,573 (1,362,780) 5,111,085 495,525 216,909 (33,890) 124,368 16,879 10,131 1,483 1,290,347 (1,554,925) 700,443 (54,243) 2,812,064 71,163 (84,124) 62,685 (1,279,679) (1,670,534) Cash contribution to joint venture operations during the period (7,711,037) (2,952,332) 17. EARNINGS PER SHARE (a) Reconciliation of earnings used in calculating earnings per share (EPS) Loss attributable to the owners of the Company used in calculating basic and diluted loss per share (6,839,936) (4,925,558) (b) Weighted average number of shares used as the denominator 2017 $ 2016 $ 2017 2016 No. of Shares No. of Shares Weighted average number of ordinary shares used as the denominator in calculating basic and diluted loss per share 239,710,693 202,482,410 As the Group incurred a loss for the period, the options on issue have an anti-dilutive effect, therefore the diluted EPS is equal to the basic EPS. A total of 19,195,821 (2016: 25,213,186) share options and 1,408,000 (2016: 1,958,000) performance rights which could potentially dilute basic EPS in the future have been excluded from the diluted EPS calculation because they are anti-dilutive for the current year presented. DANAKALI LIMITED Page 70 ABN 56 097 904 302 49 DANAKALI LIMITED ABN 56 097 904 302 50 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 13. ISSUED CAPITAL (Cont’d) 15. ACCUMULATED LOSSES 2017 Options 2016 Options 25,213,186 16,350,000 - - - - - - - - - - - - - 1,440,000 400,000 (1,356,365) (351,000) (200,000) (800,000) (550,000) 11,635,232 800,000 2,700,000 200,000 750,000 1,000,000 1,000,000 800,000 (700,000) (1,000,000) (1,300,000) (400,000) (2,630,000) (3,370,000) (622,046) - - - - - - 2017 $ 2016 $ 10,427,536 988,573 11,416,109 2,039,243 (933,753) 1,105,490 9,137,189 1,290,347 10,427,536 1,769,318 269,925 2,039,243 12,521,599 12,466,779 (d) Movements in options on issue Balance at beginning of the year Issued during the year:  Exercisable at $0.350, on or before 30 March 2018  Exercisable at $0.350, on or before 13 May 2018  Exercisable at $0.405, on or before 13 May 2018  Exercisable at $0.450, on or before 23 June 2018  Exercisable at $0.550, on or before 4 November 2018  Exercisable at $0.550, on or before 31 December 2018  Exercisable at $0.558, on or before 8 August 2019  Exercisable at $0.543, on or before 7 October 2018  Exercisable at $0.940, on or before 19 May 2020  Exercisable at $0.960, on or before 20 June 2019 Exercised, cancelled or expired during the year:  Expired, exercisable at $0.599, on or before 31 January 2016  Expired, exercisable at $0.649, on or before 31 January 2016  Expired, exercisable at $0.949, on or before 31 January 2016  Exercised, exercisable at $0.278 on or before 17 November 2017 (4,600,000)  Exercised, exercisable at $0.340 on or before 29 November 2016  Expired, exercisable at $0.340, on or before 29 November 2016  Exercised, exercisable at $0.350 on or before 30 March 2018  Exercised, exercisable at $0.350 on or before 13 May 2018  Exercised, exercisable at $0.408 on or before 4 November 2018  Cancelled, exercisable at $0.408 on or before 4 November 2018  Cancelled, exercisable at $0.543 on or before 7 October 2019 Employee and contractor share options and performance rights (note 22) Currency translation differences arising during the year/ period Balance at end of the year 14. RESERVES (a) Reserves Share-based payments reserve Balance at beginning of the year Balance at end of the year Foreign currency translation reserve Balance at beginning of the year Balance at end of the year Total reserves (b) Nature and purpose of reserves Share-based payments reserve Foreign currency translation reserve arrangement. DANAKALI LIMITED ABN 56 097 904 302 The share-based payments reserve is used to recognise the fair value of share options and performance rights issued. The foreign currency translation reserve records the exchange differences arising on translation of a foreign joint Balance at beginning of the year Loss for the year Balance at end of the year 16. STATEMENT OF CASH FLOWS (a) Reconciliation of net loss after income tax to net cash outflow from operating activities Net loss for the year Non-Cash Items: Depreciation of plant and equipment Loss of disposal of plant and equipment Share-based payment expense Accretion relating to the unwinding of discount on joint venture loan Share of net loss of associate Foreign exchange loss/(gain) Loss on re-measurement of loan to joint venture carried at amortised cost Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in trade and other payables Increase/(decrease) in provisions Net cash outflow from operating activities 2017 $ (40,559,411) (6,839,936) (47,399,347) 2016 $ (35,633,853) (4,925,558) (40,559,411) 2017 $ 2016 $ (6,839,936) (4,925,558) 3,588 - 988,573 (1,362,780) 5,111,085 495,525 216,909 (33,890) 124,368 16,879 (1,279,679) 10,131 1,483 1,290,347 (1,554,925) 700,443 (54,243) 2,812,064 71,163 (84,124) 62,685 (1,670,534) 19,195,821 25,213,186 17. EARNINGS PER SHARE (a) Reconciliation of earnings used in calculating earnings per share (EPS) (b) Funding of joint venture operations Cash contribution to joint venture operations during the period (7,711,037) (2,952,332) 2017 $ 2016 $ Loss attributable to the owners of the Company used in calculating basic and diluted loss per share (6,839,936) (4,925,558) (b) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic and diluted loss per share 239,710,693 202,482,410 As the Group incurred a loss for the period, the options on issue have an anti-dilutive effect, therefore the diluted EPS is equal to the basic EPS. A total of 19,195,821 (2016: 25,213,186) share options and 1,408,000 (2016: 1,958,000) performance rights which could potentially dilute basic EPS in the future have been excluded from the diluted EPS calculation because they are anti-dilutive for the current year presented. 2017 No. of Shares 2016 No. of Shares 49 DANAKALI LIMITED ABN 56 097 904 302 Page 71 50 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 18. FINANCIAL RISK MANAGEMENT 18. FINANCIAL RISK MANAGEMENT (Cont’d) The Group’s activities expose it to market, liquidity and credit risks arising from its financial instruments. Other than the loan to Colluli Mining Share Company, the Group does not presently have any material debtors. A formal The Group’s management of financial risk is aimed at ensuring net cash flows are sufficient to meet all of its financial commitments and maintain the capacity to fund the Colluli project and ancillary exploration activities. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Management monitors and manages the financial risks relating to the operations of the Group through regular reviews of risks. Market (including foreign exchange and interest rate risks), liquidity and credit risks arise in the normal course of business. These risks are managed under Board approved treasury processes and transactions. The principal financial instruments as at reporting date include cash, receivables and payables. This note presents information about exposures to the above risks, the objectives, policies and processes for measuring and managing risk, and the management of capital. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency and net investments in foreign operations. The Group has not formalised a foreign currency risk management policy however, it monitors its foreign currency expenditure in light of exchange rate movements. The international operations are at the start-up stage and there is limited exposure at the reporting date to assets and liabilities denominated in foreign currencies. The loan of $12,216,952 (2016: $9,519,503) to Colluli Mining Share Company is denominated in Eritrean Nakfa (Nakfa) which is pegged to the US Dollar. The following table demonstrates the sensitivity to a reasonably possible change in Nakfa exchange rates, with all other variables held constant. A strengthening of the Australian Dollar rate results in an increased loss before tax. The Group’s exposure to foreign currency changes for all other currencies is not material. Year to 31 December 2017 Year to 31 December 2016 (ii) Interest rate risk Change in Nakfa Rate % +5% -5% +5% -5% Effect on Loss before tax $ (610,848) 610,848 (475,975) 475,975 The Group is exposed to movements in market interest rates on cash. The Group’s policy is to monitor the interest rate yield curve out to six months to ensure a balance is maintained between the liquidity of cash assets and the interest rate return. The entire balance of cash for the Group of $15,559,980 (31 December 2016: $10,904,760) is subject to interest rate risk. The floating interest rates fluctuate during the period depending on current working capital requirements. The weighted average interest rate received on cash by the Group was 1.51% (31 December 2016: 1.10%). Sensitivity analysis At 31 December 2017, if interest rates had changed by -/+ 80 basis points from the weighted average rate for the period with all other variables held constant, post-tax loss for the Group would have been $117,048 higher/lower (31 December 2016: $87,238 higher/lower) as a result of lower/higher interest income from cash and cash equivalents. (b) Liquidity risk The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and ensuring sufficient cash and marketable securities are available to meet the current and future commitments of the Group. Due to the nature of the Group’s activities, being mineral exploration, the Group does not have ready access to credit facilities, with the primary source of funding being equity raisings. The Board of Directors constantly monitors the state of equity markets in conjunction with the Group’s current and future funding requirements, with a view to initiating appropriate capital raisings as required. (d) Fair values December 2017: Financial Assets: Trade and other receivables Total current Other receivables Total non-current Total Assets Financial liabilities: Trade and other payables Total current Total Liabilities December 2016: Financial Assets: Trade and other receivables Total current Other receivables Total non-current Total Assets Financial liabilities: Trade and other payables Total current Total Liabilities instruments. The financial liabilities of the Group are confined to trade and other payables as disclosed in the Consolidated Statement of Financial Position. All trade and other payables are non-interest bearing and due within 12 months of the reporting date. measurement date. (c) Credit risk The Group’s significant concentration of credit risk is cash. The maximum exposure to credit risk at balance date is the carrying amount of cash and trade and other receivables as disclosed in the Consolidated Statement of Financial Position and Notes to the Consolidated Financial Statements. credit risk management policy is not maintained in respect of debtors. Set out below is an overview of financial instruments, other than cash and short-term deposits, held by the group as at 31 Set out below is an overview of financial instruments, other than cash and short-term deposits, held by the group as at 31 Carrying Value Fair Value $ $ 174,321 174,321 174,321 174,321 12,216,952 12,216,952 12,216,952 12,216,952 12,391,273 12,391,273 1,097,087 1,097,087 1,097,087 1,097,087 1,097,087 1,097,087 Carrying Value Fair Value $ $ 93,985 93,985 93,985 93,985 9,519,503 9,519,503 9,519,503 9,519,503 9,613,488 9,613,488 210,742 210,742 210,742 210,742 210,742 210,742 The current receivables and payables carrying values approximates fair values due to the short-term maturities of these The fair value of the long-term receivable is determined by discounting future cashflows using an effective interest rate of 25%. The fair value disclosure is categorised as Level 3 in the fair value hierarchy as the estimated market interest rate is an unobserved input in the valuation. An unobserved input is used to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at DANAKALI LIMITED Page 72 ABN 56 097 904 302 51 DANAKALI LIMITED ABN 56 097 904 302 52 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 18. FINANCIAL RISK MANAGEMENT 18. FINANCIAL RISK MANAGEMENT (Cont’d) The Group’s activities expose it to market, liquidity and credit risks arising from its financial instruments. The Group’s management of financial risk is aimed at ensuring net cash flows are sufficient to meet all of its financial commitments and maintain the capacity to fund the Colluli project and ancillary exploration activities. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Management monitors and manages the financial risks relating to the operations of the Group through regular reviews of risks. Market (including foreign exchange and interest rate risks), liquidity and credit risks arise in the normal course of business. These risks are managed under Board approved treasury processes and transactions. The principal financial instruments as at reporting date include cash, receivables and payables. This note presents information about exposures to the above risks, the objectives, policies and processes for measuring and managing risk, and the management of capital. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency and net investments in foreign operations. The Group has not formalised a foreign currency risk management policy however, it monitors its foreign currency expenditure in light of exchange rate movements. The international operations are at the start-up stage and there is limited exposure at the reporting date to assets and liabilities denominated in foreign currencies. The loan of $12,216,952 (2016: $9,519,503) to Colluli Mining Share Company is denominated in Eritrean Nakfa (Nakfa) which is pegged to the US Dollar. The following table demonstrates the sensitivity to a reasonably possible change in Nakfa exchange rates, with all other variables held constant. A strengthening of the Australian Dollar rate results in an increased loss before tax. The Group’s exposure to foreign currency changes for all other currencies is not material. Change in Nakfa Rate Effect on Loss before tax % +5% -5% +5% -5% $ (610,848) 610,848 (475,975) 475,975 Year to 31 December 2017 Year to 31 December 2016 (ii) Interest rate risk Sensitivity analysis (b) Liquidity risk The Group is exposed to movements in market interest rates on cash. The Group’s policy is to monitor the interest rate yield curve out to six months to ensure a balance is maintained between the liquidity of cash assets and the interest rate return. The entire balance of cash for the Group of $15,559,980 (31 December 2016: $10,904,760) is subject to interest rate risk. The floating interest rates fluctuate during the period depending on current working capital requirements. The weighted average interest rate received on cash by the Group was 1.51% (31 December 2016: 1.10%). At 31 December 2017, if interest rates had changed by -/+ 80 basis points from the weighted average rate for the period with all other variables held constant, post-tax loss for the Group would have been $117,048 higher/lower (31 December 2016: $87,238 higher/lower) as a result of lower/higher interest income from cash and cash equivalents. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and ensuring sufficient cash and marketable securities are available to meet the current and future commitments of the Group. Due to the nature of the Group’s activities, being mineral exploration, the Group does not have ready access to credit facilities, with the primary source of funding being equity raisings. The Board of Directors constantly monitors the state of equity markets in conjunction with the Group’s current and future funding requirements, with a view to initiating appropriate capital raisings as required. The financial liabilities of the Group are confined to trade and other payables as disclosed in the Consolidated Statement of Financial Position. All trade and other payables are non-interest bearing and due within 12 months of the reporting date. (c) Credit risk The Group’s significant concentration of credit risk is cash. The maximum exposure to credit risk at balance date is the carrying amount of cash and trade and other receivables as disclosed in the Consolidated Statement of Financial Position and Notes to the Consolidated Financial Statements. Other than the loan to Colluli Mining Share Company, the Group does not presently have any material debtors. A formal credit risk management policy is not maintained in respect of debtors. (d) Fair values Set out below is an overview of financial instruments, other than cash and short-term deposits, held by the group as at 31 December 2017: Financial Assets: Trade and other receivables Total current Other receivables Total non-current Total Assets Financial liabilities: Trade and other payables Total current Total Liabilities Carrying Value $ Fair Value $ 174,321 174,321 174,321 174,321 12,216,952 12,216,952 12,216,952 12,216,952 12,391,273 12,391,273 1,097,087 1,097,087 1,097,087 1,097,087 1,097,087 1,097,087 Set out below is an overview of financial instruments, other than cash and short-term deposits, held by the group as at 31 December 2016: Financial Assets: Trade and other receivables Total current Other receivables Total non-current Total Assets Financial liabilities: Trade and other payables Total current Total Liabilities Carrying Value $ Fair Value $ 93,985 93,985 93,985 93,985 9,519,503 9,519,503 9,519,503 9,519,503 9,613,488 9,613,488 210,742 210,742 210,742 210,742 210,742 210,742 The current receivables and payables carrying values approximates fair values due to the short-term maturities of these instruments. The fair value of the long-term receivable is determined by discounting future cashflows using an effective interest rate of 25%. The fair value disclosure is categorised as Level 3 in the fair value hierarchy as the estimated market interest rate is an unobserved input in the valuation. An unobserved input is used to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. DANAKALI LIMITED ABN 56 097 904 302 51 DANAKALI LIMITED ABN 56 097 904 302 Page 73 52 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 19. CAPITAL MANAGEMENT The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it may continue to provide returns for shareholders and benefits for other stakeholders. Capital managed by the Board includes Shareholder equity, which was $40,537,286 (2016: $33,665,688). The focus of the Group’s capital risk management is the current working capital position against the requirements of the Group to meet exploration and project development programmes plus corporate overheads. The Group’s strategy is to ensure appropriate liquidity is maintained to meet anticipated operating requirements, with a view to initiating appropriate capital raisings as required. 20. CONTINGENCIES There are no material contingent liabilities or contingent assets of the Group at balance date. 21. COMMITMENTS Lease commitments: Group as lessee Operating leases (non-cancellable): Minimum lease payments - within one year - Aggregate lease expenditure contracted for at reporting date but not recognised as liabilities later than one year but not later than five years Technical services commitment: Minimum payment - within one year - later than one year but not later than five years Total Commitments Operating Leases: 2017 $ 2016 $ 70,000 11,667 81,667 47,885 - 47,885 - - - 1,214,793 - 1,214,793 81,667 1,262,678 The minimum future payments above relate to non-cancellable operating leases for offices. On 18 January 2018, the Company extended the office lease by 12 months commencing on 1 March 2018 for a total annual cost of $70,000. Historical volatility has been used as the basis for determining expected share price volatility as it assumed that this is indicative of future trends, which may not eventuate. The life of the options is based on historical exercise patterns, which Technical Services Commitment: The payments above related to a contract for technical services to be provided in relation to the Colluli Project. 22. SHARE-BASED PAYMENTS (a) Option Plans The Group provides benefits to employees (including directors), contractors and consultants of the Group in the form of share-based payment transactions, whereby employees, contractors and consultants render services in exchange for options to acquire ordinary shares. All options issued have exercise prices ranging from $0.35 each to $0.96 each and expiry dates ranging from 30 March 2018 to 19 May 2020. Options granted carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share of the Company with full dividend and voting rights. Set out below is a summary of the options granted. 2017 2016 Number of options Weighted average exercise price Number of options Weighted average exercise price Outstanding at the beginning of the year Granted Exercised Expired Outstanding at end of the year Exercisable at end of the year 25,213,186 1,840,000(a) (b) (6,507,365) (1,350,000) 19,195,821 18,845,821 $0.384 $0.944 $0.304 $0.463 $0.459 $0.547 16,350,000 18,885,232 (3,652,046) (6,370,000) 25,213,186 22,613,186 Note: DANAKALI LIMITED Page 74 ABN 56 097 904 302 $0.420 $0.397 $0.335 $0.547 $0.384 $0.370 53 22. SHARE-BASED PAYMENTS (Cont’d) (a) Options granted during the year to 31 December 2016 include: 1,000,000 options granted to Arlington Group Asset Management Ltd in consideration for services provided. 200,000 options granted to Mr C Wirth in consideration for services provided. (b) Options granted during the year to 31 December 2017 include: 1,440,000 options granted to Directors of the Company in recognition of serviced provided. 400,000 options granted to advisors in consideration for services provided. - - - - The weighted average remaining contractual life of share options outstanding at the end of the period was 0.945 years (31 December 2016: 1.38 years), with exercise prices ranging from $0.35 to $0.96. The weighted average fair value of the options granted during the period was $0.20 (31 December 2016: $0.091). The price was calculated by using the Black-Scholes European Option Pricing Model applying the following inputs, to produce the fair value per option: Options Granted during the period to 31 December 2017: Number Fair Value Exercise at Risk Free Estimated of Options Grant Date Expiry Date per Option Grant Date Interest Rate Volatility 1,440,000 19/05/2017 19/05/2019 400,000 20/06/2017 20/06/2019 $0.202 $0.193 $0.690 $0.785 1.780% 1.660% 56% 55% Share Price Options Granted during the period to 31 December 2016: Number Fair Value Exercise at Risk Free Estimated of Options Grant Date Expiry Date per Option Grant Date Interest Rate Volatility Share Price 11,635,232 31/03/2016 31/03/2018 800,000 13/05/2016 13/05/2018 2,700,000 13//05/2016 13/05/2018 200,000 750,000 23/06/2016 23/06/2018 04/11/2016 04/11/2018 1,000,000 08/08/2016 31/12/2018 1,000,000 08/08/2016 08/08/2019 800,000 07/10/2016 07/10/2019 $0.071 $0.123 $0.106 $0.145 $0.146 $0.149 $0.169 $0.173 $0.225 $0.300 $0.300 $0.375 $0.410 $0.390 $0.390 $0.390 1.890% 1.590% 1.590% 1.720% 1.645% 1.490% 1.450% 1.650% 80% 80% 80% 80% 80% 80% 80% 80% Price $0.940 $0.960 Price $0.350 $0.350 $0.405 $0.450 $0.550 $0.550 $0.558 $0.543 may not eventuate in the future. (c) Performance Rights Plan The Performance Rights Plan 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. Under the Performance Rights Plan, shares are issued in the future subject, to the performance-based vesting conditions being met. 1,408,000 performance rights on issue at 31 December 2017 (31 December 2016: 1,958,000) had the following vesting conditions. • 308,000 upon completion of securing finance for the development of the Colluli Potash Project. • 75,000 upon granting of a Mining License for the Colluli Potash Project (vested February 2017); and • 75,000 upon completion of securing finance for the development of the Colluli Potash Project (forfeited 6 February Class 1: Class 2: 2017). Class 4: • 700,000 upon awarding of the Colluli mining licence (vested February 2017); and • 800,000 upon commencement of construction of the production facility. DANAKALI LIMITED ABN 56 097 904 302 54 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 19. CAPITAL MANAGEMENT The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it may continue to provide returns for shareholders and benefits for other stakeholders. Capital managed by the Board includes Shareholder equity, which was $40,537,286 (2016: $33,665,688). The focus of the Group’s capital risk management is the current working capital position against the requirements of the Group to meet exploration and project development programmes plus corporate overheads. The Group’s strategy is to ensure appropriate liquidity is maintained to meet anticipated operating requirements, with a view to initiating appropriate capital raisings as required. 20. CONTINGENCIES 21. COMMITMENTS There are no material contingent liabilities or contingent assets of the Group at balance date. Lease commitments: Group as lessee Operating leases (non-cancellable): Minimum lease payments - within one year - later than one year but not later than five years Aggregate lease expenditure contracted for at reporting date but not recognised as liabilities Technical services commitment: Minimum payment - within one year - later than one year but not later than five years 2017 $ 2016 $ 70,000 11,667 81,667 47,885 - 47,885 - - - 1,214,793 - 1,214,793 81,667 1,262,678 The minimum future payments above relate to non-cancellable operating leases for offices. On 18 January 2018, the Company extended the office lease by 12 months commencing on 1 March 2018 for a total annual cost of $70,000. The payments above related to a contract for technical services to be provided in relation to the Colluli Project. Total Commitments Operating Leases: Technical Services Commitment: 22. SHARE-BASED PAYMENTS (a) Option Plans The Group provides benefits to employees (including directors), contractors and consultants of the Group in the form of share-based payment transactions, whereby employees, contractors and consultants render services in exchange for options to acquire ordinary shares. All options issued have exercise prices ranging from $0.35 each to $0.96 each and expiry dates ranging from 30 March 2018 to 19 May 2020. Options granted carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share of the Company with full dividend and voting rights. Set out below is a summary of the options granted. Outstanding at the beginning of the year Granted Exercised Expired Outstanding at end of the year Exercisable at end of the year Note: DANAKALI LIMITED ABN 56 097 904 302 2017 2016 Number of Weighted average Number of Weighted average options exercise price options exercise price 25,213,186 1,840,000(a) (b) (6,507,365) (1,350,000) 19,195,821 18,845,821 $0.384 $0.944 $0.304 $0.463 $0.459 $0.547 16,350,000 18,885,232 (3,652,046) (6,370,000) 25,213,186 22,613,186 $0.420 $0.397 $0.335 $0.547 $0.384 $0.370 53 22. SHARE-BASED PAYMENTS (Cont’d) (a) Options granted during the year to 31 December 2016 include: - - 1,000,000 options granted to Arlington Group Asset Management Ltd in consideration for services provided. 200,000 options granted to Mr C Wirth in consideration for services provided. (b) Options granted during the year to 31 December 2017 include: - - 1,440,000 options granted to Directors of the Company in recognition of serviced provided. 400,000 options granted to advisors in consideration for services provided. The weighted average remaining contractual life of share options outstanding at the end of the period was 0.945 years (31 December 2016: 1.38 years), with exercise prices ranging from $0.35 to $0.96. The weighted average fair value of the options granted during the period was $0.20 (31 December 2016: $0.091). The price was calculated by using the Black-Scholes European Option Pricing Model applying the following inputs, to produce the fair value per option: Options Granted during the period to 31 December 2017: Number of Options 1,440,000 400,000 Grant Date Expiry Date 19/05/2017 19/05/2019 20/06/2017 20/06/2019 Fair Value per Option $0.202 $0.193 Exercise Price $0.940 $0.960 Share Price at Grant Date $0.690 $0.785 Risk Free Interest Rate 1.780% 1.660% Estimated Volatility 56% 55% Options Granted during the period to 31 December 2016: Number of Options 11,635,232 800,000 2,700,000 200,000 750,000 1,000,000 1,000,000 800,000 Grant Date Expiry Date 31/03/2016 31/03/2018 13/05/2016 13/05/2018 13//05/2016 13/05/2018 23/06/2016 23/06/2018 04/11/2016 04/11/2018 08/08/2016 31/12/2018 08/08/2016 08/08/2019 07/10/2016 07/10/2019 Fair Value per Option $0.071 $0.123 $0.106 $0.145 $0.146 $0.149 $0.169 $0.173 Exercise Price $0.350 $0.350 $0.405 $0.450 $0.550 $0.550 $0.558 $0.543 Share Price at Grant Date $0.225 $0.300 $0.300 $0.375 $0.410 $0.390 $0.390 $0.390 Risk Free Interest Rate 1.890% 1.590% 1.590% 1.720% 1.645% 1.490% 1.450% 1.650% Estimated Volatility 80% 80% 80% 80% 80% 80% 80% 80% Historical volatility has been used as the basis for determining expected share price volatility as it assumed that this is indicative of future trends, which may not eventuate. The life of the options is based on historical exercise patterns, which may not eventuate in the future. (c) Performance Rights Plan The Performance Rights Plan 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. Under the Performance Rights Plan, shares are issued in the future subject, to the performance-based vesting conditions being met. 1,408,000 performance rights on issue at 31 December 2017 (31 December 2016: 1,958,000) had the following vesting conditions. Class 1: • 308,000 upon completion of securing finance for the development of the Colluli Potash Project. Class 2: • 75,000 upon granting of a Mining License for the Colluli Potash Project (vested February 2017); and • 75,000 upon completion of securing finance for the development of the Colluli Potash Project (forfeited 6 February 2017). Class 4: • 700,000 upon awarding of the Colluli mining licence (vested February 2017); and • 800,000 upon commencement of construction of the production facility. DANAKALI LIMITED ABN 56 097 904 302 Page 75 54 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 22. SHARE-BASED PAYMENTS (Cont’d) 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: • 10,000 upon market announcement of a binding offtake agreement to support debt funding of the project; • 10,000 upon market announcement on completion of FEED; • 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 form 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 prior to the London listing; • 50,000 on securing a strategic equity partner; • 5,000 on completion of executing of two high quality investor roadshows; • 10,000 on finalising broker mandates which support the equity capital market strategy; and • 10,000 upon execution of a high-quality FEED communication strategy. Subject to achievement of either one of these performance conditions, one share will be issued for each Performance Right that has vested. The fair value of performance rights is initially determined by consideration of the Company’s share price at the grant date. There were 300,000 performance rights issued during the year to 31 December 2017 (31 December 2016: Nil). Details of performance rights on issue are set out in the following tables. 2017 Grant Date 25 January 2012 (Class 1) 15 May 2012 (Class 1) 12 December 2012 (Class 2) 9 December 2014 (Class 4) 20 June 2017 (Class 5) 20 June 2017 (Class 6) 15 November 2017 (Class 7) 15 November 2017 (Class 8) TOTAL 2016 Grant Date Balance at 1 January 2017 Issued during the period 50,000 258,000 150,000 1,500,000 - - - - 1,958,000 - - - - 100,000 50,000 50,000 100,000 300,000 Balance at 1 January 2016 Issued during the period 25 January 2012 (Class 1) 15 May 2012 (Class 1) 12 December 2012 (Class 2) 9 December 2014 (Class 4) TOTAL 50,000 258,000 150,000 1,500,000 1,958,000 - - - - - Vested and converted to shares - - (75,000) (700,000) - - - - (775,000) Vested and converted to shares - - - - - Cancelled upon termination Balance 31 December 2017 - - (75,000) - - - - 50,000 258,000 - 800,000 100,000 50,000 50,000 100,000 (75,000) 1,408,000 Cancelled upon termination Balance 31 December 2016 - - - - - 50,000 258,000 150,000 1,500,000 1,958,000 22. SHARE-BASED PAYMENTS (Cont’d) (d) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period were as follows: 2017 $ - 988,573 988,573 2016 $ - 1,290,347 1,290,347 Options and Performance Rights issued to directors, employees and Shares contractors (a) Parent entity (b) Subsidiary 23. RELATED PARTY TRANSACTIONS The ultimate parent entity within the Group is Danakali Limited. Interests in the subsidiary is set out in note 25. (c) Investment in Joint Venture Transactions with Colluli Mining Share Company are set out in notes 8 and 10 of this report. (d) Key management personnel compensation Short-term benefits Post-employment benefits Share-based payments There were no material related party transactions. (d) Key management personnel placement participation 2017 $ 1,232,171 67,199 768,027 2,067,397 2016 $ 986,020 86,232 830,623 1,902,875 In the previous financial year, on 13 May 2016, subsequent to shareholder approval, related parties participated in a placement of ordinary shares at an issue price of $0.22 per share to raise $352,000. In addition, one free attaching unlisted option was issued for every two shares purchased under the placement. The unlisted options are exercisable at $0.35 on or before 13 May 2018. Participation by related parties in the transaction detailed above, is set out in the following table. Related Party Position Seamus Ian Cornelius Non-Executive Chairman Paul Michael Donaldson Managing Director Anthony William Kiernan Non-Executive Director Liam Raymond Cornelius Non-Executive Director John Daniel Fitzgerald Non-Executive Director Placement Shares 250,000 100,000 100,000 1,000,000 150,000 1,600,000 Free Attaching Unlisted Options 125,000 50,000 50,000 500,000 75,000 800,000 DANAKALI LIMITED Page 76 ABN 56 097 904 302 55 DANAKALI LIMITED ABN 56 097 904 302 56 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 22. SHARE-BASED PAYMENTS (Cont’d) (d) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period were as follows: 2017 $ - 988,573 988,573 2016 $ - 1,290,347 1,290,347 Shares Options and Performance Rights issued to directors, employees and contractors 23. RELATED PARTY TRANSACTIONS (a) Parent entity The ultimate parent entity within the Group is Danakali Limited. (b) Subsidiary Interests in the subsidiary is set out in note 25. (c) Investment in Joint Venture • 5,000 on completion of an approval and issued CSR report befitting an ASX200 company prior to the London listing; Transactions with Colluli Mining Share Company are set out in notes 8 and 10 of this report. (d) Key management personnel compensation Short-term benefits Post-employment benefits Share-based payments There were no material related party transactions. (d) Key management personnel placement participation 2017 $ 1,232,171 67,199 768,027 2,067,397 2016 $ 986,020 86,232 830,623 1,902,875 In the previous financial year, on 13 May 2016, subsequent to shareholder approval, related parties participated in a placement of ordinary shares at an issue price of $0.22 per share to raise $352,000. In addition, one free attaching unlisted option was issued for every two shares purchased under the placement. The unlisted options are exercisable at $0.35 on or before 13 May 2018. Participation by related parties in the transaction detailed above, is set out in the following table. Related Party Seamus Ian Cornelius Paul Michael Donaldson Anthony William Kiernan Liam Raymond Cornelius John Daniel Fitzgerald Position Non-Executive Chairman Managing Director Non-Executive Director Non-Executive Director Non-Executive Director Placement Shares 250,000 100,000 100,000 1,000,000 150,000 1,600,000 Free Attaching Unlisted Options 125,000 50,000 50,000 500,000 75,000 800,000 22. SHARE-BASED PAYMENTS (Cont’d) • 20,000 upon commencement of the first development work on the ground at the Colluli site within 1 week of the • 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 scheduled development time; contractual requirements). • 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. • 10,000 upon market announcement of a binding offtake agreement to support debt funding of the project; • 10,000 upon market announcement on completion of FEED; • 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 form a strategic investor. • 20,000 on completion of a London stock exchange listing; • 50,000 on securing a strategic equity partner; • 5,000 on completion of executing of two high quality investor roadshows; • 10,000 on finalising broker mandates which support the equity capital market strategy; and • 10,000 upon execution of a high-quality FEED communication strategy. Subject to achievement of either one of these performance conditions, one share will be issued for each Performance Right that has vested. The fair value of performance rights is initially determined by consideration of the Company’s share price at the grant There were 300,000 performance rights issued during the year to 31 December 2017 (31 December 2016: Nil). Details of performance rights on issue are set out in the following tables. Balance at 1 January 2017 Issued during the period Cancelled upon Balance 31 termination December 2017 Vested and converted to shares 25 January 2012 (Class 1) 15 May 2012 (Class 1) 12 December 2012 (Class 2) 50,000 258,000 150,000 9 December 2014 (Class 4) 1,500,000 20 June 2017 (Class 5) 20 June 2017 (Class 6) 15 November 2017 (Class 7) 15 November 2017 (Class 8) - - - - 100,000 50,000 50,000 100,000 300,000 (75,000) (700,000) (75,000) Class 5: Class 6: Class 7: Class 8: date. 2017 Grant Date TOTAL 2016 Grant Date 1,958,000 (775,000) (75,000) 1,408,000 Balance at 1 January 2016 Issued during the period Cancelled upon Balance 31 termination December 2016 Vested and converted to shares - - - - - - - - - - - 50,000 258,000 - 800,000 100,000 50,000 50,000 100,000 50,000 258,000 150,000 1,500,000 1,958,000 25 January 2012 (Class 1) 15 May 2012 (Class 1) 12 December 2012 (Class 2) 9 December 2014 (Class 4) TOTAL 50,000 258,000 150,000 1,500,000 1,958,000 - - - - - - - - - - - - - - - - - - - - DANAKALI LIMITED ABN 56 097 904 302 55 DANAKALI LIMITED ABN 56 097 904 302 Page 77 56 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 24. REMUNERATION OF AUDITORS 28. EVENTS OCCURRING AFTER THE BALANCE DATE During the period, the following fees were paid or payable for services provided by the auditor of the Company, its related practices and non-related audit firms: On 29 January 2018, the Company announced the results of the front-end engineering design (FEED) phase for the Colluli Potash Project. On 31 January 2018 the Company released a presentation detailing the FEED results. (a) Audit services Ernst and Young (b) Non-audit services Ernst and Young – since appointment as auditor 25. SUBSIDIARY 2017 $ 2016 $ On 19 February 2018, the Company released an updated JORC-2012 Colluli Potassium Sulphate Ore Reserve. Subsequent to balance date up to the reporting date, the Company issued the following fully paid ordinary shares: 41,391 41,391 6,000 6,000 33,621 33,621 33,013 33,103 ▪ ▪ 400,000 shares on exercise of unlisted options at $0.405 each 775,000 shares on exercise of unlisted options at $0.35 each Subsequent to balance date up to the reporting date, the Company issued 25,000 shares on the vesting of performance No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future rights. financial years. Interest in subsidiary The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance with the accounting policy: Name STB Eritrea Pty Ltd Principal Activities Investment in Potash Exploration Country of Incorporation Class of Shares Australia Ordinary 2017 % 100 2016 % 100 Equity Holding The proportion of ownership interest is equal to the proportion of voting power held. 26. PARENT ENTITY INFORMATION The following information relates to the parent entity, Danakali Limited. The information presented here has been prepared using accounting policies consistent with those presented in note 2. Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Issued capital Share-based payments reserve Accumulated losses Total equity Loss for the year Total Comprehensive loss for the year 27. DIVIDENDS 2017 $ 15,784,395 26,044,008 41,828,403 1,263,306 27,811 1,291,117 75,415,034 11,416,109 (46,293,858) 40,537,286 2016 $ 11,023,845 23,029,735 34,053,580 345,443 42,450 387,893 61,758,320 10,427,536 (38,520,169) 33,665,687 (7,773,689) (7,773,689) (4,655,632) (4,655,632) No dividends were paid during the financial period. No recommendation for payment of dividends has been made. DANAKALI LIMITED Page 78 ABN 56 097 904 302 57 DANAKALI LIMITED ABN 56 097 904 302 58 Danakali Annual Report 2017DANAKALI LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2017 24. REMUNERATION OF AUDITORS practices and non-related audit firms: During the period, the following fees were paid or payable for services provided by the auditor of the Company, its related 28. EVENTS OCCURRING AFTER THE BALANCE DATE On 29 January 2018, the Company announced the results of the front-end engineering design (FEED) phase for the Colluli Potash Project. On 31 January 2018 the Company released a presentation detailing the FEED results. 2017 $ 2016 $ On 19 February 2018, the Company released an updated JORC-2012 Colluli Potassium Sulphate Ore Reserve. Subsequent to balance date up to the reporting date, the Company issued the following fully paid ordinary shares: 41,391 41,391 6,000 6,000 33,621 33,621 33,013 33,103 ▪ ▪ 400,000 shares on exercise of unlisted options at $0.405 each 775,000 shares on exercise of unlisted options at $0.35 each Subsequent to balance date up to the reporting date, the Company issued 25,000 shares on the vesting of performance rights. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Ernst and Young – since appointment as auditor (a) Audit services Ernst and Young (b) Non-audit services 25. SUBSIDIARY Interest in subsidiary with the accounting policy: The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance Name Principal Activities Incorporation Country of Class of Shares STB Eritrea Pty Ltd Australia Ordinary Investment in Potash Exploration 2017 % 100 Equity Holding 2016 % 100 The proportion of ownership interest is equal to the proportion of voting power held. 26. PARENT ENTITY INFORMATION The following information relates to the parent entity, Danakali Limited. The information presented here has been prepared using accounting policies consistent with those presented in note 2. Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Accumulated losses Total equity Loss for the year 27. DIVIDENDS Issued capital Share-based payments reserve Total Comprehensive loss for the year 2017 $ 15,784,395 26,044,008 41,828,403 1,263,306 27,811 1,291,117 75,415,034 11,416,109 (46,293,858) 40,537,286 2016 $ 11,023,845 23,029,735 34,053,580 345,443 42,450 387,893 61,758,320 10,427,536 (38,520,169) 33,665,687 (7,773,689) (7,773,689) (4,655,632) (4,655,632) No dividends were paid during the financial period. No recommendation for payment of dividends has been made. DANAKALI LIMITED ABN 56 097 904 302 57 DANAKALI LIMITED ABN 56 097 904 302 Page 79 58 Danakali Annual Report 2017DANAKALI LIMITED Directors’ Declaration In the Directors’ opinion: (a) the financial statements and notes set out on pages 52 to 79 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the Group’s financial position as at 31 December 2017 and of its performance for the financial period ended on that date; there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (b) The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Seamus Cornelius CHAIRMAN Perth, 22 March 2018 DANAKALI LIMITED Page 80 ABN 56 097 904 302 59 Danakali Annual Report 2017DANAKALI LIMITEDDirectors’ Declaration In the Directors’ opinion: including: reporting requirements; and the financial period ended on that date; due and payable; and (a) the financial statements and notes set out on pages 52 to 79 are in accordance with the Corporations Act 2001, (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional (ii) giving a true and fair view of the Group’s financial position as at 31 December 2017 and of its performance for (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Seamus Cornelius CHAIRMAN Perth, 22 March 2018 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au INDEPENDENT AUDITOR’S REPORT To the Shareholders of Danakali Limited INDEPENDENT AUDITOR’S REPORT Report on the audit of the financial report To the Shareholders of Danakali Limited Opinion Report on the audit of the financial report We have audited the financial report of Danakali Limited (the Company), including its subsidiaries (the Opinion Group), which comprises the consolidated statement of financial position as at 31 December 2017, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising We have audited the financial report of Danakali Limited (the Company), including its subsidiaries (the a summary of significant accounting policies and other explanatory information and the Directors’ Group), which comprises the consolidated statement of financial position as at 31 December 2017, the Declaration. consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising In our opinion: a summary of significant accounting policies and other explanatory information and the Directors’ Declaration. the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: In our opinion: (i) the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: giving a true and fair view of the Group’s consolidated financial position as at 31 December 2017 and of its consolidated financial performance for the year ended on that date; and (ii) (i) complying with Australian Accounting Standards and the Corporations Regulations 2001. giving a true and fair view of the Group’s consolidated financial position as at 31 December 2017 and of its consolidated financial performance for the year ended on that date; and Basis for opinion complying with Australian Accounting Standards and the Corporations Regulations 2001. (ii) We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under Basis for opinion those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial financial report in Australia; and we have fulfilled our other ethical responsibilities in accordance with the Report section of our report. We are independent of the Group in accordance with the Corporations Act Code. 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for financial report in Australia; and we have fulfilled our other ethical responsibilities in accordance with the our opinion. Code. Key audit matters We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters are those matters that, in our professional judgment, were of most significance in our Key audit matters audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For the matter below, our description of how our audit addressed the Key audit matters are those matters that, in our professional judgment, were of most significance in our matter is provided in that context. audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For the matter below, our description of how our audit addressed the matter is provided in that context. DANAKALI LIMITED ABN 56 097 904 302 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 59 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DANAKALI:030  Page 81 GB:EH:DANAKALI:030  Danakali Annual Report 2017DANAKALI LIMITED                                We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the performed to address the matter below, provide the basis for our audit opinion on the accompanying Financial Report section of our report, including in relation to these matters. Accordingly, our audit financial report. included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures Accounting for the Group’s interest in Colluli Mining Share Company (“CMSC”)  performed to address the matter below, provide the basis for our audit opinion on the accompanying financial report. Why significant Accounting for the Group’s interest in Colluli Mining Share Company (“CMSC”)  How our audit addressed the key audit matter The group acquired an interest in Colluli Mining Share Company (“CMSC”) at the date of CMSC’s incorporation Why significant on 5 March 2014. This acquisition was in accordance with the Shareholders Agreement entered into with the The group acquired an interest in Colluli Mining Share Eritrean National Mining Corporation (“ENAMCO”) Company (“CMSC”) at the date of CMSC’s incorporation which was executed in November 2013. CMSC was on 5 March 2014. This acquisition was in accordance incorporated in Eritrea, in accordance with the with the Shareholders Agreement entered into with the Shareholders’ Agreement, to hold the Colluli project, Eritrean National Mining Corporation (“ENAMCO”) with Danakali and ENAMCO each holding 50% of the which was executed in November 2013. CMSC was equity. incorporated in Eritrea, in accordance with the The group’s interest in CMSC is accounted for as a joint Shareholders’ Agreement, to hold the Colluli project, venture using the equity method and as a shareholder with Danakali and ENAMCO each holding 50% of the loan receivable. equity. The accounting for the results of and investment in The group’s interest in CMSC is accounted for as a joint CMSC is significant to our audit due to the complexity venture using the equity method and as a shareholder involved in measuring both the investment as well as loan receivable. the shareholder loan receivable. Specifically key The accounting for the results of and investment in assumptions underpinning the measurement of these CMSC is significant to our audit due to the complexity balances relate to the timing as to when the group involved in measuring both the investment as well as considers CMSC will have generated free cashflows the shareholder loan receivable. Specifically key from the project to enable repayment of monies loaned assumptions underpinning the measurement of these to them and an appropriate discount rate to reflect the balances relate to the timing as to when the group risk applicable to the timing and repayment of the considers CMSC will have generated free cashflows shareholder loan. from the project to enable repayment of monies loaned Refer to note (1)(r)(ii) and notes 8 and 10 to the to them and an appropriate discount rate to reflect the financial report for further detail explaining the key risk applicable to the timing and repayment of the judgements underpinning the accounting discussed in shareholder loan. the two preceding paragraphs. Refer to note (1)(r)(ii) and notes 8 and 10 to the At 31 December 2017, the Investment in CMSC financial report for further detail explaining the key amounted to $13.8 million (refer to Note 10 in the judgements underpinning the accounting discussed in financial statements) and the receivable from CMSC the two preceding paragraphs. amounted to $12.2 million (refer to Note 8 in the At 31 December 2017, the Investment in CMSC financial statements). amounted to $13.8 million (refer to Note 10 in the financial statements) and the receivable from CMSC amounted to $12.2 million (refer to Note 8 in the financial statements). Our procedures included the following: ► We reviewed the applicable Shareholders’ How our audit addressed the key audit matter Agreement and the group’s position paper which concluded that it is appropriate for Danakali’s investment in CMSC to be equity accounted. Our procedures included the following: ► We reviewed the applicable Shareholders’ ► We assessed the group’s calculations supporting Agreement and the group’s position paper which the measurement of the investment and the concluded that it is appropriate for Danakali’s shareholder loan. This calculation included the investment in CMSC to be equity accounted. discounting of the shareholder loan balance based ► We assessed the group’s calculations supporting on the group’s current best estimate of when the the measurement of the investment and the shareholder loan will be repaid. shareholder loan. This calculation included the ► We involved our valuation specialists to assess the discounting of the shareholder loan balance based assumed discount rate having regard to factors on the group’s current best estimate of when the such as the project and country risk. shareholder loan will be repaid. ► We assessed the group’s shareholder loan ► We assessed the group’s shareholder loan ► We involved our valuation specialists to assess the repayment assumptions having regard to the assumed discount rate having regard to factors current status of the project and the group’s best such as the project and country risk. estimates of the timeline to finance, develop, commission and produce free cashflow from the repayment assumptions having regard to the project to repay the shareholder loan. current status of the project and the group’s best ► We assessed the arithmetical accuracy of the estimates of the timeline to finance, develop, group’s calculations, including where applicable commission and produce free cashflow from the any foreign currency translations embedded in the project to repay the shareholder loan. measurement process. ► We assessed the arithmetical accuracy of the ► We performed appropriate audit procedures over group’s calculations, including where applicable the results of CMSC and confirmed that Danakali’s any foreign currency translations embedded in the 50% interest in these results were accounted for on measurement process. an equity basis in the financial statements of the ► We performed appropriate audit procedures over group. the results of CMSC and confirmed that Danakali’s ► We considered whether there were any impairment 50% interest in these results were accounted for on indicators to suggest that Danakali’s investment in an equity basis in the financial statements of the and shareholder loan to CMSC may be impaired at group. balance date. ► We considered whether there were any impairment indicators to suggest that Danakali’s investment in and shareholder loan to CMSC may be impaired at balance date. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page 82 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DANAKALI:030  GB:EH:DANAKALI:030  Danakali Annual Report 2017DANAKALI LIMITED                                Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au INDEPENDENT AUDITOR’S REPORT To the Shareholders of Danakali Limited Information other than the financial statements and auditor’s report Report on the audit of the financial report The Directors are responsible for the other information. The other information comprises the information in the Group’s Annual Report for the year ended 31 December 2017, but does not include the financial Opinion report and the auditor’s report thereon. We obtained the Directors’ report prior to the date of our auditor’s report. The commentary on the Potash Project Overview, Economic outcome of the FEED, We have audited the financial report of Danakali Limited (the Company), including its subsidiaries (the Development approach, Ownership and financing structure is expected to be made available to us after Group), which comprises the consolidated statement of financial position as at 31 December 2017, the the date of this auditor’s report.   consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising Our opinion on the financial report does not cover the other information and we do not express any form a summary of significant accounting policies and other explanatory information and the Directors’ of assurance conclusion thereon. Declaration. In connection with our audit of the financial report, our responsibility is to read the other information and, In our opinion: in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based upon the the accompanying financial report of the Group is in accordance with the Corporations Act 2001, work we have performed on the other information obtained prior to the date of the auditor’s report, we including: conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. (i) Directors’ responsibilities for the financial report giving a true and fair view of the Group’s consolidated financial position as at 31 December 2017 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (ii) The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for Basis for opinion such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under error. those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act In preparing the financial report, the Directors are responsible for assessing the Group’s ability to 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s continue as a going concern, disclosing, as applicable, matters related to going concern and using the APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the going concern basis of accounting unless the Directors either intend to liquidate the Group or cease financial report in Australia; and we have fulfilled our other ethical responsibilities in accordance with the operations, or have no realistic alternative but to do so. Code. Auditor’s responsibilities for the audit of the financial report We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes Key audit matters our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in our when it exists. Misstatements can arise from fraud or error and are considered material if, individually or audit of the financial report of the current year. These matters were addressed in the context of our in the aggregate, they could reasonably be expected to influence the economic decisions of users taken audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a on the basis of this financial report. separate opinion on these matters. For the matter below, our description of how our audit addressed the matter is provided in that context. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DANAKALI:030  Page 83 GB:EH:DANAKALI:030  Danakali Annual Report 2017DANAKALI LIMITED                                We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgment misstatement of the financial statements. The results of our audit procedures, including the procedures and maintain professional scepticism throughout the audit. We also: performed to address the matter below, provide the basis for our audit opinion on the accompanying financial report. ► Accounting for the Group’s interest in Colluli Mining Share Company (“CMSC”)  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. How our audit addressed the key audit matter Why significant Our procedures included the following: Obtain an understanding of internal control relevant to the audit in order to design audit ► We reviewed the applicable Shareholders’ Agreement and the group’s position paper which procedures that are appropriate in the circumstances, but not for the purpose of expressing an concluded that it is appropriate for Danakali’s opinion on the effectiveness of the entity’s internal control. investment in CMSC to be equity accounted. ► The group acquired an interest in Colluli Mining Share Company (“CMSC”) at the date of CMSC’s incorporation on 5 March 2014. This acquisition was in accordance with the Shareholders Agreement entered into with the Eritrean National Mining Corporation (“ENAMCO”) which was executed in November 2013. CMSC was incorporated in Eritrea, in accordance with the Shareholders’ Agreement, to hold the Colluli project, with Danakali and ENAMCO each holding 50% of the equity. ► ► ► ► We assessed the group’s shareholder loan ► We assessed the group’s calculations supporting Evaluate the appropriateness of accounting policies used and the reasonableness of accounting the measurement of the investment and the estimates and related disclosures made by the Directors. shareholder loan. This calculation included the discounting of the shareholder loan balance based Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting in on the group’s current best estimate of when the the preparation of the financial report. We also conclude, based on the audit evidence obtained, shareholder loan will be repaid. whether a material uncertainty exists related to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the disclosures in the financial report about the material uncertainty or, if such disclosures are inadequate, to modify the opinion on the financial report. However, future events or conditions may cause an entity to cease to continue as a going concern. ► We involved our valuation specialists to assess the assumed discount rate having regard to factors such as the project and country risk. repayment assumptions having regard to the current status of the project and the group’s best estimates of the timeline to finance, develop, Evaluate the overall presentation, structure and content of the financial report, including the commission and produce free cashflow from the project to repay the shareholder loan. disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. The group’s interest in CMSC is accounted for as a joint venture using the equity method and as a shareholder loan receivable. The accounting for the results of and investment in CMSC is significant to our audit due to the complexity involved in measuring both the investment as well as the shareholder loan receivable. Specifically key assumptions underpinning the measurement of these balances relate to the timing as to when the group considers CMSC will have generated free cashflows from the project to enable repayment of monies loaned to them and an appropriate discount rate to reflect the risk applicable to the timing and repayment of the shareholder loan. Refer to note (1)(r)(ii) and notes 8 and 10 to the financial report for further detail explaining the key judgements underpinning the accounting discussed in the two preceding paragraphs. group’s calculations, including where applicable any foreign currency translations embedded in the Obtain sufficient appropriate audit evidence regarding the financial information of the entities or measurement process. business activities within the Group to express an opinion on the financial report. We are ► We performed appropriate audit procedures over responsible for the direction, supervision and performance of the Group audit. We remain solely the results of CMSC and confirmed that Danakali’s responsible for our audit opinion. 50% interest in these results were accounted for on an equity basis in the financial statements of the group. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. ► We assessed the arithmetical accuracy of the At 31 December 2017, the Investment in CMSC amounted to $13.8 million (refer to Note 10 in the financial statements) and the receivable from CMSC amounted to $12.2 million (refer to Note 8 in the financial statements). ► We considered whether there were any impairment indicators to suggest that Danakali’s investment in and shareholder loan to CMSC may be impaired at balance date. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. ► From the matters communicated to the Directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page 84 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DANAKALI:030  GB:EH:DANAKALI:030  Danakali Annual Report 2017DANAKALI LIMITED                                Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au INDEPENDENT AUDITOR’S REPORT To the Shareholders of Danakali Limited Report on the Remuneration Report Report on the audit of the financial report Opinion on the Remuneration Report Opinion We have audited the Remuneration Report included in pages 39 to 49 of the Directors' Report for the year ended 31 December 2017. We have audited the financial report of Danakali Limited (the Company), including its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2017, the In our opinion, the Remuneration Report of Danakali Limited for the year ended 31 December 2017, consolidated statement of profit or loss and other comprehensive income, the consolidated statement of complies with section 300A of the Corporations Act 2001. changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the Directors’ Responsibilities Declaration. The Directors of the Company are responsible for the preparation and presentation of the Remuneration In our opinion: Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian the accompanying financial report of the Group is in accordance with the Corporations Act 2001, Auditing Standards. including: (i) giving a true and fair view of the Group’s consolidated financial position as at 31 December 2017 and of its consolidated financial performance for the year ended on that date; and Ernst & Young (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under Gavin Buckingham those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Partner Report section of our report. We are independent of the Group in accordance with the Corporations Act Perth 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s 22 March 2018 APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia; and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For the matter below, our description of how our audit addressed the matter is provided in that context. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation GB:EH:DANAKALI:030  Page 85 GB:EH:DANAKALI:030 Danakali Annual Report 2017DANAKALI LIMITEDASX Additional Information Additional information required by Australian Securities Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 28 February 2018. (a) Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1 1,001 5,001 10,001 100,001 TOTAL - 1,000 - 5,000 - 10,000 - 100,000 and over Holders Securities 577 841 352 680 169 250,940 2,160,111 2,673,943 22,104,461 225,683,232 % 0.10% 0.85% 1.06% 8.74% 89.25% 2,619 252,872,687 100.00% The number of shareholders holding less than a marketable parcel was 421. (b) Twenty largest shareholders The names of the twenty largest holders of quoted ordinary shares are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J P Morgan Nominees Australia Ltd Pershing Australia Nominees Pty Ltd (Well Efficient Ltd) HSBC Custody Nominees (Australia) Ltd Liam Cornelius Montezuma Mining Company Ltd Citicorp Nominees Pty Ltd Paul Hartley Watts BNP Paribas Noms Pty Ltd Seamus Cornelius Alpha Boxer Limited Merrill Lynch (Australia) Nominees Pty Ltd Kongming Investments Ltd Ranguta Ltd Paul Donaldson BNP Paribas Nominees Pty Ltd John Joseph Wallace Dongarra Ltd Anthony Maslin + Marite Norris National Nominees Ltd Grandor Pty Ltd Listed ordinary shares Number of shares 51,110,446 30,000,000 24,871,646 14,422,041 7,271,925 6,960,435 5,000,000 4,693,206 4,300,883 4,245,000 4,182,304 4,178,992 3,395,685 2,718,334 2,541,905 2,470,983 2,234,398 2,010,000 1,997,989 1,964,917 Percentage of ordinary shares 20.21 11.86 9.84 5.70 2.88 2.75 1.98 1.86 1.70 1.68 1.65 1.65 1.34 1.07 1.01 0.98 0.88 0.79 0.79 0.78 180,571,089 71.41 (c) Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Well Efficient Ltd JP Morgan Asset Management (UK) The Capital Group Companies, Inc. Liam Cornelius (d) Voting rights Number of Shares 30,000,000 20,200,000 16,700,000 14,422,041 All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Holders of unlisted options and performance rights do not have voting rights. DANAKALI LIMITED Page 86 ABN 56 097 904 302 65 Danakali Annual Report 2017DANAKALI LIMITED Additional information required by Australian Securities Exchange Ltd and not shown elsewhere in this report is as follows. ASX Additional Information The information is current as at 28 February 2018. (a) Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1 1,001 5,001 - 1,000 - 5,000 - 10,000 10,001 - 100,000 100,001 and over TOTAL Holders Securities 577 841 352 680 169 250,940 2,160,111 2,673,943 22,104,461 % 0.10% 0.85% 1.06% 8.74% 225,683,232 89.25% 2,619 252,872,687 100.00% The number of shareholders holding less than a marketable parcel was 421. (b) Twenty largest shareholders The names of the twenty largest holders of quoted ordinary shares are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J P Morgan Nominees Australia Ltd Pershing Australia Nominees Pty Ltd (Well Efficient Ltd) HSBC Custody Nominees (Australia) Ltd Liam Cornelius Montezuma Mining Company Ltd Citicorp Nominees Pty Ltd Paul Hartley Watts BNP Paribas Noms Pty Ltd Seamus Cornelius Alpha Boxer Limited Merrill Lynch (Australia) Nominees Pty Ltd Kongming Investments Ltd Ranguta Ltd Paul Donaldson BNP Paribas Nominees Pty Ltd John Joseph Wallace Dongarra Ltd Anthony Maslin + Marite Norris National Nominees Ltd Grandor Pty Ltd (c) Substantial shareholders Corporations Act 2001 are: Well Efficient Ltd JP Morgan Asset Management (UK) The Capital Group Companies, Inc. Liam Cornelius (d) Voting rights performance rights do not have voting rights. DANAKALI LIMITED ABN 56 097 904 302 Listed ordinary shares Number of shares Percentage of ordinary shares 51,110,446 30,000,000 24,871,646 14,422,041 7,271,925 6,960,435 5,000,000 4,693,206 4,300,883 4,245,000 4,182,304 4,178,992 3,395,685 2,718,334 2,541,905 2,470,983 2,234,398 2,010,000 1,997,989 1,964,917 180,571,089 71.41 Number of Shares 30,000,000 20,200,000 16,700,000 14,422,041 20.21 11.86 9.84 5.70 2.88 2.75 1.98 1.86 1.70 1.68 1.65 1.65 1.34 1.07 1.01 0.98 0.88 0.79 0.79 0.78 65 The names of substantial shareholders who have notified the Company in accordance with section 671B of the All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Holders of unlisted options and . s t h g i r e c n a m r o f r e p 0 0 0 , 8 0 4 , 1 d n a s e r a h s y r a n d r o i r e v o s n o i t p o d e t s i l n u 1 2 8 , 0 2 0 , 8 1 e u s s i n o s a h y n a p m o C e h t 8 1 0 2 y r a u r b e F 8 2 t A n o i t a m r o f n I l a n o i t i d d A X S A s e i t i r u c e s d e t o u q n U ) e ( . l w o e b d e t s i l e r a y t i r u c e s f o l s s a c d e t s i l n u n a f o % 0 2 n a h t e r o m g n d o h i l l s r e d o h y t i r u c e s f o s e m a n e h T d e t s i l n U s n o i t p O 6 9 . 0 $ d e t s i l n U s n o i t p O 5 3 . 0 $ d e t s i l n U s n o i t p O 5 3 . 0 $ d e t s i l n U s n o i t p O 5 5 . 0 $ d e t s i l n U s n o i t p O 7 2 5 . 0 $ d e t s i l n U s n o i t p O 4 9 . 0 $ d e t s i l n U s n o i t p O 5 5 . 0 $ d e t s i l n U s n o i t p O 5 5 . 0 $ d e t s i l n U s n o i t p O 3 4 5 . 0 $ 9 1 0 2 / 6 / 0 2 8 1 0 2 / 5 / 3 1 8 1 0 2 / 3 / 0 3 8 1 0 2 / 5 / 1 3 8 1 0 2 / 5 / 9 2 0 2 0 2 / 5 / 9 1 8 1 0 2 / 1 1 / 4 8 1 0 2 / 2 1 / 1 3 9 1 0 2 / 0 1 / 7 d e t s i l n U s n o i t p O 8 5 5 . 0 $ 9 1 0 2 / 8 / 8 - - - - - - - - - - - - - 0 0 0 , 0 0 2 0 0 0 , 0 0 2 - - - - - - - - - - - - - - - - - - - - - - - - 8 2 7 , 2 7 2 , 2 0 0 0 , 0 0 0 , 5 0 0 0 , 0 0 5 - 0 0 0 , 0 0 2 3 9 0 , 9 0 7 , 1 - - - - - - - 0 0 0 , 0 0 6 - - - - - - - - - - - - - - - - - - - - - 0 0 0 , 0 5 7 - - - - - - - - - - - 0 0 0 , 0 0 5 0 0 0 , 0 4 6 - - - - - - - - - - - - - - - 0 0 0 , 0 0 3 0 0 0 , 0 5 7 - - - - - - - 0 0 0 , 0 0 0 , 1 - - - - - - - - - - - - - 0 0 0 , 0 5 2 - - - - - - - - - - - - - - - - - - - - - - 0 0 0 , 0 0 0 , 1 d e t s i l n U s n o i t p O 5 4 0 $ . d e t s i l n U s n o i t p O 5 0 4 . 0 $ - - - - 8 1 0 2 / / 6 3 2 - - - - - - - - - - 0 0 0 0 0 2 , - - - - - - - - - - 0 0 0 , 0 0 4 0 0 0 , 0 0 5 0 0 0 , 0 0 5 0 0 0 , 0 0 4 8 1 0 2 5 3 1 / / s u i l e n r o C s u m a e S r M l n o s d a n o D l u a P r M l d a r e g z t i F n h o J r M h t r i W n a i t s i r h C r M n a m e o G y n n a D r M t n a r r u D s e m a J r M t n e m e g a n a M t e s s A p u o r G n o t g n i l r A d t L i e h c o n n o C t r e b o R r M r e t s u H s n n a H r M l i t n o e d d M c i r d e C r M t d L y t P d e t a d i l o s n o C n o t e k u D d t L t n e c i f f i E l l e W d t L y n a p m o C i i g n n M a m u z e t n o M r e d o H l s u i l e n r o C m a L i r M 0 0 0 , 9 4 1 y l l i a u d v d n i i s r e d o H l 0 0 0 , 0 0 4 0 0 0 , 0 0 7 1 2 8 , 1 8 9 , 8 0 0 0 , 0 0 6 0 0 0 , 0 5 7 0 0 0 , 0 4 4 , 1 0 0 0 , 0 5 7 0 0 0 , 0 0 0 , 1 0 0 0 , 0 5 2 0 0 0 , 0 0 0 , 1 0 0 0 0 0 2 , , 0 0 0 9 4 9 1 , D E T M L I I I L A K A N A D % 0 2 n a h t s s e l l a t o T Page 87 6 6 2 0 3 4 0 9 7 9 0 6 5 N B A Danakali Annual Report 2017DANAKALI LIMITED 7 6 D E T I M I L I L A K A N A 2 0 3 4 0 9 7 9 0 6 5 N B A D d e n w O : t s e r e n t I f o e r u a N t % 0 5 : y t i u q E t n e r r u C - 0 0 0 , 0 0 1 - - - - - - - - - - - - - - - - - 0 0 0 0 5 , 0 0 0 , 0 5 - - - - - - 0 0 0 , 0 0 1 - - - - - - 0 0 0 , 0 0 8 0 0 0 , 0 0 1 0 0 0 0 5 , 0 0 0 , 0 5 0 0 0 , 0 0 1 0 0 0 , 0 0 8 - - - - 0 0 0 , 5 7 0 0 0 , 5 8 0 0 0 , 8 4 1 0 0 0 , 8 0 3 e c n a m r o f r e P e c n a m r o f r e P e c n a m r o f r e P e c n a m r o f r e P e c n a m r o f r e P e c n a m r o f r e P s t h g R i 8 s s a C l s t h g R i 7 s s a C l s t h g R i 6 s s a l C s t h g R i 5 s s a l C s t h g R i 4 s s a l C s t h g R i 1 s s a l C d t L y t P s t n e m t s e v n I h c a e B e a g d e R t r e d o H l d t L l a n o i t a n r e n t I s t o c s a M e k a L y a r e Z r M l n o s d a n o D l u a P r M n o t g n i r r a H y n o T r M t n a r r a T t r a u S t r M % 0 2 n a h t s s e l y l l i a u d v d n i i s r e d o H l l a t o T s t n e m e n e T g n n M n i i i s t s e r e t n I l f o e u d e h c S ) f ( a e r t i r E , i l u l l o C : t n e m e n e T n o i t a m r o f n I l a n o i t i d d A X S A Page 88 e s n e c L i n o i t a r o p x E l : e p y T e s n e c L i Danakali Annual Report 2017DANAKALI LIMITED How to Invest ASX Danakali is listed on the Australian Stock Exchange (ASX) (ASX: DNK). Shares can be bought and sold on the market. You can buy as little as A$500 worth of shares. As with any investment, shares carry risk and investors need to inform themselves of these. By investing in Danakali shares on the ASX you are buying part ownership of the company. You can buy and sell shares by using a licensed broker on your behalf. For more information on how to trade in ASX shares please visit ASX’s online resources via http://asx.com.au/education/shares-courses.htm ADRs Investors located in North America have access to the American Depository Receipts (ADR) Program. The Bank of New York Mellon sponsors Danakali’s Level 1 ADRs which 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 Danakali. US OTC Market information is available here: http://www.otcmarkets.com/stock/DNKLY/quote Danakali’s ADR information can also be viewed here: https://www.adrbnymellon.com/?cusip=23585T101 ADR Holders seeking information on their shareholding should contact: LONDON NEW YORK Mark Lewis +44 207 163 7407 mark.lewis@bnymellon.com Rick Maehr +1 212 815 2275 richard.maehr@bnymellon.com Further information may be obtained from the company website: http://www.danakali.com/investor-relations/ american-depository-receipts Other OTC OTC trading in Danakali is also available on the Frankfurt and Berlin Stock Exchanges. Frankfurt symbol: SO3-FRA, further information can be found here: http://en.boerse-frankfurt.de/stock/Danakali-share Berlin symbol: SO3-BER, further information can be found here: http://en.boerse-frankfurt.de/stock/Danakali-share Competent Persons Statement (Sulphate of Potash Mineral Resource) Colluli has a JORC-2012 compliant Measured, Indicated and Inferred Mineral Resource estimate of 1,289Mt @11% K20. The resource contains 303Mt @ 11% K20 of Measured Resource, 951Mt @ 11% K20 of Indicated Resource and 35Mt @ 10% K20 of Inferred Resource. The information relating to the 2015 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 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 (Sulphate of Potash Ore Reserve) The January 2018 Colluli Ore Reserve is reported according to the JORC Code and estimated at 1,100Mt @ 10.5% K2O Equiv. The Ore Reserve is classed as 285Mt @ 11.3% K2O Equiv. Proved and 815Mt @ 10.3% K2O Equiv. Probable. The Competent Person for the estimate is Mr Mark Chesher, a mining engineer with more than 30 years’ experience in the mining industry. Mr Chesher is a Fellow of the Australasian Institute of Mining and Metallurgy, a Chartered Professional, a full-time employee of AMC Consultants Pty Ltd (AMC), and has sufficient open pit mining activity experience relevant to the style of mineralisation and type of deposit under consideration to qualify as a Competent Person as defined in the JORC Code. Mr Chesher consents to the inclusion of information relating to the Ore Reserve in the form and context in which it appears. In reporting the Mineral Resources and Ore Reserves referred to in this public release, AMC acted as an independent party, has no interest in the outcomes of Colluli and has no business relationship with Danakali other than undertaking those individual technical consulting assignments as engaged, and being paid according to standard per diem rates with reimbursement for out-of-pocket expenses. Therefore, AMC and the Competent Persons believe that there is no conflict of interest in undertaking the assignments which are the subject of the statements. 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. 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. Page 89 Danakali Annual Report 2017DANAKALI LIMITEDTHIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK Page 90 Danakali Annual Report 2017DANAKALI LIMITEDPage 91 Danakali Annual Report 2017DANAKALI LIMITEDDanakali Limited, Level 1, 234 Churchill Avenue Churchill Court, Subiaco, Perth, WA 6008 T +61 8 6315 1444 E info@danakali.com ABN 56 097 904 302 www.danakali.com 

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