DIATREME RESOURCES LIMITED — Annual Report 2012

Apr 26, 2012

2011 Annual Report

Diatreme Resources Limited ABN 33 061 267 061

CONTENTS

Chairman's Review	2
Corporate Review	3
Operations Report	4
Tenement Schedule	15
Corporate Governance Statement	18
Financial Report	32
Directors' Report	33
Auditor's Independence Declaration	41
Directors' Declaration	69
Independent Auditor's Report	70
Shareholder Information	72

Australian Securities Exchange Ltd Code: DRX Shares Code: DRXO Options

CORPORATE DIRECTORY

Company

Diatreme Resources Limited ABN 33 061 267 061 and subsidiaries:

• • Lost Sands Pty Ltd
• • Regional Exploration Management Pty Ltd
• • Chalcophile Resources Pty Ltd

Directors

Anthony John Fawdon David Hugh Hall George Henry White Andrew Tsang Cheng (William) Wang Neil McIntyre

Joint Company Secretary

Leni Pia Stanley Tuan Do

Registered and Principle Office

Level 2 87 Wickham Terrace Spring Hill Queensland 4000 Telephone: 07 3832 5666 Facsimilie: 07 3832 5300 Email: manager@diatreme.com.au Website: www.diatreme.com.au Postal Address: PO Box 10288 Brisbane Adelaide Street Queensland 4000

Share Registry

LINK MARKET SERVICES ANZ Building Level 15, 324 Queen Street Brisbane Queensland 4000 Telephone (Call Centre): 1300 554 474 02 8280 7454 Facsimilie: 02 9287 0303 Email:registrars@linkmarketservices.com.au Postal Address: Locked Bag A14 Sydney South NSW 1235

Auditor

BDO Audit Pty Ltd Level 18, 300 Queen Street Brisbane Queensland 4000

Chairman's Review 2011

Diatreme made significant progress during 2011 in advancing its flagship Eucla Basin, Cyclone Zircon Project. With the global economy experiencing a period of strengthening heavy mineral prices and increasing product demand, Cyclone's development is expected to lead to improved outcomes for the Company as it moves toward mining.

Cyclone's current ore reserve stands at 97Mt grading 2.5% Heavy Minerals. The Prefeasibility Study (PFS) completed in March 2012 indicated that a 10 year mining operation could annually produce 65,000t zircon, 10,000t HiTi87 and 46,000t HiTi67. The world zircon market needs projects like Cyclone to come on stream over the next few years to help meet the increasing product demand, spurred on by the continually expanding Chinese and Indian economies.

Shareholders who have followed the steady progress made over Cyclone since the initial discovery in 2007 will recognise, that with the release of positive PFS results and the decision to proceed into a Definitive Feasibility Study (DFS), the project has all the hallmarks of a "company maker". Two independent valuations have given the project a net present value exceedingA\$300 million. However, Diatreme's PFS, using more conservative assumptions, has applied a net present value of A\$194 million. There exists a large imbalance between Diatreme's current share price and the project's valuation, but such imbalance is expected to be reduced as Cyclone advances toward development.

In addition to solid progress made on Diatreme's heavy mineral projects portfolio, the Company has been able to secure the interest of joint venture parties over two of its metalliferous projects in Queensland. At Clermont, Diatreme will continue as manager with the incoming overseas party providing US\$8 million funding to earn a 51% interest over four years in what represents a significant Porphyry Copper target. At Tick Hill, the incoming party has a right to earn a 50% interest over mining leases which covered one of the highest grade gold deposits in Australia's recent gold producing history.

During the year, and with changing Company requirements, the Board was expanded by the inclusion of two new directors with experience in overseas business and marketing dealings, taking into account the global nature of the mineral sands industry and the direction Diatreme is expected to follow in the years ahead.

In the current economy, it remains an exciting road ahead for both the Board and Diatreme's dedicated personnel. The important job is for all to remain focussed on seeing Cyclone through the DFS and forward into construction and production.

Board of Directors: Left to Right, David Hall, George White, William Wang, Tony Fawdon (Executive Chairman), Andrew Tsang, Neil McIntyre

Corporate Review

COMPANY BACKGROUND

Diatreme Resources Limited (Diatreme) was incorporated in 1993. As an Australian based, ASX listed, diversified mineral explorer with significant Australian projects targeting heavy mineral sands, copper, base metals and gold, the Company currently explores across three states; WesternAustralia, South Australia and Queensland.

CORPORATE PHILOSOPHY

Diatreme seeks to increase Shareholder value by the procurement of, and exploration over, highly targeted exploration holdings within established or newly emerging mineral belts, and the advancement of its Cyclone Zircon Deposit through feasibility and ultimately mining.

The Company aims to:

• • Conduct a Definitive Feasibility Study over the Cyclone Zircon Project in Western Australia.
• • Continue to explore and seek funding opportunities over its Queensland and South Australian copper, base metal and gold projects.
• • Organically generate and grow new prospects in-house and successfully explore them resulting in the identification of new mineral resources.

Project Location Map

Operations Report

INTRODUCTION

During 2011, Diatreme Resources Limited (DRX) focussed its Australian exploration and development activities on advancing its 100% owned Cyclone Zircon Project in Western Australia. This work culminated in the completion of a revised mineral resource estimate, the release of a maiden ore reserve estimate and the completion of a Prefeasibility Study over the project. In March 2012, the Board made the positive decision to commence the Cyclone Definitive Feasibility Study, targeting completion in mid 2013. Plans exist seeking to develop the proposed mine into production during 2015.

Further exploratory aircore drilling for mineral sands was conducted in both Western and South Australia along with limited reconnaissance drilling for metalliferous targets over the Gilbert River Project in north Queensland.

Efforts to conclude joint venture arrangements over a number of the Company's metalliferous projects continued resulting in the formalisation of agreements in Queensland with Antofagasta Minerals S.A. over the Clermont Copper/Gold Project and Superior Resources Limited over the Tick Hill Gold Project.

The Company has a number of exploration tenements under application throughout Australia and is awaiting tenure grant to continue its efforts in seeking to delineate both mineral sand and metalliferous prospects.

MINERAL SAND PROJECTS

EUCLA BASIN

Cyclone Zircon Project, WA Prefeasibility Study

The Cyclone HM Deposit is located within the Great Victoria Desert of Western Australia along the northern margin of the Eucla Basin some 25km west of the WA/SA state border approximately 300km north of Eucla and 230km north of the Trans Australia railway. The deposit is situated within determined Native Title lands owned by the Spinifex People.

A Prefeasibility Study ("PFS") for the Cyclone Zircon Project was completed in March 2012, showing the potential for the project to mine 10 million tonnes (Mt) per annum of ore for 9.7 years with an expected average annual production of 65,000 tonnes zircon, 46,000 tonnes HiTi67 and 10,000 tonnes HiTi87.

The PFS has demonstrated the potential for Cyclone to become a companymaking project. On an annual basis, the project would generate sales revenue of \$191 million and net operating profit after tax of \$78 million, contribute \$28million a year to government tax revenue and \$7 million in government royalties.

Conventional mining technology is proposed for the project, with concentrate expected to be trucked 240 kilometres south to facilities at Forrest where it would be railed to an appropriate seaport. The concentrate would be stored in containers at the seaport before being bulk shipped to a mineral separation plant located overseas, possibly in China.

The PFS financial forecasts include a base case net present value of \$194 million and an internal rate of return of 32%, with a payback period of 2.1 years.

The PFS results are underpinned by strong fundamentals for the three proposed mine products comprising standard grade zircon, HiTi87 (86.6% TiO2) and HiTi67 (67.3% TiO2). These products would be sold into overseas markets, where current forecasts indicate strong demand for zircon and high titanium feedstocks along with continuing high prices.

The forecasts are based on a strategy of building the proposed mineral separation plant in China and marketing the products in that country, resulting in estimated long-term prices of US\$2,100/t for zircon, US\$1,200/t for HiTi87 and US\$400/t for HiTi67.

Cyclone Mineral Deposit – Project Development and Planning

With the initial discovery of the Cyclone Deposit in 2007, and progressive exploration over the past four years, the Company upgraded its mineral resource estimate to Measured and Indicated status in January 2012. This was followed closely in February 2012 with the release of Cyclone's Maiden Ore Reserve.

The deposit occurs within the southern part E69/1920 and the adjoining northern part of E69/2425. An application for a Mining Lease (M69/141) was lodged in August 2011 to cover the area of the Cyclone Ore Reserve and certain proposed mine infrastructure. M69/141 lies wholly within E69/1920 and shares a number of common boundaries with it. The granting of a mining lease is subject to completion of a compensation agreement with the traditional landowners, completion of an Environmental Impact Assessment (EIA) and the submission of an acceptable Mining Proposal to the WA Government. Miscellaneous Licence applications for access and transport roads, mine village, airstrip and services corridor will also be required prior to a mining operation commencing over the deposit.

Geologically, Cyclone comprises a number of beach strandline systems of variable width and grade with associated aeolian mineralisation to form overlying dunal deposits. Two main strand systems are evident. The West Strand extends for 4.5km in length and reaches a maximum mineable width of 750m, while the East Strand extends for around 4.8km in length and reaches a maximum mineable width of 650m. Both strands extend into a neighbouring tenement held by Image Resources NL, but the quality of the resource appears to decline rapidly. The whole deposit lies above the water table.

The combined beach and dunal mineralisation can be up to 18m thick and averages around 13.5m across the resource. The beach strandline mineralisation which makes up the bulk of the Cyclone Ore Reserve comprises free flowing sand with minimal induration. It is most suitable for dozer push mining and transport by slurry pumping. Due to the nature of the induration present in the overburden, excavator and truck mining has been selected as the appropriate overburden removal technique. Data obtained from air core drilling and a test pit indicates the indurated overburden material would be readily mined by a large excavator.

The resource estimate for Cyclone was updated in January 2012 to reflect the large amount of resource definition drilling, improved geological interpretation and additional QEMSCAN mineralogical determinations undertaken during 2011. The Cyclone resource estimate has been classified in the Measured and Indicated Resource categories, as defined in the 2004 edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code). Approximately 79% of the resource is now classified as Measured.

The combined Measured and Indicated Mineral Resource totalling 136Mt at 2.3% HM is shown in Table 1.

The Cyclone ore reserve estimate has been classified in the Probable Reserve category, as defined in the 2004 edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code). This classification reflects the preliminary nature of mine planning completed for the PFS. More detailed mine planning would allow a large portion of the Ore Reserve to be classified as Proved Reserve.

The Probable Ore Reserve totaling 97Mt at 2.5% HM is shown in Table 2.

Table 1: Cyclone Resource Estimate

	Material	HM	HM	Slime	OS		Head Grade					Zircon
Category	Mt	%	Mt	%	%	Zircon	Rutile	Leuc	HiTi	Alt Ilm	Si TiOx	Kt
						%	%	%	%	%	%
MEASURED	107	2.4	2.63	4.1	5.6	0.77	0.08	0.17	0.52	0.26	0.55	826
INDICATED	29	1.6	0.47	3.6	6.1	0.44	0.06	0.06	0.5	0.11	0.31	128
TOTAL	136	2.3	3.1	4	5.7	0.7	0.08	0.14	0.51	0.23	0.5	954
Mineral Assemblage					31%	3%	6%	23%	10%	22%

CYCLONE RESOURCE ESTIMATE BY MINERALISATION DOMAIN

	Material	HM	HM	Slime	OS		Head Grade					Zircon
Category	Mt	%	Mt	%	%	Zircon	Rutile	Leuc	HiTi	Alt Ilm	Si TiOx	Kt
						%	%	%	%	%	%
TOTAL BEACH DOMAIN
MEASURED	89	2.6	2.3	4	5.1	0.81	0.08	0.19	0.53	0.29	0.58	717
INDICATED	7	2	0.15	3.5	4.9	0.55	0.1	0.14	0.5	0.25	0.41	41
SUB TOTAL	96	2.5	2.45	3.9	5.1	0.79	0.08	0.18	0.53	0.29	0.56	758
		Mineral Assemblage				31%	3%	7%	21%	11%	22%
TOTAL NEARSHORE DOMAIN
MEASURED	19	1.8	0.33	4.6	8	0.58	0.06	0.06	0.43	0.09	0.4	109
INDICATED	21	1.5	0.32	3.7	6.5	0.41	0.05	0.03	0.49	0.06	0.28	87
SUB TOTAL	40	1.6	0.64	4.1	7.2	0.49	0.06	0.05	0.46	0.07	0.34	196
		Mineral Assemblage				30%	3%	3%	29%	4%	21%
TOTAL	136	2.3	3.1	4	5.7	0.7	0.08	0.14	0.51	0.23	0.5	954
		Mineral Assemblage				31%	3%	6%	23%	10%	22%

Table Notes

• • HM Cut-off Grade: 1%HM
• • Rounding may generate differences in last decimal place
• • A constant SG of 1.7 has been used to derive material tonnes
• • Slime refers to material <53um
• • OS refers to oversize material >2mm
• • Mineral Assemblage derived from QEMSCAN® analysis
• • Leucoxene (Leuc) Ti-oxides containing 85 95% TiO2, HiTi Ti-oxides containing 70 85% TiO2, Altered Ilmenite (Alt Ilm) - Ti-oxides containing <70% TiO2, Si-bearing Ti-Oxide (Si TiOx) – Ti-oxides containing >10% silica rich Ti minerals.
• • "Beach" and "Nearshore" represent differing geological domains based upon varying mineral grain size, mineralogy and HM grade.

TABLE 2: CYCLONE ORE RESERVE

Ore Reserve Mt	HM %	Zircon kt	Rutile kt	Leucoxene kt	HiTi kt	Altered Ilmenite kt	SiTiOx kt
97	2.5	760	80	170	500	250	540

Current project development study and planning details follow:

A conventional 10Mt per year dry mining system for minerals sands is to be used. Overburden will be removed using excavator and trucks. The ore will be mined by bulldozers at 1,300 tonnes per hour and pushed to two dozer traps. The average overburden removal rate is 10% higher than the ore mining rate resulting in a total annual average earthmoving rate of 2,730 tonnes per hour.

The ore will be screened and slurried in the pit and pumped to the wet concentrator for production of a high grade heavy mineral concentrate. The concentrator will be in a fixed location for the life of the mine and pumping distances for ore and tailings will average 1,500m with a maximum distance of 3,000m. The mine pit will be progressively backfilled with overburden, and tailings from the wet concentrator. The backfilled pit will be rehabilitated on a continuous basis throughout the life of the mine.

Metallurgical test work has demonstrated good recovery of valuable heavy minerals and heavy mineral concentrate will be produced at an average rate of approximately 19 tonnes per hour or 147,000 tonnes per year. The concentrate will be transported in containers by truck from Cyclone to a siding at Forrest on the Trans Australia rail line. The trucking distance will be approximately 240km. The concentrate will then be loaded onto a train at Forrest and transported by train to Port Adelaide or other port as yet to be decided, a distance between 1,000 and 1,300km.

The concentrate will remain stored in containers at the port until 15,000 to 20,000 tonnes has been accumulated ready for shiploading and transport to China. The containers will be emptied into the ship's hold for shipping as a bulk commodity. The shipping time will vary from 15 days to 30 days depending on the number of port stops for the ship between Australia and China. The concentrate will be unloaded at a Chinese port and transported by truck or other means to the Mineral Separation Plant (MSP).

The Base Case for this study assumes the MSP will be built in China to benefit from lower capital cost, lower operating costs and higher prices into niche markets. The MSP will include a hot acid leach process to remove iron and other acid soluble coatings from the mineral before entering the mineral separation process. Removal of the coatings improves the mineral separation efficiency and also results in higher quality final products.

Standard grade zircon and two high titanium mineral products (HiTi87 and HiTi67) will be produced by the MSP. The chemical specifications derived from bulk sample test work for Zircon, HiTi87 and HiTi67 products are shown in Table 3, Table 4 and Table 5 respectively.

ZrO2	FE2O3	SiO2	Al2O3	TiO2	P2O5	U+Th	CeO2
%	%	%	%	%	%	ppm	%
66.0	0.10	32.8	0.20	0.31	0.07	369	0.020

TABLE 3: ZIRCON PRODUCT SPECIFICATION

TABLE 4: HiTi87 PRODUCT SPECIFICATION

TiO2	FE2O3	SiO2	Al2O3	ZrO2	MgO	MnO	CaO	CR2O3	U+Th
%	%	%	%	%	%	%	%	%	ppm
86.6	2.6	5.0	1.01	3.3	0.04	0.02	0.03	0.06	84

TABLE 5: HiTi67 PRODUCT SPECIFICATION

TiO2	FE2O3	SiO2	Al2O3	ZrO2	MgO	MnO	CaO	CR2O3	U+Th
%	%	%	%	%	%	%	%	%	ppm
67.3	20.1	6.3	1.75	0.05	0.10	0.42	0.07	0.08	94

The estimated annual production rates of the three mineral products produced at the MSP are shown in Table 6.

TABLE 6: AVERAGE ANNUAL PRODUCTION

ZIRCON	65,000 tonnes
HiTi87	10,000 tonnes
HiTi67	46,000 tonnes

The water supply for the project has not been finalised and hydrogeological studies are continuing to evaluate alternatives to ensure the most suitable supply option is developed. Water supply for the project is expected to be sourced from a deep aquifer in the Officer Basin, a large sedimentary basin underlying the project area. A high quality aquifer is known to exist in two test wells drilled by Officer Basin Energy 80km to the east of Cyclone and is also indicated by seismic survey to be present at a site approximately 150km further to the east. The aquifer is thought to continue westward in the Officer Basin sediments at approximately 700m depth. An 800m deep bore close to Cyclone will be drilled to test this deep aquifer along with further investigations for alternative water sources for the project.

A reliable water supply of 250 litres per second from a borefield(s) will be required for the mine, supporting infrastructure, and mine village. If the deep aquifer in the Cyclone area proves successful, then approximately eight deep bores will be required for the operation.

The mine and Wet Concentrator Plant will be located 240km by road north of the Trans Australian railway and current planning and cost estimation assumes a licence for a road corridor can be obtained for the preferred transport route. An environmental and Cultural Heritage assessment of three road options will be completed as part of the DFS in consultation with relevant WA State Government Departments to determine an acceptable route of lowest impact. Costs associated with road construction, road haulage, and road maintenance will be finalised after completion of the road impact assessment and following acceptance by the WA State Government. The capital and operating costs for road haulage of Heavy Mineral concentrate from the mine to rail siding is a risk that will be mitigated when an agreed road route is finalised. Licences for constructing and using the road will need to be obtained from the relevant government departments after finalising the agreed route.

Having successfully delivered a substantive and positive PFS, DRX has commenced the Definitive Feasibility Study (DFS) to take the project through to the construction phase.

Bulk sample collection for detailed plant design and environmental surveys are already underway as part of the DFS, which is planned for completion in mid 2013.

Considerable interest in the project has been received from leading industry players and DRX continues to hold discussions regarding investor partnerships. The Company aims to secure project development financing in 2013 and undertake project construction and development over 2013/2014. Depending upon receipt of necessary approvals, the Company plans to be in production during 2015.

Regional Exploration, WA

Regional exploration drilling confirmed the presence of the Barton shoreline north of the Cyclone Deposit and investigated other interpreted shorelines features in the northeast. A total of 195 aircore drill holes were completed for 7,684m over the WA Eucla Basin tenements during the year. An additional 250 air core drill holes for 9,698m were drilled on the Cyclone deposit within tenement E69/1920 during 2011.

The interpreted beach barrier topographic feature that appears to control HM mineralisation at Cyclone extends northwest for a considerable distance straddling the boundary between E69/1920 and E69/2408. Whilst reconnaissance exploration has been carried out over this feature over the past five years, significant gaps in drill coverage still existed, and it was felt that potential remained for the delineation of smaller strands or pods of HM mineralisation associated with localised embayment features or trap sites along the interpreted beach barrier.

A drilling program was carried out to both improve the drill density across the DEM feature, and to follow-up anomalous results from previous drilling. These anomalous results included both HM assay results, and beach sands which were not previously assayed but were subsequently logged

Cyclone Deposit and Resource

Cyclone Resource Section Line WL21N displaying multiple HM strands in Beach domain and homogenous HM in underlying Nearshore domain.

as having zircon present by using a UV light. The drilling was successful in delineating a beach sequence at the expected elevation along the entire length of the DEM feature, thereby confirming the potential of the feature. However, only minor heavy mineral mineralisation was noted and the area now appears to have been mostly explored thereby limiting the prospectivity of the area as hosing additional mineralisation.

As a result of the regional exploration E69/2425 (Wanna South), E69/2427 (Marble Gum) and E69/2428 (Jungooner) were partially surrendered and E69/2426 (Serpentine Lake) fully surrendered during the year.

Zephyr Deposit, WA

The Zephyr Deposit is situated within E69/2408 (Wanna East) and within 2 km of the Cyclone Deposit. The resource estimate for the Zephyr Deposit stands at 106 Mt at 1.5% HM at 1% HM cutoff grade, and is classified as Inferred (Table 7). The mineralogy of the Zephyr HM is different from that observed at Cyclone, as expected from the contrasting geological setting, and initial samples reveal the deposit to be low in zircon and high in leucoxene/HiTi minerals.

TABLE 7: ZEPHYR DEPOSIT RESOURCE ESTIMATE
-------------------------------------------

Category	HM cut-off	Material	HM	HM	Slimes	Oversize
	%	Mt	%	Mt	%	%
INFERRED	1.0	106	1.5	1.54	3.1	2.4

Table Notes

• • A constant SG of 1.7 has been used to derive material tonnes
• • Slimes refers to material <53um
• • Oversize refers to material >2mm

During 2011, infill drilling, at 100m hole spacing, was carried out over two drill lines over the western arm of the deposit in order to confirm the geology and HM mineralisation interpreted from previous drilling which confirmed the continuity of mineralisation. Additional resource definition drilling is recommended and expected to be carried out in 2012.

Ooldea Range, SA

Follow-up aircore drilling has been carried out on EL3616 during the year with 91 drill holes completed for a total of 4,358m.

Over the three contiguous tenements along the Ooldea Range (EL's 3614, 3615 and 3616) 44,781m of aircore drilling (within 977 drill holes) have been completed since exploration commenced in late 2006. These exploration programs have confirmed the Ooldea Range as being prospective for mineral sands, although definition of trap sites for the heavy minerals to accumulate is proving difficult.

The Irish Well prospect within EL3616 has been drilled over four separate drill lines spaced 1.6km apart that traverse an interpreted southwest facing embayment feature along the Ooldea Range. Previous drilling by DRX over this prospect during late 2009 / early 2010 had returned encouraging results including a best assay of 9m at 5.3% HM from 24m depth within Tertiary beach sands.

The 2011 drill program was successful in defining three sub-parallel NW-SE trending beach strand systems at 2 – 3km spacing associated with the embayment feature:

• • The central strand is the best developed of the three, comprising visible HM mineralisation with an average width of 500m and thickness of 12m over a 9km strike length. The mineralisation commences around 25m below surface within a well-developed beach sand sequence, with best mineralisation occurring immediately above a coarse-grained to gritty surf zone. However, assay results were disappointing in that the assay grade was considerably lower than the estimated grade. Amongst the best assayed intersections returned were 21m at 2.5% HM from 18m depth in MA468, 13.5m at 1.5% HM from 39m depth in MA428, and 9m at 1.8% HM from 31.5m depth in MA489. A large but low grade beach strand system has been clearly delineated, but the presence of a consistent high grade core has not yet been established by the infill drilling. Preliminary mineralogy has indicated that the HM assemblage is dominated by titanium bearing minerals.
• • The southern strand appears restricted to two drill lines based on current drilling, but further drilling may well expand its known strike direction and length.
• • The northern strand displays a relatively narrow width (~100m), thickness (~6m), and occurs at a greater depth below surface compared to the central strand, but does display a similar strike continuity to the central strand. Again, assay results reported lower than the estimated grades.

These results have downgraded the prospectivity of the Ooldea Range where it was believed this embayment held the best potential for mineralisation. As a consequence, EL3614 and the majority of EL3615 have not been renewed for any further term. Renewal has been sought over the majority of EL3616 and further work will be carried out.

ARCKARINGA MINERAL SANDS PROJECT – SA

Following clearances to explore within the Woomera Prohibited Area and the Tallaringa Conservation Park, a follow-up regional drilling program was undertaken in November 2011 over four tenements. A total of 64 aircore drill holes were completed for 2,963m along five regional drill lines.

Although drilling proved to be a technical success, again intersecting marine sands and minor HM, the economic prospectivity of the tenements, coupled with the significant Tallaringa Conservation Park environmental restrictions, have downgraded the local targets. All Arckaringa tenements have since been relinquished.

SHARK BAY MINERAL SANDS PROJECT – WA

A cultural heritage survey was initiated over exploration licence E09/1518 in December 2011, but not completed due to logistical access constraints. Following evaluation of the geology and historical drill data for the area, and the increased costs involved with gaining access to the area, a decision was made to surrender the tenement.

METALLIFEROUS PROJECTS

CLERMONT COPPER GOLD PROJECT – QLD

DRXhas entered into a Memorandum of Understanding withAntofagasta MineralsS.A.("Antofagasta") in respect of a proposed farm-in to the Clermont tenements located in central Queensland. The Clermont tenements are 100%-owned by subsidiary, Chalcophile Resources Pty Ltd.

Within the Clermont tenements, Antofagasta will specifically target the highly prospective "Rosevale Porphyry Corridor", a geological zone hosting copper, gold, silver and molybdenum porphyry-style mineralisation, along with adjacent geologically related mineralisation.

Under the agreed terms, Antofagasta will commit US\$400,000 over a six month period (nominated as the Initial Assessment Phase) to fund exploration mainly over the RPC, including geological mapping of outcrop, relogging of all DRX's RPC diamond drill core and reprocessing and assessment of existing data.

This Initial Phase of exploration is designed to define subsurface targets for further evaluation through drilling, and to improve upon the geological understanding of the Clermont tenements as a whole, from an exploration and resource perspective.

On completion of the Initial Assessment Phase, to the satisfaction of Antofagasta, Antofagasta has the option of signing a Farm-in Agreement which will contain the following terms:

• • Demarcate areas of the tenement deemed prospective for copper mineralisation.
• • Antofagasta to earn a 51% interest in the defined area of interest by funding US\$8 million in exploration expenditures over a four (4) year period.
• • Antofagasta has the right to withdraw from the defined area of interest after spending a minimum of US\$1.5 million within the first year, but without earning any equity.
• • On earning its 51% interest in the defined area of interest, Antofagasta has the option to earn, at its sole expense, an additional 9% interest (total 60%) by delivering a JORC-compliant inferred resource and completing a scoping study on at least one mineral deposit.
• • The vested interests in the defined area of interest of the parties upon completion of a JORCcompliant inferred resource and scoping study would be Antofagasta 60% and DRX 40%.
• • Forward expenditure at this stage would be prorata, with industry standard dilution practises being applied.
• • Should Antofagasta decide to withdraw from the project after vesting at 51%, DRX will retain management control of the defined area of interest and will dilute Antofagasta's interest in accordance with industry standard practice.
• • If either party dilute to less than a 10% interest, then the diluted party shall relinquish its equity position and revert to a 1.5% net smelter return royalty.
• • DRX will be the operator in the Initial Assessment and Farm-in Phases of the project.
• • Under certain circumstances, DRX will have the right to reacquire a 100% interest in the defined area of interest by reimbursement to Antofagasta of 150% of all defined area of interest related exploration costs incurred during the farm-in period.

DRX considers the exploration funding and expertise that Antofagasta brings to the Clermont tenements to be of immense value in advancing the identification, delineation and development of a large polymetallic porphyry-style mining operation in the Clermont area.

With Antofagasta recognising the high prospectivity of the Clermont tenements and in particular the Rosevale Porphyry Corridor, DRX believes its' commitment to enter into a farm-in arrangement has added confidence to realizing the potential of this new Queensland porphyry copper/gold belt.

ANABAMA COPPER PROJECT – SA

DRX has sought interest from other parties to farm-out its two tenements (EL 3923 and EL 4783). As these tenements are highly prospective for hosting copper and gold within an open ended mineralised corridor at least 200m wide and containing several sub-parallel mineralised vein breccias and copper veined schists, the Company will continue to maintain exploration activities.

GILBERT RIVER BASE METAL PROJECT – QLD

Four new exploration permits totalling an area of 675km2 (EPMs 18213, 18262, 18353 and 18547) were granted during the year. This has increased DRX's total holding in this greenfields exploration area to over 1,200km2, with a further 775km2 remaining under application.

Reconnaissance work in the past has highlighted the area as highly prospective for gold and base metal targets. With the grant of the new areas a targeted exploration program can be conducted, particularly around the two initial areas of primary interest – the "Carsons Prospect" and "Big Bend Prospect" in the vicinity of the Gilbert River.

Recent reassessment by DRX geologists has upgraded the status of these prospects following a review of all the previous exploration data and examination of the rocks and mineralisation potential. Table 8 indicates a number of anomalous rock chip assay results from the Carsons and Castle prospects.

Reconnaissance fieldwork conducted during the year aimed to establish a drilling program over the Saddle (Big Bend) and Carsons/Castle prospects. The historic Ortona Copper mine was visited and appears highly prospective, but will require more ground work prior to drill testing.

The rugged nature of the country hindered the access for drilling. However, a small RAB drilling program consisting of eight (8) drill holes for a total of 217m was completed in September 2011 over quartz lodes at the Carsons/Castle Prospect. Drilling was terminated early in most holes with holes not reaching target depth due to the highly fractured geology and groundwater conditions. Future drilling will require a diamond coring rig, possibly track mounted to overcome the difficult terrain.

Drill assay results were generally disappointing as the majority of the targets were not intersected. However, drill hole GRC07, sited within 3m of the Castle Prospect, returned 6m at 0.18% copper from surface including 2m at 0.27g/t gold and 12.5 g/t silver from 4m to 6m.

All historic and company geological data is being compiled to allow a thorough assessment of the numerous prospects located within the project area. Once completed, it will enable prospect evaluation to be undertaken of all previous work on a GIS based system.

	Easting	Northing		Au	Ag	Cu	Pb	Zn
Sample Number	MGA94, Zone 54		Prospect		All assay results are in parts per million (ppm) except as indicated
3008202	768242	7869465	Castle	0.76	5.9	503	37	2
3008204	768156	7869457	Castle	1.05	324	41.5%	240	876
3008213	766758	7869262	Carsons	6.47	25.7	4.08%	1,210	243
3008214	766865	7869279	Carsons	0.45	23.3	1,795	275	143
3008215	766970	7869305	Carsons	0.47	79.3	5.78%	1.10%	2,170

TABLE 8: ROCK CHIP SAMPLE RESULTS FROM CARSONS AND CASTLE PROSPECTS, GILBERT RIVER PROJECT

TICK HILL GOLD PROJECT – QLD

On 11August 2011, the Company announced that it had reached agreement with Superior Resources Limited (ASX: "SPQ") to farm-out the Tick Hill Gold Project, comprising granted Mining Lease No's 7094, 7096 and 7097, located 110km southeast of Mount Isa. DRX and SPQ are now in the process of completing a formal agreement reflecting the agreed terms of the joint venture.

DRX has existing rights to the Project under an Option and Sale Agreement with Mount Isa Mines Limited (ISA) and is currently in the process of executing its option and assuming ownership of the project.

The agreement between DRX and SPQ gives SPQ the right to earn a 50% interest in the project by:

• • Completion of \$750,000 of exploration including substantial drilling;
• • Payment to DRX of \$100,000; and
• • Lodgement of 50% of the government security bond on the tenements (\$150,000).

The Tick Hill Gold Deposit was mined between 1991 and 1995 by Carpentaria Gold Pty Ltd (a subsidiary of MIM Holdings Limited) for the production of 513,333 ounces of gold from 705,000 tonnes of ore at a recovered grade of 22.6 g/t gold (MIM Holdings Limited – Annual Reports). This makes it one of the highest grade gold deposits in Australia's recent gold producing history.

The prime purpose of the exploration program to be completed by SPQ is to define a high-grade gold resource similar to that previously mined by Carpentaria Gold Pty Ltd. SPQ has identified a fault near the bottom of the previously mined gold shoot with the possibility that the gold shoot may exist at depth in an offset position from the previously mined area. SPQ will initially drill areas containing the possible offset extension of the mined shoot.

Additional exploration to be completed by SPQ includes assessment of other potentially gold bearing areas within the mining leases, testing of the tailings from the previous mining to determine if these contain sufficient gold to warrant reprocessing, assessment of potential alluvial resources and investigation of the grade of the old mine dumps.

TERM DEFINITIONS

Text term	Definition
EL / EPM	Exploration Licence / Exploration Permit for Minerals
g/t	grams per tonne
HM	Heavy minerals such as Zircon, Rutile, Ilmenite and Leucoxene
km	kilometre
m	metre
ML	Mining Lease
Mt	million tonne
ppm	parts per million
RAB	rotary air blast

COMPETENT PERSON STATEMENTS

The information in this report, insofar as it relates to Exploration Results and Mineral Resources is based on information compiled by company personnel under the supervision of Mr David Jelley, who is a full time employee of Diatreme Resources Limited and a Member of the Australasian Institute of Mining and Metallurgy. Mr Jelley has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr Jelley consents to the inclusion in the report of the matters based on the information in the form and context in which it appears.

The information in this report that relates to Ore Reserves is based on information compiled by Mr Phil McMurtrie, who is a Member of the Australasian Institute of Mining and Metallurgy. Mr McMurtrie is a director of Tisana Pty Ltd, and is a consultant to Diatreme Resources Limited. Mr McMurtrie has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr McMurtrie consents to the inclusion in the report of the matters based on the information in the form and context in which it appears.

Current interests in mineral tenements held by Diatreme Resources Limited and its subsidiaries - 02 April 2012

STATE	PROJECT	TENEMENT NAME	TENEMENT ID	AREA	HOLDER	%
QLD	Gilbert River	Bellfield Gilbert River Bellfield Extended Bellfield East Bellfield North Conical Hill Mt Hogan Gilbert River Stn Hanns Table	EPM 12868 EPM 12888 EPM 18213 EPM 18262 EPM 18353 EPM 18547 EPM(A) 18609 EPM(A) 18612 EPM(A) 19124	162 km2 392 km2 113 km2 13 km2 321 km2 226 km2 161 km2 126 km2 488 km2	CHAL CHAL CHAL CHAL CHAL CHAL CHAL CHAL CHAL	100 100 100 100 100 100 100 100 100
QLD	Clermont	Clermont Parpet Expedition Ck	EPM 17968 EPM 19189 EPM(A) 19544	864 km2 315 km2 41 km2	CHAL CHAL CHAL	100 100 100
QLD	Ironhurst	Ironhurst	EPM 12976	6 km2	CHAL	100
SA	Anabama	Anabama Anabama North	EL 3923 EL 4783	182 km2 104 km2	CHAL CHAL	100 100
QLD	Cape Bedford	Cape Bedford	EPM(A) 17795	552 km2	DRX	100
QLD	Tick Hill	Tick Hill Tick Hill Tick Hill	ML 7094 ML 7096 ML 7097	30 ha 30 ha 30 ha	MIM MIM MIM*	100 100 100
SA	Arckaringa Basin	Tarlina South Tarlina Wilari Narana Meramangye Ungoolya Leemurra Ammaroodinna 2	EL(A) 07/418 EL(A) 07/419 EL(A) 07/420 EL(A) 07/428 EL(A) 07/429 EL(A) 07/430 EL(A) 07/431 EL(A) 08/123	865 km2 713 km2 895 km2 999 km2 966 km2 845 km2 885 km2 246 km2	DRX DRX DRX DRX DRX DRX DRX DRX	100 100 100 100 100 100 100 100
WA	Mandora	Mandora	EL(A) 45/4022	471 km2	DRX	100
SA	Eucla Basin	Eucla 3 Eucla 4 Eucla 5 Eucla 6 Eucla 7 Eucla 8 Noorina 1 Noorina 2 Eucla 9 Eucla 10	EL 3615 EL 3616 EL(A) 05/934 EL(A) 05/935 EL(A) 05/936 EL(A) 05/937 EL(A) 07/391 EL(A) 07/392 EL(A) 08/235 EL(A) 08/236	670 km2 1324 km2 374 km2 1328 km2 924 km2 591 km2 770 km2 571 km2 972 km2 658 km2	LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL	100 100 100 100 100 100 100 100 100 100
WA WA	Eucla Basin Cyclone	Wanna Lakes Wanna Lakes East Wanna South Marble Gum Jungooner Ilma Boorabie West Boorabie East Forrest Lakes West Forrest Lakes East Cyclone	E 69/1920 E 69/2408 E 69/2425 E 69/2427 E 69/2428 E(A) 69/2740 E(A) 69/2741 E(A) 69/2742 E(A) 69/2743 E(A) 69/2744 M(A) 69/141	210 km2 210 km2 12 km2 36 km2 145 km2 602 km2 602 km2 602 km2 602 km2 602 km2 1558 ha	LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL LSPL	100 100 100 100 100 100 100 100 100 100 100

Tenement Schedule Notes

MIM* - DRX has rights under the Tick Hill Option and Sale Agreement. Assignments of the leases 100% to DRX are being processed by the Queensland Government. DRX has entered into a joint venture arrangement with Superior Resources Limited

Abbreviations:

EPM(A)	Exploration Permit for Minerals (Application) - Queensland
EL(A)	Exploration Licence (Application) South Australia
E(A)	Exploration Licence (Application)Western Australia
ML	Mining Lease - Queensland
M(A)	Mining Lease (Application) - Western Australia
DRX	Diatreme Resources Limited
CHAL	Chalcophile Resources Pty Ltd
LSPL	Lost Sands Pty Ltd
MIM	Mount Isa Mines

Corporate Governance Statement

Corporate Governance practices that form the bases of a comprehensive system of control and accountability for the administration of Diatreme Resources Limited (the Company) have been adopted. The Board is committed to administering the policies and procedures with openness and integrity, pursuing the true spirit of corporate governance commensurate with the Company's needs.

To the extent they are applicable to the Company, the Board has adopted the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations. Although the Company's practices are largely consistent with the Council's principles, in certain cases they are not compliant. The following table sets out the Company's current position

	Compliant	Non Compliant
PRINCIPLE
Principle 1: Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of board and management.
Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.
Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives
Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1.
The Board is responsible for the corporate governance of the Company.

The Board:

• • Guides and monitors the business and affairs of the Company on behalf of the Company's members to whom they are accountable.
• • Provides corporate strategy and guidance.
• • Reviews appropriate plans and annual budgets, including allocation of resources and capital expenditure.
• • Monitors financial performance.
• • Protects and enhances the Company's reputation.
• • Ensures compliance with regulatory and other requirements, and manages risks to the Company and its business.
• • Appoints the Managing Director and appraises his performance.

Day to day management of the Company's affairs and the implementation of the corporate strategy and policy is currently delegated to the two executive directors and to senior executives. The delegation policy is reviewed at least annually.

The Board has established the following guidelines to ensure the effective operation and discharge of its responsibilities.

The Board has adopted and discloses a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. This includes trade practices and fair dealing laws, consumer protection, respect for privacy, employment law, occupational health and safety, equal employment opportunity, superannuation and environment controls.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Principle 2: Structure the Board to add value Companies should have a board of effective composition, size and commitment to adequately discharge its responsibilities and duties.
Recommendation 2.1: A majority of the board should be independent directors.
Recommendation 2.2: The chair should be an independent director.
Recommendation 2.3: The roles of the chair and chief executive officer should not be exercised by the same individual.
Recommendation 2.4: The board should establish a nomination committee
Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.
Recommendation 2.6: Companies should provide the information indicated in the Guide to Reporting on Principle 2.

Board Structure

The Board currently comprises two executive directors and four non-executive directors. The Board, which meets at least quarterly, comprises directors with an appropriate blend of qualifications and expertise in:

• • Accounting and finance;
• • Marketing and sales;
• • Mineral exploration experience; and
• • CEO level experience.

The Chairperson (and Managing Director) is an executive director due to the small size of the Company, its specific needs, his particular skills set and experience and his history as founder of the Company.

The Board strives to ensure that all transactions between the Company and any related party are always conducted on arms length terms.

Where possible, the Board undertakes an annual review of the performance of the Board and the individual directors and examines the appropriate mix of skills to ensue maximum effectiveness and contribution to the results of the Company's business. Newly appointed directors are required to attend the appropriate induction.

Directors

The Company provides details of each director, such as their skills, experience and expertise relevant to their position, together with an explanation of any departures from the best practice recommendations.

In accordance with the Corporations Act and the Company's Constitution, the directors must advise

the Board on an ongoing basis of any interests that might conflict with those of the Company. Where the Board believes that a conflict exists, the director concerned is not permitted to be present at the meeting when the relevant issue is considered and does not receive the relevant Board papers.

The code of conduct adopted by the Board promotes ethical and responsible decision-making and guides directors, key executives and designated officers as to:

• • the practices necessary to maintain confidence in the Company's integrity; and
• • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

Nomination Committee

The Board as a whole comprises the Nomination Committee. Responsibilities include Board succession as well as evaluation of directors' performance and competencies.

The Nomination Committee:

• • Conducts an annual review of the membership of the Board having regard to the present and future perceived needs of the Company and makes recommendations as considered appropriate to be considered at a Board meeting.
• • Annually examines the independence status of each director.
• • Oversees the annual review and assessment program.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Principle 3: Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making
Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to:
• the practices necessary to maintain confidence in the company's integrity.
• the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders.
• the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.
Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy.
Recommendation 3.3: Companies should provide the information indicated in the Guide to reporting on Principle 3.
Recommendation 3.4: Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity and for the board to assess annually both the objectives and progress in achieving them.

Code of Conduct

The Company's framework is designed to:

• • enable the Board to provide strategic guidance for the Company and effective oversight of management;
• • clarify the respective roles and responsibilities of Board members and senior executives in order to facilitate Board and management accountability to both the Company and its shareholders;
• • ensure a balance of authority so that no single individual has unfettered powers.

Securities Trading Policy

Taking into account the specific operations of the Company at this time, the Board has approved and communicated the following Securities Trading Policy effective 29 December 2010:

1. Purpose

The purpose of this policy is to prevent Diatreme Resources Limited ("DRX") and its employees from breaching legislative prohibitions on insider trading by dealing in the Securities of DRX or other companies while in possession of inside information. The policy outlines where DRX Employees may deal in DRX Securities, or the Securities of other companies. The definition of Securities is complex but includes shares in a company and instruments such as exchange traded options and warrants.

2. Application

This Policy applies to:

• • DRX's Directors;
• • Employees of DRX and its related bodies corporate; and
• • Contractors and Consultants engaged by DRX who, in the course of their engagement with DRX, come in possession of inside information about DRX or another company.

In this policy, all of these people are referred to as DRX Employees. Additional responsibilities apply to DRX Directors, Executive Officers and others identified as Designated Officers. Aspects of this Policy also extend to associates of DRX Employees, such as family members or companies and other entities controlled by DRX Employees and their associates. If you are unsure about how this policy applies to you or to any instrument you wish to deal in, you should seek assistance from the Company Secretary before you deal in the instrument.

3. The Law against Insider Trading

The Corporations Act prohibits a person from dealing, or procuring other persons to deal, in the Securities of a company if the person:

• • possesses inside information about the company; and
• • knows, or ought to reasonably know, that the information is inside information.

For DRX Employees, this prohibition applies to dealing in DRX Securities. It can also apply to dealing in Securities of another company where a DRX Employee is in possession of inside information about that other company.

3.1 What is inside information?

Inside information is information about a company that is not generally available and that, if it were to be made generally available, would reasonably be expected to have a material effect on the price or value of Securities issued by the company. Information is generally available if:

• • it consists of readily observable matter; or
• • it has been publicly disclosed by an announcement to the ASX and a reasonable period for its dissemination among investors has elapsed; or
• • it consists of deductions, conclusions or inferences made or drawn from other generally available information.

DRX has legal obligations to immediately disclose to the market all information which would reasonably be expected to have a material effect on the price or value of its Securities. However, there are circumstances where information of this kind is not required to be disclosed, particularly if it relates to an incomplete proposal or to matters which are insufficiently definite to warrant disclosure. Examples of information that might be inside information include information about:

• • DRX's financial performance, particularly in comparison with forecast results or market expectations;
• • a substantial transaction under consideration;
• • an actual or proposed change to capital structure, including a share issue or a debt refinancing;
• • a material claim or unexpected liability.

3.2 What is dealing in Securities?

You deal in Securities if you acquire or dispose of any economic interest in those Securities. This includes:

• • acquiring or disposing of the Securities
• • entering into an agreement to acquire or dispose of the Securities; or
• • granting, accepting, acquiring, disposing, exercising, or discharging an option or other right or obligation to acquire or dispose of the Securities.

3.3 Consequences of breaching prohibition against insider trading

Insider trading is a criminal offence and may attract substantial fines or imprisonment. Civil penalties may also apply, including the payment of compensation to any person who has suffered loss or damage because of insider trading. DRX Employees who fail to adhere to the requirements of this Policy may face disciplinary action.

The Australian Securities Exchange (ASX), the Australian Securities and Investments Commission (ASIC), and external governance advisers all monitor DRX's compliance with this Policy. Breaches of the Policy by DRX Employees can have material adverse consequences for DRX's reputation with the ASX and ASIC, and with the investment community at large.

4. DRX's Policy Positions

4.1 Prohibited Dealing in DRX Securities

DRX Employees must not deal in DRX Securities at any time if they are in possession of inside information about DRX. DRX Employees also must not deal in DRX Securities during either of the following blackout periods:

• • the period between 1 January and the close of business on the second day after DRX announces its Preliminary Final Results (Appendix 4E);
• • the period between 1 July and the close of business on the second day after DRX announces its Half Year Results (Appendix 4D);
• • the period between 1 April and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the March Quarter;
• • the period between 1 October and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the September Quarter;
• • the period ending at the close of the second day after DRX announces price sensitive information.

4.2 Permitted Dealing in DRX Securities

Subject to additional requirements set out below, DRX Employees may deal in DRX Securities at any other time. These additional requirements relate mainly to DRX Employees who are Designated Officers.

4.3 Dealing in Securities of other companies

From time to time, DRX will be engaged in activities which might result in inside information about another company becoming available to some DRX Employees because of their role or position with DRX. For example:

• • another company may provide information about itself, or about a third company, to DRX in the course of a proposed transaction;
• • DRX may be considering a transaction which, if implemented, may have an effect on another company and the value of that company's Securities;
• • DRX may receive information about the financial or operating performance of a company that DRX has a joint venture with or an investment in.

DRX employees must not deal in Securities of another company if they are in possession of inside information about that other company.

4.4 Short-term or speculative dealing

DRX encourages DRX Employees to be long-term investors in DRX Securities and to act in a way that promotes growth in long-term returns for all holders of DRX Securities. Speculation in shortterm fluctuations in the value of DRX Securities does not promote market confidence in the integrity of DRX or DRX Employees. DRX Employees must not deal in DRX Securities as a short-term trader or on a speculative basis. DRX Employees who acquire DRX Securities must not dispose of those Securities, or enter into arrangements (such as margin loans) which could result in those Securities being disposed of within six months of acquisition. This prohibition does not apply to Securities acquired as a result of the exercise of an option or similar right where the option or right has been held for at least 6 months. This prohibition also does not apply to DRX shares acquired by DRX Employees under any DRX Employee Share Option Plan.

4.5 Derivatives

DRX may grant DRX shares, options or performance rights to DRX Employees as part of their remuneration entitlements. These grants will usually be subject to the satisfaction of performance hurdles before they vest in the DRX Employee. The use of Derivatives over unvested DRX Securities has the potential to allow DRX Employees to realise value from those Securities even if the performance hurdles have not been satisfied. This would undermine the intended alignment between the performance of DRX Employees and the interests of DRX shareholders. DRX Employees are not permitted to use Derivatives in relation to any unvested DRX Securities. For this purpose, a Derivative includes any option, forward contract, swap, futures contract or warrant, or any other arrangement, which itself or in combination with one or more other Derivatives would have the effect of providing a DRX Employee with greater benefit than would otherwise have been realised in respect of the unvested DRX Securities. DRX Employees may use Derivatives in relation to DRX Securities which have vested, provided they have the prior written approval of the Board any dealing in those Derivatives complies with the other requirements of this Policy.

5. Specific Rules for Designated Officers

5.1 Who is a Designated Officer?

Additional safeguards are necessary to avoid the potential for adverse public perceptions of DRX as a result of dealings in DRX Securities by DRX Employees in senior roles. For the purposes of this Policy, these DRX Employees are Designated Officers. A Designated Officer is a DRX Employee who is:

• • a DRX Director; or
• • a member of DRX's Executive Team.

Other DRX Employees may also occupy a position, or perform a role, which may attract public scrutiny of dealings by those DRX Employees in DRX Securities. The Managing Director may, from time to time, designate any DRX Employee to be a Designated Office for the purpose of this Policy.

5.2 Dealings in DRX Securities by Designated Officers

Any Designated Office who proposes dealing in DRX Securities must, before the dealing occurs, notify the Company Secretary of the proposed dealing in writing (or by email) setting out the full details of the proposed dealing including:

• • Name of security holder;
• • Proposed date of dealing;
• • Type of proposed transaction (purchase, sale, etc); and
• • Number of securities involved.

The Designated Officer must not undertake the proposed dealing until it has been approved in writing (or by email) in accordance with the following protocol:

Dealing to be undertaken by:	Dealing to be approved by;
A non-executive Director or Company Secretary	Chairman of the Board
Chairman of the Board	Chairman of the Audit Committee
Managing Director	Chairman of the Board
Chief Financial Officer	Chairman of the Board
Member of Executive Team	Managing Director
All other Designated Officers	Managing Director

An approval to undertake the proposed dealing will be valid for two (2) weeks (but completion of the proposed dealing must not occur during a blackout period and must otherwise comply with the requirements of this Policy. The requirements for Designated Officers to seek approval before dealing in DRX Securities do not apply to:

• • the acquisition of Securities under any DRX Employee Share or DRX Employee Share Option Plan;
• • the acquisition of shares under a DRX Dividend Reinvestment Plan;
• • participation in an offer or invitation made to all or most of the security holders, eg. Rights Issues and Share Purchase Plans.

5.3 Restrictions applicable to associates of Designated Officers

This Policy extends to associates of Designated Officers in relation to dealing in DRX Securities. A Designated Officer's associates include family members or companies and other entities controlled by the Designated Officer. This means that a Designated Office must take all steps reasonably necessary for the Designated Officer's associates to:

• • avoid dealing in DRX Securities during a blackout period;
• • avoid dealing in DRX Securities as a short-term trader or on a speculative basis;
• • notify the Company Secretary of, and seek approval for, proposed dealings in DRX Securities.

5.4 Margin Loans

Margin loans to support an investment in Securities have the potential to compromise a DRX Employee's ability to comply with this Policy or with the legal prohibition against insider trading. This is because the terms of a margin loan may require the sale of Securities during a blackout period (in relation to DRX Securities) or at a time when the DRX Employee is in possession of inside information about DRX or another company in which the DRX Employee holds Securities. DRX Employees are prohibited from entering into margin loan arrangements to fund the acquisition of DRX Securities or in relation to which DRX Securities may be used as a security against repayment of the loan.

The following requirements will apply to margin loans proposed to be obtained by a Designated Officer to acquire Securities of any other company in relation to which it is reasonably foreseeable that the Designated Officer could come into possession of inside information as a consequence of being a DRX Employee.

• The Designated Officer must provide notice of, and obtain approval for, the proposed margin lending arrangements following the process outlined in paragraph 5.2 above. Approval must be obtained before the margin lending arrangements are entered into.

• • Similarly, the Designated Officer must ensure that the terms of the margin lending arrangements do not require, or allow for, Securities of any company to be disposed of at a time when the Designated Officer is in possession of inside information in relation to that company.
• • The Designated Office must promptly inform the Company Secretary in writing (or by email) of any margin call that is made under the margin lending arrangements, and of the terms of that margin call.

5.5 Notification by Directors of Dealing in DRX Securities

DRX is required to notify the ASX within 5 business days of any dealings by DRX Directors in DRX Securities. To allow DRX to meet its ASX obligations, DRX Directors must notify the Company Secretary as soon as practicable (and, in any case, no later than 2 business days) after the dealing occurs. The Company Secretary will notify the ASX of the Director's dealing in DRX Securities using Appendix 3Y as required by the ASX Listing Rules. The Company Secretary will promptly provide all Directors with a copy of each Appendix 3Y sent to the ASX.

6. Exceptional Circumstances

6.1 Exemption to allow dealings during blackout periods

The Company Secretary has the discretion to give approval to a DRX Employee to dispose of DRX Securities during a blackout period if both of the following conditions are satisfied:

• • the DRX Employee is experiencing genuine financial hardship or there are other exceptional circumstances; and
• • the DRX Employee is not actually in possession of inside information about DRX.

A DRX Employee seeking approval to dispose of DRX Securities during a blackout period should do so in accordance with procedures set out in 5.2 of this Policy. Full details of why the DRX Employee considers that exceptional circumstances exist should be included. The Company Secretary must maintain a record of all approvals given to sell DRX Securities during a blackout period. The Company Secretary must promptly inform the Board of all instances where approval has been given to a DRX employee to sell DRX Securities during a blackout period.

7. Other Matters

7.1 Date of effect

This Policy has been approved by DRX's Board and has effect from 29 December 2010.

7.2 Further Information about this Policy

If you have any questions about the application of this Policy to you, please contact the Company Secretary.

8. Glossary

Terms used in this Policy have the meaning set out below: DRX means DRX Limited (ABN 33 061 267 061).

DRX Board means the board of directors of DRX.

DRX Employees means each director, officer and employee of DRX or its related bodies corporate (within the meaning of section 50 of the Corporations Act), and each contractor and consultant to DRX or its related bodies corporate who are contractually bound to comply with this policy.

DRX Executive Team means DRX Employees who hold a senior management role and who directly reports to the DRX Managing Director.

Associate in relation to a DRX Employee means:

• • a member of the DRX Employee's immediate family; and
• • a company or other entity controlled by the DRX Employee or a member of their immediate family.

Blackout Period means each of the following periods:

• the period between 1 July and the close of business on the second day after DRX announces its Preliminary Final Results (Appendix 4E)/Financial Resultsthe period between 1 July and the

• • close of business on the second day after DRX announces its Half Year Results (Appendix 4D);
• • the period between 1 April and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the March Quarter;
• • the period between 1 October and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the September Quarter;
• • the period ending at the close of the second day after DRX announces price sensitive information.

Company Secretary means the Company Secretary of DRX from time to time.

Corporations Act means the Corporations Act 2001 (Cth).

Deal or dealing in relation to Securities means to acquire or dispose of any economic interest in those Securities. The term is intended to be interpreted broadly and includes:

• • acquiring or disposing of the Securities;
• • entering into an agreement to acquire or dispose of the Securities; or
• • granting, accepting, acquiring, disposing, exercising, or discharging an option or other right or obligation to acquire or dispose of the Securities.

Derivatives has the meaning given in Section 761D of the Corporations Act and includes options, forward contracts, swaps, future contracts and warrants and any combination of one or more of these things.

Designated Person means a DRX Employee who is:

• • a DRX Director
• • a member of DRX's Executive Team; or
• • any person designated by the Managing Director as a Designated Officer in accordance with paragraph 5.1 of this Policy.

Inside information in relation to a company means information about the company that is not generally available and that, if it were to be made generally available, would reasonably be expected to have a material effect on the price or value of Securities issued by the company.

Securities include shares, options, rights, debentures, interests in a managed investment scheme, Derivatives, and financial products covered by section 1042A of the Corporations Act.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Diversity Policy

Given the size of the Company, the size of the Board and the activities of the Company, the Board does not consider it practical to adopt a diversity policy at this time.

Principle 4: Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.
Recommendation 4.1: The board should establish an audit committee.
Recommendation 4.2: The audit committee should be structured so that it: • consists only of non-executive directors • consists of a majority of independent directors • is chaired by an independent chair, who is not chair of the board • has at least three members.
Recommendation 4.3: The audit committee should have a formal charter.
Recommendation 4.4: Companies should provide the information indicated in the Guide to reporting on Principal 4.

Integrity in Financial Reporting

The Managing Director and the CFO (or equivalent) are required to make the following certifications to the Board:

• • That the Company's financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with the relevant accounting standards.
• • That the above statement is based on a sound system of risk management and internal compliance and control and which implements the policies adopted by the Board and that the Company's risk management and internal compliance and control is operating efficiently and effectively in all material respects.

Audit Committee

The Board has established an Audit Committee which operates under a charter approved by the Board. It is the Board's responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes such as the safeguarding of assets, maintenance of proper accounting records, the reliability of financial information and non-financial considerations such as the benchmarking of operational key performance indicators. The Audit Committee provides a forum for effective communication between the Board and the external auditor. The Audit Committee also provides the Board with additional assurance regarding the reliability of financial information for inclusion in the financial report.

Taking into account the specific operations of the Company, the Audit Committee meets at least twice a year with the auditors without the presence of any executive directors. Because of the size of the Board, the current audit committee comprises only two members (two non-executive directors) and the chairman of the committee is not the Chairman of the Board.

The Audit Committee operates under the following charter approved by the Board:

• • The board as a whole is responsible for the accuracy and relevance of the financial statements. However, the Audit Committee provides an additional and more specialised oversight of the financial reporting process.
• • The Audit Committee shall, if possible, comprise a majority of non-executive directors and an independent chairman who is not the Chairman of the Board. The Audit Committee shall consist of at least two members.
• • The finance director and other executive directors may be present during Audit Committee deliberations but will not be members of the committee.
• • The Audit Committee will meet at least two times a year and will meet independently of the executive management of the Company with the external auditors at least once a year.
• • The Audit Committee reports to the Board and copies of Audit Committee minutes should be tabled at the first Board meeting at which it is practicable to do so.

The Company currently had two executive and four non-executive directors. The Company's Audit Committee is comprised of two non-executive directors.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Principle 5: Make timely and balanced disclosure

Companies should promote timely and balanced disclosure of all material matters concerning the company.

Recommendation 5.1:

Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

Recommendation 5.2:

Companies should provide the information indicated in the Guide to reporting on Principle 5.

Continuous Disclosure

The Company has a continuous disclosure program in place designed to ensure the factual presentation of the Company's financial position.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Principle 6: Respect the rights of shareholders

Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

Recommendation 6.2:

Companies should provide the information indicated in the Guide to reporting on Principle 6.

Shareholders Information

The Board aims to ensure that shareholders and other stakeholders have equal and timely access to material information concerning the Company. Information is communicated through:

• • The annual report which is distributed to the Australian Securities Exchange and to all shareholders who have elected to receive such report.
• • Notices of the Annual General Meeting and other meetings of members called as required to obtain approval for Board action.
• • Timely announcements through the Australian Securities Exchange company announcements platform, including Quarterly Activity Reports as required for mineral exploration companies.
• • The half-year report containing summarised financial information and a review of operations for that period.

The Board encourages full participation of shareholders at the Annual General Meeting and at other general meetings as may be called.

The Company requests the external auditor to attend all annual general meetings of the Company to answer shareholder questions about the conduct of the audit and the preparation and content of the auditors report.

Recognising the Rights of Shareholders

Directors bear individual responsibilities for the performance of their duties before the law, and collective responsibility for the behaviour of the Board.

The code of conduct, as pronounced by the Australian Institute of Company Directors in September 2005, encompasses the legislative and common law requirement of directors, as well as specific behaviour that the Company expects of directors. The Company has adopted this code of conduct, which provides that:

• A director must act honestly, in good faith and in the best interests of the Company as a whole.

• • Adirector has a duty to use due care and diligence in fulfilling the functions of office and exercising the powers attached to that office.
• • Adirector must use the powers of office for a proper purpose, in the best interests of the Company as a whole.
• • A director must recognise that the primary responsibility is to the Company's shareholders as a whole but should, where appropriate, have regard for the interests of all stakeholders of the Company.
• • A director must not make improper use of information acquired as a director.
• • A director must not take improper advantage of the position of director.
• • A director must not allow personal interests, or the interests of any associated person, to conflict with the interests of the Company.
• • A director has an obligation to be independent in judgment and actions and to take all reasonable steps to be satisfied as to the sound¬ness of all decisions taken by the Board.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Principle 7: Recognise and Manage risk Companies should establish a sound system of risk oversight and management and internal control.
Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.
Recommendation 7.2: The board should require management to design and implement the risk management and internal control system to manage the company's material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company's management of its material business risks.
Recommendation 7.3: The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.
Recommendation 7.4: Companies should provide the information indicated in the Guide to reporting on Principle 7.

Risk Management

The Board has established a Risk Management Committee. The prime purpose of the Risk Management Committee is to identify those areas of risk which are most likely to cause major disruption and damage to the business of the Company and to implement, with Board approval, plans and procedures which will mitigate any damage.

The Risk Management Committee will meet as often as considered necessary but not less than twice per year.

Certifications to the Board

The Managing Director and the CFO (or equivalent) are required to make the following certifications to the Board:

• • That the Company's financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with the relevant accounting standards.
• • That the above statement is based on a sound system of risk management and internal compliance and control and which implements the policies adopted by the Board and that the Company's risk management and internal compliance and control is operating efficiently and effectively in all material respects.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Principle 8: Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.
Recommendation 8.1: The board should establish a remuneration committee. The committee should be structured so that it consists of a majority of independent directors, is chaired by an independent chair, and has at least 3 members.
Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors'
remuneration from that of executive directors and senior executives.

Enhanced Performance

The Board encourages enhanced performance and has adopted a program that enables directors to gain an understanding of:

• • the Company's financial, strategic, operational and risk management position;
• • their rights, duties and responsibilities; and
• • the role of the Board's committees.

The Board undertakes an annual review of the performance of the Board and the individual directors and examines the appropriate mix of skills to ensue maximum effectiveness and contribution to the results of the Company's business.

Remuneration Policy

The Company has a formal remuneration policy.

The Company will disclose the quantum of remuneration paid to directors and senior executives in its annual reports. Any links between the remuneration paid to directors and key executives and corporate performance will be fully disclosed.

The Board is responsible for determining and reviewing remuneration arrangements for the directors and the executive team. The Board has established a Remuneration Committee consisting of three non-executive directors.

The Company's constitution provides that the total remuneration of all non-executive directors will not be more than the aggregate fixed sum determined by a general meeting. The aggregate remuneration has been set at an amount of \$300,000 per annum.

Diatreme Resources Limited

The Company will seek shareholder approval for the future grant of equity based remuneration to directors.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

FINANCIAL REPORT

For the year ended 31 December 2011

Directors' Report

The Directors present their report on Diatreme Resources Limited ("the Company") and its subsidiaries (the "Group") for the year ended 31 December 2011.

DIRECTORS

The following persons were Directors of Diatreme Resources Limited during the whole of the financial year and up to the date of this report unless otherwise stated:

Anthony John Fawdon FAICD, FAusIMM. (Executive Chairman/CEO)

Experience

Board member since 12 January 2001, Mr Fawdon has been active in the Australian mining and exploration industry for 36 years, working until 1982 in various management levels for multinational companies. He then became founder and director of several listed mineral explorers, including the Queensland based gold and base metal explorer Strike Mining NL in 1994 for which he was Managing Director/CEO until mid 2000.

Other current directorships (listed entities) - None Former directorships in last 3 years (listed entities) - None

David Hugh Hall BAppSc (Geol), G.Dip.ESc., MAICD. (Executive Director – Operations)

Experience

Board member since 12 January 2001, Mr Hall is a geologist with over 30 years experience in the mining industry.After spending the early part of his career in both coal and mineral exploration, in 1990 he branched into developing specialist experience in tenement administration and stakeholder liaison within a private consultancy group. Between 1994 and 2000 he was the exploration administrator with Strike Mining NL. He joined Diatreme as an executive director in early 2001.

Other current directorships (listed entities) - None Former directorships in last 3 years (listed entities) – None

George Henry White BSc.Hons., FAICD. (Non-executive Director)

Experience

Mr White was appointed Director in April 2006. He has over 30 years experience in the mineral and energy industries and has held senior environmental and mining management positions in Alcoa, Chief Executive positions in Doral Resources NL and Doral Mineral Industries Ltd.

Mr White has been instrumental in the establishment of a number of greenfield resource projects in mineral sands, gold, magnetite, natural gas production and the downstream processing of mineral sands to zirconia and zirconium chemicals.

Other current directorships (listed entities) - None Former directorships in last 3 years (listed entities) – None

Andrew Tsang (Non-executive Director)

Experience

Mr Tsang is a naturalised Australian citizen who was born and educated in China and who has successfully established and run construction, engineering and property development businesses both in China and Australia as well as establishing successful import agencies for Australian manufactured goods into China.

Other current directorships (listed entities) – Mindax Limited (Director since 28 March 2008) Former directorships in last 3 years (listed entities) – None

Cheng (William) Wang MBA. (Non-executive Director)

Experience

Mr Wang was appointed Director in May 2011. For 15 years he held senior management positions in several Chinese state owned companies. Now domiciled in Australia, he has been active with Australian companies including directorships with China Century Capital Limited and Jupiter Mines Limited. He is currently Director of Investment Banking for the AIMS Financial Group and Director of Gulf Alumina Limited and Katana Group Limited.

Other current directorships (listed entities) – None Former directorships in last 3 years (listed entities) – None

Neil John McIntyre MBE, MAICD. (Non-executive Director)

Experience

Mr McIntyre was appointed Director in July 2011. Mr McIntyre is a senior executive with broad based commercial skills in Merchant Banking, Finance, CorporateAdvisory Services, Mining and Petroleum, Government relations, Agriculture and Cross Border Management. Throughout his career he has demonstrated visionary leadership, expertise and outstanding performance in business start-up and financial/operational management of commercial entities within Papua New Guinea, Australia and Indonesia.

Other current directorships (listed entities) – None Former directorships in last 3 years (listed entities) – None

Directors' Interests

The following table sets out each Director's relevant interest in shares or options in shares of the Company as at 31 December 2011.

Directors	Full paid ordinary shares number	Share options number
A J Fawdon	3,524,577	243,179
D H Hall	2,800,000	320,000
G H White	216,667	516,667
A Tsang	77,177,551	35,832,933
C Wang	2,537,822	804,903
N J McIntyre	-	-
	86,256,617	37,717,682

COMPANY SECRETARY

The Company Secretaries are:

Leni Pia Stanley CA, B.Com.

Ms Stanley is currently a partner with a Chartered Accounting firm and holds the office of Company Secretary with other companies.

Tuan Quy Do CA, B.Com.

Mr Do was appointed in May 2011 and is also the Group Financial Controller.

PRINCIPAL ACTIVITIES

The principal activity of the Group during the course of the financial year was exploration for heavy mineral sands, copper, gold and base metals in Australia. There were no changes in the nature of the Group's principal activities during the year.

REVIEW OF OPERATIONS

During the year the Company heavily concentrated its efforts on progressing a prefeasibility study over its flagship Cyclone Heavy Mineral (Zircon) Deposit in Western Australia. Regional mineral sands exploration was conducted over numerous other prospects and efforts made to advance the metal projects through joint venture arrangements.

Highlights for the year were:

• • Securing a major Chinese end user as an interested party seeking entry into the Cyclone Zircon Project.
• • Completion of a significant portion of the Cyclone Prefeasibility Study, including the determination of an updated mineral resource and maiden ore reserve.
• • Securing a joint venture arrangement with a major international mineral company over the Company's Rosevale Porphyry project in Queensland.

OPERATING RESULTS

The net loss of the Group for the financial year ended 31 December 2011 was \$4,377,262 (2010: loss of \$4,000,451).

During the year the Group utilised its cash resources to undertake exploration and evaluation activities within its tenement portfolio. The Group monitors cash flow requirements for operational, exploration and evaluation expenditure and will continue to use capital market issues to satisfy anticipated funding requirements.

DIVIDENDS

No dividend has been paid since the end of the previous year and the Directors do not recommend the payment of any dividend for the year ended 31 December 2011.

SIGNIFICANT CHANGES IN STATE OF AFFAIRS

In April 2011, the Company successfully completed a non-renounceable rights issue to shareholders on a 1 for 3 basis. As a result contributed equity increased by \$6,531,755 (from \$33,321,487 to \$39,853,242) from the issue of 88,650,039 ordinary shares.

EVENTS SUBSEQUENT TO REPORTING DATE

In relation to the Gilbert River Project tenements, the Queensland government, in January 2012, advised that three of the Projects' five granted tenements may be impacted by a proposed gazettal of national park. At this stage it is not practical to quantify the financial impact of this government action. The carrying value of the Group's exploration and evaluation assets on the potentially affected areas is \$926,206.

On 23 January 2012, the Company announced a review and upgrade of the Heavy Mineral resource estimate for the Cyclone Zircon Deposit.

On 7 February 2012, the Company announced a maiden ore reserve estimate for the Cyclone Zircon Project as part of the Prefeasibility Study ("PFS").

On 20 March 2012, the Company announced positive PFS results for the Cyclone Zircon Project. The PFS has shown the potential for the project to mine 10 million tonnes per annum of ore for 10 years, yielding approximately 147,000 tonnes per annum of heavy mineral (HM) concentrate.

On 27 March 2012, the Company announced details of a proposed farm-in agreement signed with Antofagasta Minerals S.A. over the Clermont Copper Project in central Queensland.

No other matter or circumstance has arisen since the end of the year that has 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 years subsequent to 31 December 2011.

FUTURE DEVELOPMENTS

Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual financial report because the directors believe it would be likely to result in unreasonable prejudice of the Group.

REMUNERATION REPORT - AUDITED

The remuneration report is set out under the following main headings:

• A Principles used to determine the nature and amount of remuneration
• B Relationship of remuneration with Company performance
• C Details of remuneration
• D Share-based compensation
• E Service agreements

A Principles used to determine the nature and amount of remuneration

The board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.

(i) Executive Directors

The combination of Directors' fees, salary, non-cash benefits and superannuation make up the Executive Directors' total remuneration. The salary component of Executive Directors' remuneration packages is reviewed annually to ensure the Executives' pay is competitive with the market. Executive Directors' pay is not directly linked to the financial performance of the Group.

(ii) Non-executive Directors

Fees and payments to Non-executive Directors reflect the demands which are made on, and the responsibilities of, the Director. Non-executive Directors' fees and payments are reviewed annually by the Remuneration Committee.

(iii) Directors' fees

Non-executive Directors' fees are determined within an aggregate Directors' fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at \$300,000 per annum plus statutory superannuation.

B Relationship of remuneration with Company performance

The Directors consider that, as the Group is in an exploration phase of its development, it is not appropriate that remuneration for employees and Directors be linked to the financial performance of the Group. Once the Group enters a sustained production phase, this assessment may change accordingly.

		2007	2008	2009	2010	2011
Share price at year end	\$/share	0.19	0.08	0.13	0.07	0.07
Market capitalisation	\$ million	27	12	26	19	26
Revenue	\$'000	446	601	251	241	511
Total assets	\$ million	20	18	22	23	25
Net profit/(loss) after tax	\$'000	704	(2,513)	2,759)	(4,000)	(4,377)

C Details of remuneration

The key management personnel include the Directors as per the "Directors" section above and the following executive officers who have authority and responsibility for planning, directing and controlling the activities of the entity:

2011 D Jelley – Exploration Manager L Stanley – Co-Company Secretary

REMUNERATION REPORT (Continued)

T Do – Group Financial Controller/Co-Company Secretary (became part of key management personnel from appointment as Co-Company Secretary on 27 May 2011)

2010

D Jelley – Exploration Manager

L Stanley – Co-Company Secretary

Details of the nature and amount of remuneration of the Directors and other key management personnel of the Group are set out in the following table

2011	Short - term employee benefits	Post - employment benefits	Long-term benefits	Share-based payments
Name	Salary & fees \$	Superannua tion \$	Long service leave \$	Options \$	Total \$
Non-executive Directors
G H White A Tsang C Wang (1) N J McIntyre (2)	45,000 45,000 26,815 19,264	4,050 4,050 2,413 1,734	- - - -	- - - -	49,050 49,050 29,228 20,998
Executive Directors
A J Fawdon # D H Hall #	254,351 230,625	22,892 20,756	15,889 14,415	- -	293,132 265,796
Other key management personnel
D Jelley # L Stanley # T Do (3) #	188,550 30,000 128,000	13,162 - 11,520	- - -	- -	201,712 30,000 139,520
Total	967,605	80,577	30,304	-	1,078,486

(1) Appointed Non-executive Director on 27 May 2011

(2) Appointed Non-executive Director on 29 July 2011

(3) Appointed Co-Company Secretary on 27 May 2011

Included as one of the 5 highest paid executives of the Group. There are no other executives.

2010	Short - term employee benefits	Post - employment benefits	Long-term benefits	Share-based payments
Name	Salary & fees \$	Superannuation \$	Long service leave \$	Options \$	Total \$
Non-executive Directors
L J Litzow ^ G H White A Tsang	99,583 40,000 40,000	- 3,600 3,600	- - -	- - -	99,583 43,600 43,600
Executive Directors
A J Fawdon # D H Hall #	248,000 225,000	22,320 20,250	4,557 3,996	- -	274,877 249,246
Other key management personnel
D Jelley # L Stanley #	155,592 35,000	- -	- -	- -	155,592 35,000
Total	843,175	49,770	8,553	-	901,498

Included as one of the 5 highest paid executives of the Group. There are no other executives

^ Resigned on 30 November 2010

D Share-based compensation

There was no share-based compensation to key management personnel or executive in 2011.

E Service agreements

A J Fawdon, Executive Chairman/CEO

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$277,078.
• • The agreement may be terminated by 1 month notice from either party
• • Termination benefit six months salary plus two weeks for every year, or part thereof, for service to the Company since appointment (1 August 2000).

D H Hall, Executive Director - Operations

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$251,381
• • The agreement may be terminated by 1 month notice from either party
• • Termination benefit six months salary plus two weeks for every year, or part thereof, for service to the Company since appointment (1 August 2000).

G H White, Non-executive Director

• • Term of agreement no fixed term
• • Base salary inclusive of superannuation, of \$49,050.
• • No termination benefit is specified in the agreement.

A Tsang, Non-executive Director

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$49,050.
• • No termination benefit is specified in the agreement.

C Wang, Non-executive Director

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$49,050.
• • No termination benefit is specified in the agreement.

N J McIntyre, Non-executive Director

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$49,050.
• • No termination benefit is specified in the agreement.

D Jelley, Exploration Manager

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$212,550
• • The agreement may be terminated by 1 month notice from either party
• • No termination benefit is specified in the agreement.

T Do, Group Financial Controller/Co-Company Secretary

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$163,500
• • The agreement may be terminated by 1 month notice from either party
• • No termination benefit is specified in the agreement.

L Stanley, Co-Company Secretary

• • Term of agreement no fixed term.
• • Fixed monthly fee \$2,500.
• • No termination benefit is specified in the agreement

The salary package amounts disclosed above are the amounts as at the date of this report.

END OF AUDITED REMUNERATION REPORT

MEETINGS OF DIRECTORS

The number of meetings of the board of Directors held during the year ended 31 December 2011, and the number of meetings attended by each Director were:

Name	Board		Audit Committee		Remuneration Committee
	Held	Attented	Held	Attented	Held	Attented
A J Fawdon	6	5	-	-	-	-
D H Hall	6	6	2	2	-	-
G H White	6	6	2	2	1	1
A Tsang	6	5	-	-	1	1
C Wang	5	4	-	-	-	-
N J McIntyre	3	3	2	1	1	1

SHARES UNDER OPTION

88,650,039 listed options, each to acquire one ordinary share in Diatreme Resources Limited, were issued as the result of the Rights Issue in April 2011. The options have an exercise price of 15 cents per share and expire on 30 September 2013. The options carry no rights to dividends and no voting rights.

The option holders have no rights under the option to participate in any share issue or interest issue of the Company or any other entity.

ENVIRONMENTAL REGULATION

The Group is not subject to any significant environmental regulation (apart from normal requirements under its mineral tenements) in respect of its operations.

INDEMNIFICATION OF OFFICERS AND AUDITORS

During the financial year, Diatreme Resources Limited paid a premium in respect of a contract insuring Directors and executive officers of the Company and its controlled entities against a liability incurred as Director or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or any of its controlled entities against a liability incurred as such an officer or auditor.

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 part of those proceedings.

No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under Section 237 of the Corporations Act 2001.

AUDITOR

BDO Audit (QLD) Pty Ltd was appointed as the Company's auditor at the 2010 Annual General Meeting held on 27 May 2010.

Non-audit services

BDO Audit (QLD) Pty Ltd, the Company's current auditor did not perform any other services in addition to their statutory audit duties.

AUDITOR'S INDEPENDENCE DECLARATION

The auditor's independence declaration is set out on page 41.

This report was authorised for issue on 29 March 2012 in accordance with a resolution of the directors.

AJ Fawdon Executive Chairman/CEO Brisbane, 29 March 2012

Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au

Level 18, 300 Queen St Brisbane QLD 4000, GPO Box 457, Brisbane QLD 4001 Australia

DECLARATION OF INDEPENDENCE BY CHRIS SKELTON TO THE DIRECTORS OF DIATREME RESOURCES LIMITED

As lead auditor for the audit of Diatreme Resources Limited for the year ended 31 December 2011, I declare that to the best of my knowledge and belief, there have been:

• • no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
• • no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Diatreme Resources Limited and the entities it controlled during the year.

C J Skelton Director

BDO Audit (QLD) Pty Ltd

Brisbane: 29 March 2012

BDO Audit (QLD) Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (QLD) Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2011

		Consolidated
		2011	2010
	Note	\$	\$
Revenue	6	510,638	240,809
Employee benefits expenses Depreciation expenses Exploration assets written off Other expenses Finance costs	11 12 6	(881,859) (213,628) (2,419,719) (1,648,855) (13,864) (4,667,287)	(796,841) (281,605) (2,037,694) (1,422,778) (17,945) (4,316,054)
Loss before income tax
Income tax benefit	7	290,025	315,603
Loss after income tax		(4,377,262)	(4,000,451)
Other comprehensive income Other comprehensive income for the year, net of tax		-	-
Total comprehensive loss for the year		(4,377,262)	(4,000,451)
Loss per share		Cents	Cents
Basic earnings per share Diluted earnings per share	28 28	(1.4) (1.4)	(1.8) (1.8)

The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION for the year ended 31 December 2011

	Consolidated
		2011	2010
	Note	\$	\$
Current Assets
Cash and cash equivalents Trade and other receivables Current tax asset	8 9	3,650,010 232,024 -	1,602,313 164,370 315,603
Total Current Assets		3,882,034	2,082,286
Non-current Assets
Available-for-sale financial assets Property, plant and equipment Exploration and evaluation assets Other assets Total Non-current Assets	10 11 12 13	162,586 734,591 19,379,377 701,194 20,977,748	162,586 938,513 18,791,274 683,113 20,575,486
Total Assets		24,859,782	22,657,772
Current Liabilities
Trade and other payables Interest-bearing liabilities	14 15	313,078 130,050	255,914 45,107
Total Current Liabilities		443,128	301,021
Non-current Liabilities
Interest-bearing liabilities Provisions	15 16	- 124,979	130,050 89,519
Total Non-current Liabilities		124,979	219,569
Total Liabilities		568,107	520,590
Net Assets		24,291,675	22,137,182
Equity
Issued capital Reserve Accumulated losses	17 18 19	39,853,242 - (15,561,567)	33,321,487 87,670 (11,271,975)
Total Equity		24,291,675	22,137,182

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2011

	Note	Issued capital \$	Share option reserve \$	Accumulated losses \$	Total \$
Balance at 1 January 2010		28,724,912	87,670	(7,271,524)	21,541,058
Total comprehensive income: Loss for the year		-	-	(4,000,451)	(4,000,451)
Transactions with owners in their capacity as owners:
Shares issued Share issue costs		5,179,535 (582,960)	- -	- -	5,179,535 (582,960)
Balance at 31 December 2010		33,321,487	87,670	(11,271,975)	22,137,182
Total comprehensive income: Loss for the year		-	-	(4,377,262)	(4,377,262)
Transactions with owners in their capacity as owners:
Shares issued Share issue costs Transfer from reserve	18	7,092,003 (560,248) -	- - (87,670)	- - 87,670	7,092,003 (560,248) -
Balance at 31 December 2011	17 & 19	39,853,242	-	(15,561,567)	24,291,675

The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2011

		Consolidated
		2011	2010
	Note	\$	\$
Cash flows from operating activities
Receipts in the course of operations Receipts from research and development tax claims Payments to suppliers and employees Interest received Finance costs Net cash inflow/(outflow) from operating activities		227,357 605,628 (2,532,833) 225,750 (13,864)	182,039 - (2,032,276) 58,769 (17,945)
	27	(1,487,962)	(1,809,413)
Cash flows from investing activities Payments for property, plant and equipment Payments for exploration and evaluation assets Proceeds from sale of property, plant and equipment Payments for security deposits Payments for other deposits Refund of security deposits Net cash inflow/(outflow) from investing activities		(9,785) (2,905,634) - (15,000) (20,570) - (2,950,989)	(23,823) (3,019,312) 3,000 (93,573) 74,200 (3,059,508)
Cash flows from financing activities
Proceeds from issue of shares Payments for share issue costs Repayment of interest-bearing liabilities		7,092,003 (560,248) (45,107)	5,179,535 (582,960) (42,083)
Net cash inflow/(outflow) from financing activities		6,486,648	4,554,492
Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year		2,047,697 1,602,313	(314,429) 1,916,742
Cash and cash equivalents at the end of the year	8	3,650,010	1,602,313

The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes.

Contents of the notes to the consolidated financial statements

• 1 Reporting entity
• 2 Basis of preparation
• 3 Significant accounting policies
• 4 Critical accounting estimates and judgments
• 5 Segment information
• 6 Revenue and expenses
• 7 Income tax
• 8 Current assets cash and cash equivalents
• 9 Current assets trade and other receivables
• 10 Non-current assets available-for-sale financial assets
• 11 Non-current assets property, plant and equipment
• 12 Non-current assets exploration and evaluation assets
• 13 Non-current assets other
• 14 Current liabilities trade and other payables
• 15 Interest-bearing liabilities
• 16 Non-current liabilities provisions
• 17 Issued capital
• 18 Reserve
• 19 Accumulated losses
• 20 Financial instruments
• 21 Key management personnel disclosures
• 22 Remuneration of auditors
• 23 Contingencies
• 24 Commitments
• 25 Related party transactions
• 26 Group entities
• 27 Reconciliation of net profit/(loss) to net cash flow from operating activities
• 28 Earnings per share
• 29 Share-based payments
• 30 Parent entity information
• 31 Events subsequent to reporting date
• 32 New accounting standards and interpretations

1. REPORTING ENTITY

Diatreme Resources Limited (the "Company") is a public company listed on the Australian Securities Exchange (trading under the code DRX), and is incorporated and domiciled in Australia. The address of the Company's registered office and principal place is 87 Wickham Terrace, Spring Hill, Queensland 4000. The Group financial statements as at and for the year ended 31 December 2011 comprise the Company and its subsidiaries (together referred to as the "Group").

Separate financial statements for Diatreme Resources Limited as an individual entity are no longer presented as the consequence of a change to the Corporations Act 2001, however, limited financial information for the Company as an individual entity is included Note 30.

The principal activity of the Group during the course of the financial year was the exploration for heavy mineral sands, copper, gold and base metals in Australia.

2. BASIS OF PREPARATION

(a) Statement of compliance

The financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

(b) Basis of measurement

The Group financial statements have been prepared on the historical cost basis.

(c) Functional and presentation currency

These Group financial statements are presented in Australian dollars, which is the Company's functional currency and the functional currency of the Group.

(d) Adoption of new and revised accounting standards

The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2011:

• • AASB 2009-10 Amendments to Australian Accounting Standards Classification of Rights Issues
• • AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project
• • AASB Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments
• • AASB 124 (Revised) Related Parties
• • AASB 2009-12 Amendments to Australian Accounting Standards
• • AASB 2009-14 Amendments to Australian Interpretation Prepayments of a Minimum Funding Requirement
• • AASB 2010-4 Amendments to Australian Accounting Standards arising from the Annual Improvements Project
• • AASB 2010-5 Amendments to Australian Accounting Standards

The adoption of these standards did not have any material impact on the current period or any prior period and is not likely to affect future periods.

(e) Uncertainty regarding going concern

The financial statements have been prepared on a going concern basis which contemplates the continuity of the normal business activities and the realization of assets and discharge ofliabilities in the ordinary course of business. This includes the realisation of capitalised exploration assets of \$19,379,377 (31 December 2010: \$18,791,274).

The Directors acknowledge that, as in the prior year, to continue the exploration and development of the Group's exploration projects, the budgeted cash flows from operating and investing activities for the future will necessitate further capital raising. In the event that the Group is unable to raise future funding requirements there exists a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern with the result that the Group may be required to realise their assets at amounts different to those currently recognized, settle liabilities other than in the ordinary course of business and make provisions for costs which may arise as a result of cessation or curtailment of normal business operations

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.

(a) Basis of consolidation

The consolidated financial statements comprise the financial statements of Diatreme Resources Limited and its subsidiaries at 31 December 2011. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another 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.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b) Revenue

Revenue is recognised at the fair value of the consideration received or receivable, and recognised when the service is provided, or ownership of the product has passed to the customer.

Interest revenue is recognised on a time proportion basis using the effective interest method.

(c) Income tax

The income tax expense or revenue for the year is the tax payable on the taxable income based upon the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

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.

Current and deferred tax balances attributable to amounts recognised directly in other comprehensive income are also recognised directly in other comprehensive income. Tax consolidation legislation

The Company and its wholly-owned Australian subsidiaries have implemented the tax consolidation legislation as of 1 January 2004.

Where applicable, each entity in the Group recognises its own current and deferred tax assets and liabilities. Amounts resulting from unused tax losses and tax credits are then immediately assumed by the parent entity. The current tax liability of each subsidiary entity is then also assumed by the parent entity.

The entities have also entered into a tax sharing and funding arrangement. Under the terms of this agreement, the wholly-owned entities reimburse the Company for any current income tax payable by the Company arising in respect of their activities. The reimbursements are payable at the same time as the associated income tax liability falls due.

In the opinion of the Directors, the tax sharing agreement is also a valid agreement under the tax consolidation legislation and limits the joint and several liability of the wholly-owned entities in the case of a default by the Company.

(d) Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents include cash on hand, deposits held at call, 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 an insignificant risk of changes in value and bank overdrafts. Bank overdrafts are shown in interest-bearing liabilities in the statement of financial position.

(e) Trade and other receivables

Trade and other receivables are recognised at nominal amount less an allowance for uncollectible amounts and have repayment terms between 30 and 90 days. Collectability of receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off. An allowance is made for doubtful debts where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Objective evidence of impairment include financial difficulties of the debtor, default payments or debts more than 120 days overdue. On confirmation that the receivable will not be collectible the gross carrying value of the asset is written off against the associated provision.

(f) Available-for-sale financial assets

Available-for-sale financial assets comprise investments in listed and unlisted entities and any non-derivatives that are not classified as any other category of financial asset, and are classified as non-current assets (unless management intends to dispose of the investments within 12 months of the end of the reporting period).

(g) Property, plant and equipment

Property, plant and equipment is stated at historical cost, including costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, less depreciation and any impairments.

Depreciation is calculated on a diminishing value basis. Estimates of remaining useful lives are made on a regular basis for all assets.

The depreciation rates used for each class of assets are as follows:

Furniture and fittings	40%
Motor vehicles	20%
Plant and equipment	40%
Leased motor vehicles	20%

(h) Leases

(i) Finance leases

Assets acquired under finance leases which result in the Group receiving substantially all the risks and rewards of ownership of the asset are capitalised at the lease's inception at the lower of the fair value of the leased property or the estimated present value of the minimum lease payments. The corresponding finance lease obligation, net of finance charges, is included within interest bearing liabilities. The interest element is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the liability for each accounting period. The leased asset is included in property, plant and equipment and is depreciated over the shorter of the estimated useful life of the asset or the lease term.

(ii) Operating leases

Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Payments made under operating leases (net of incentives received from the lessor) are charged to the profit or loss on a straight-line basis over the period of the lease.

(i) Exploration and Evaluation Costs

Exploration and evaluation costs, including the costs of acquiring licences, are capitalised as exploration and evaluation assets on an area of interest basis. Costs incurred before the Group has obtained the legal rights to explore an area are recognised in the profit or loss.

Exploration and evaluation assets are only recognised if the rights to the tenure of the area of interest are current and either:

• • the expenditures are expected to be recouped through successful development and exploitation of the area of interest or alternatively, by its sale; or
• • activities in the area of interest have not, at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

(j) Impairment of assets

At the end of each reporting period the Group assesses whether there is any indication that individual assets are impaired. Where impairment indicators exist, recoverable amount is determined and impairment losses are recognised in profit or loss where the asset's carrying value exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units).

Where it is not possible to estimate recoverable amount for an individual asset, recoverable amount is determined for the cash-generating unit to which the asset belongs.

The carrying values of capitalised exploration and evaluation expenditure and property, plant and equipment are assessed for impairment when indicators of such impairment exist. External factors, such as changes in expected future processes, technology and economic conditions,

are also monitored to assess for indicators of impairment.

(k) Trade and Other Payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of the reporting period and which remain unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.

(l) Employee Benefits

(i) Wages and Salaries and Annual Leave

Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the end of the reporting period are recognised in other liabilities in respect of employees' services rendered up to the end of the reporting period and are measured at amounts expected to be paid when the liabilities are settled.

(ii) Long Service Leave

Liabilities for long service leave are recognised as part of 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 to the end of the reporting period. Consideration is given to expected future salaries and wages levels, experience of employee departures and periods of service. Expected future payments are discounted using national government bond rates at the end of the reporting period with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.

(m) Issued Capital

Ordinary shares are classified as equity.

Costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

(n) Earnings per share

(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit or loss attributable to equity holders 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 year, adjusted for bonus elements in ordinary shares issued during the year.

(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.

(o) 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 statement of financial position.

Cash flows are included in the statement of cash flows 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.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below:

(i) Carrying value of exploration and evaluation assets

The Group performed a detailed review of its exploration tenements at period end to determine whether the related expenditure should continue to be capitalised under AASB 6 Exploration for and Evaluation of Mineral Resources or written off. As a result of this review, management has determined that \$2,419,719 (2010: \$2,037,694) be written off in the year ended 31 December 2011.

Geological test-work during the year downgraded the prospectivity of various Western Eucla and South Australian tenements resulting in their full or partial relinquishments, which necessitates the writing off their respective costs.

The ultimate recoupment of cost carried forward for the exploration and evaluation assets is dependent upon the successful development and commercial exploitation or sale of the respective areas of interest. Ultimate exploitation through the development of mines will depend on raising of necessary funding.

5. SEGMENT INFORMATION

Operating segments are now reported in a manner that is consistent with the internal reporting to the chief operating decision maker ("CDM"), which has been identified by the Group as the Chairman and other members of the Board of directors.

(i) Identification of reportable segments

The Group has identified that it operates in only one segment based on the internal reports that are reviewed and used by the CDM in assessing performance and determining the allocation of resources. The Group operates in one business segment as an explorer for heavy mineral sands, copper, gold and base metals in Australia.

(ii) Revenue and assets by geographical region

The Group's revenue is received from sources and assets that are located wholly within Australia.

(iii) Financial information

Reportable items required to be disclosed in this note are consistent with the information disclosed in the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position and are not duplicated here.

6. REVENUE AND EXPENSES

		Consolidated
	2011	2010
	\$	\$
(a) Revenue
Interest	253,511	58,769
Management fees	5,542	6,201
Other	251,585	175,839
	510,638	240,809
(b) Other expenses
Professional fees	166,687	312,294
Rental expenses on operating leases	315,208	291,039
Listing and share registry expenses	83,559	78,436
Superannuation expenses	116,959	126,034
Write-off rent prepayments from relinquished
exploration tenements	-	126,719
Loss on disposal of non-current assets	79	2,804
Stamp duty	110,836	-
Administration costs	855,527	485,452
	1,648,855	1,422,778

7. INCOME TAX

	Consolidated
	2011	2010
	\$	\$
(a)The prima facie tax on accounting loss differs from the income tax provided in the financial statements. The difference is reconciled as follows:
Loss before income tax	(4,667,287)	(4,316,054)
Prima facie income tax benefit at 30% (2010: 30%)	(1,400,186)	(1,294,816)
Tax effect of amounts which are not deductible in calculating taxable income: Entertainment	2,818	-
Deferred tax assets not recognised	(1,397,368) 1,397,368	(1,294,816) 1,294,816
Recognition of research & development tax claim	(290,025)	(315,603)
Total income tax benefit	(290,025)	(315,603)
(b) The components of income tax benefit: Current tax Deferred tax	- -	- -
Research & development tax claim	(290,025)	(315,603)
Total income tax benefit	(290,025)	(315,603)

7. INCOME TAX (Continued)

	Consolidated
	2011	2010
	\$	\$
(c) Deferred tax
Deferred tax assets
Unused tax losses	5,030,427	4,882,283
Unused capital losses	4,507	4,507
Temporary differences:
- Property, plant and equipment	13,273	-
- Accruals	10,233	7,778
- Employee benefits	48,499	39,306
- Capital raising costs	276,076	239,273
- Other	121,993	-
	5,505,008	5,173,147
Deferred tax liabilities
- Property, plant and equipment	-	(5,381)
- Exploration expenditure	(5,497,958)	(5,167,512)
- Income receivable	(7,050)	-
- Other	-	(254)
	(5,505,008)	(5,173,147)
Net deferred tax asset/liability	-	-
Unrecognised deferred tax assets
Unused tax losses	27,864,232	23,866,070
Potential tax effect at 30%	8,359,270	7,159,821

The net deferred tax assets arising from these balances have not been recognised as an asset because recovery is not probable at the point in time. The recoupment of available tax loses as at 31 December 2011 is contingent upon the following:

(i) The Group deriving future assessable income of a nature and an amount sufficient to enable the benefit to be realised;

(ii) The conditions for deductibility imposed by tax legislation continuing to be complied with; and

(iii) There being no changes in tax legislation which adversely affect the Group from realising the benefit.

(iv) Given the Group is in a taxable loss position there is no franking credit to report

8. CURRENT ASSETS – CASH AND CASH EQUIVALENTS

	Consolidated
2011	2010
\$	\$
3,650,010	1,602,313

9. CURRENT ASSETS – TRADE & OTHER RECEIVABLES

	Consolidated
	2011	2010
	\$	\$
Trade receivables	72,139	1,319
Other receivables	102,890	79,905
Prepayments	56,995	83,146
	232,024	164,370

Trade and other receivables do not contain impaired assets and are not past due.

10. NON-CURRENT ASSETS – AVAILABLE-FOR-SALE FINANCIAL ASSETS

	Consolidated
	2011	2010
	\$	\$
Shares in an unlisted company – at cost	162,586	162,586

Unlisted shares comprise an investment in Opal Horizon Limited. (Refer also to Note 20 (f)).

11. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT

Consolidated	Furniture and fittings \$	Motor vehicles \$	Leased Motor vehicles \$	Plant and Equipment \$	Total \$
Year ended 31 December 2010
Opening net book amount	57,484	170,984	197,967	775,665	1,202,100
Additions	-	444	-	23,379	23,823
Disposals	-	-	-	(5,805)	(5,805)
Depreciation charge	(16,422)	(34,266)	(39,593)	(191,324)	(281,605)
Closing net book amount	41,062	137,162	158,374	601,915	938,513
At 31 December 2010
Cost Accumulated depreciation	135,198 (94,136)	245,301 (108,139)	287,346 (128,972)	1,104,136 (502,221)	1,771,981 (833,468)
Net book amount	41,062	137,162	158,374	601,915	938,513
Year ended 31 December 2011
Opening net book amount	41,062	137,162	158,374	601,915	938,513
Additions	-	806	-	8,979	9,785
Disposals	(79)	-	-	-	(79)
Depreciation charge	(17,300)	(27,502)	(31,675)	(137,151)	(213,628)
Closing net book amount	23,683	110,466	126,699	473,743	734,591
At 31 December 2011
Cost	134,835	246,107	287,346	1,113,115	1,781,403
Accumulated depreciation	(111,152)	(135,641)	(160,647)	(639,372)	(1,046,812)
Net book amount	23,683	110,466	126,699	473,743	734,591

12. NON-CURRENT ASSETS – EXPLORATION AND EVALUATION ASSETS

	Consolidated
	2011	2010
	\$	\$
Exploration and evaluation assets – at cost
less impairment	19,379,377	18,791,274
Opening balance	18,791,274	17,820,255
Costs capitalised during the year	3,007,822	3,008,713
Costs written off during the year #	(2,419,719)	(2,037,694)
Closing balance	19,379,377	18,791,274

Geological test-work during the year downgraded the prospectivity of various Western Eucla and South Australian tenements resulting in their full or partial relinquishments, which necessitates the writing off their respective costs.

The recoverability of the carrying amount of the exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest. (Refer also to Note 4 (i)).

At balance date the carrying amount of exploration and evaluation assets was \$19,379,377 of which \$4,051,184 is attributable to the significant exploration of the Group's Cyclone Heavy Mineral Project.

13. NON-CURRENT ASSETS – OTHER

	Consolidated
	2011	2010
	\$	\$
Rent guarantee deposit Security deposits	105,669 595,525	105,669 577,444
	701,194	683,113

14. CURRENT LIABILITIES – TRADE & OTHER PAYABLES

	Consolidated
	2011	2010
	\$	\$
Unsecured
Trade payables	190,802	145,782
Other payables and accruals	85,592	68,631
Employee benefits	36,684	41,501
	313,078	255,914

Trade payables are non-interest bearing and are normally settled on 30 day terms.

15. INTEREST BEARING LIABILITIES

	Consolidated
	2011	2010
	\$	\$
Secured Finance lease liabilities - current Finance lease liabilities – non-current	130,050 -	45,107 130,050
	130,050	175,157

Lease liabilities are secured over the rights to the leased assets, refer Note 11, recognised in the Consolidated Statement of Financial Position which will revert to the lessor if the Group defaults.

16. NON-CURRENT LIABILITIES – PROVISIONS

Consolidated
2011	2010
\$	\$
124,979	89,519

17. ISSUED CAPITAL

	2011	2010
	\$	\$
354,597,423 (Dec 2010: 265,947,384) fully paid ordinary shares	39,853,242	33,321,487

(a) Movements in ordinary share capital

Date	Details	Number of shares	Issue price \$	\$
1 January 2010 March April June August November December	Opening balance Shares issued Shares issued Shares issued Shares issued Shares issued Shares issued Share issue costs	202,191,209 3,300,000 20,350,000 200,000 8,823,525 25,082,650 6,000,000	0.1225 0.0900 0.0900 0.0850 0.0700 0.0700	28,724,912 404,250 1,831,500 18,000 749,999 1,755,786 420,000 (582,960)
31 December 2010	Balance	265,947,384		33,321,487
April 2011 (1)	Shares issued Share issue costs	88,650,039	0.0800	7,092,003 (560,248)
31 December 2011	Balance	354,597,423		39,853,242

(1) InApril 2011, the Company successfully completed a non-renounceable rights issue to shareholders on a 1 for 3 basis. As a consequence, \$7,092,003 was raised through the issue of 88,650,039 fully paid ordinary shares at 8 cents each, each with a free attaching listed option exercisable at 15 cents expiring on 30 September 2013.

Ordinary shares

Holders of ordinary shares are entitled to receive dividends that may be declared from time to time and are entitled to one vote per share at shareholders' meetings.

In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds from liquidation.

Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares.

(b) Share Options

		Number at end of year
		2011	2010
Expiry date	Exercise Price	\$	\$
30 June 2011 (unlisted) 31 July 2011 (unlisted) 30 September 2013 (listed)	\$0.47 \$0.47 \$0.15	- - 88,650,039 88,650,039	16,800,000 3,000,000 - 19,800,000

No unlisted share options were exercised during the financial year (2010: nil), and all have now expired.

Share options

Share options issued by the Company carry no rights to dividends and no voting rights. All options are exercisable for cash on a 1:1 basis.

18. RESERVE

	Consolidated
	2011	2010
	\$	\$
Share-based payment reserve Opening balance Transfer to accumulated losses for expired options (1) Closing balance	87,670 (87,670)	87,670 -
	-	87,670

(1) Transfer from share-based payment reserve to accumulated losses relate to the 19,800,000 unlisted options that expired on 30 June 2011 and 31 July 2011 (refer to Note 17(b) above).

Nature and purpose of share-based payment – option reserve The share-based payment reserve is used to recognise the fair value of options issued under the employee share option plan.

19. ACCUMULATED LOSSES

	Consolidated
	2011	2010
	\$	\$
Accumulated losses at the beginning of the year	(11,271,975)	(7,271,524)
Loss attributable to owners of Diatreme Resources Limited	(4,377,262)	(4,000,451)
Transfer from reserve	87,670	-
Accumulated losses at the end of the year	(15,561,567)	(11,271,975)

20. FINANCIAL INSTRUMENTS

The Group's principal financial instruments comprise cash and short-term deposits. The main purpose of these financial instruments is to fund the Group's operations.

The Group does not use any form of derivatives as it is not at a level of exposure that requires the use of derivatives to hedge its exposure. Exposure limits are reviewed by management on a continuous basis. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

(a) Categories of financial instruments

	Consolidated
	2011	2010
	\$	\$
Financial assets
Cash and cash equivalents	3,650,010	1,602,313
Trade and other receivables	232,024	164,370
Security and other deposits	701,194	683,113
Available-for-sale financial assets	162,586	162,586
Total financial assets	4,745,814	2,612,382
Financial liabilities
Trade and other payables	313,078	255,914
Interest-bearing liabilities	130,050	175,157
Total financial liabilities	443,128	431,071

The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework which is summarised below:

(b) Capital risk management

The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. As an emerging explorer, the Group does not establish a return on capital. Capital management requires the maintenance of strong cash balance to support ongoing exploration. There were no changes in the Group's approach to capital management during the year. The Group is not subject to externally imposed capital requirements.

(c) Market risk

Interest rate risk

Exposure to interest rate risk arises on financial assets and financial liabilities recognised at the end of reporting period whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. The Group is also exposed to earning volatility on floating rate instruments. The Group does not have a formal policy in place to mitigate interest rate risks as the Group's income and operating cash flows are not materially exposed to changes in market interest rates.

At balance date, the Group had the following financial assets which are interest bearing:

		Consolidated
	2011	2010
	\$	\$
Cash and cash equivalents (variable interest rates) Security deposits (fixed interest rates)	3,650,010 595,525	1,602,313 577,444
	4,245,535	2,179,757

Interest rate sensitivity analysis

An increase of 80 basis points in interest rates at the reporting date, with all other variables held constant, would have decreased the Group's loss and increased equity by \$33,964 (2010: \$17,416). Where interest rates decreased, there would be an equal and opposite impact on the loss and equity.

Price risk

The Group is exposed to equity securities price risk. This arises from an investment held by the Group and classified on the consolidated statement of financial position as an available-for-sale financial asset.

The price risk for unlisted securities is immaterial in terms of the possible impact on profit or loss or total equity. A sensitivity analysis has therefore not been performed.

The Group is not exposed to commodity price risk or currency risk.

(d) Credit risk

Credit risk is the risk that a counter party will not complete its obligation under a financial instrument that will result in a financial loss to the Group. The carrying amount of financial assets represents the maximum credit exposure.

The Group manages any credit risk associated with its funds on deposit by ensuring that it only invests its funds with reputable financial institutions. The Group currently has deposits with the ANZ and Suncorp banks.

At 31 December 2011, trade and other receivables are mostly receivable within 30 days.

(e) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The Group manages liquidity risk by maintaining adequate cash reserves from funds raised in the market and by continuously monitoring forecast and actual cash flows.

The following are the contractual maturities of financial liabilities:

Consolidated	Carrying amount \$	Contractual cash flow \$	< 6 months \$	6-12 months \$	1-3 years \$	> 3 years \$
31 Dec 2011 Trade and other payables Interest bearing liabilities	313,078 130,050	(313,078) (133,232)	(313,078) (133,232)	- -	- -	- -
	443,128	(446,310)	(446,310)	-	-	-

Consolidated	Carrying amount \$	Contractual cash flow \$	< 6 months \$	6-12 months \$	1-3 years \$	> 3 years \$
31 Dec 2010 Trade and other payables Interest bearing liabilities	255,914 175,157	(255,914) (192,083)	(255,914) (29,953)	- (28,898)	- (133,232)	- -
	431,071	(447,997)	(285,867)	(28,898)	(133,232)	-

(f) Fair values

The carrying amount of financial assets and financial liabilities recorded in the financial statements approximate their respective fair values, other than as noted below.

The fair value of the non current asset comprising available-for-sale financial assets has been valued at cost. As disclosed in the above Note 10, the assets are shares in an unlisted company Opal Horizon Limited and as such their fair value can not be determined reliably. This is because there is not an active market for the issued shares of the company as the investment is not listed. The intention at this stage is to not dispose of the shares.

21. KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) Key management personnel compensation

		Consolidated
	2011	2010
	\$	\$
Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments	967,605 80,577 30,304 -	843,175 49,770 8,553 -
	1,078,486	901,498

(a) Key management personnel compensation

(i) Option holdings

2011	Balance at the start of the year	Granted as remuneration	Lapse	Rights Issue (4)	Purchases	Other Changes	Balance at the end of the year	Vested and exercisable
Directors
A J Fawdon D H Hall G H White A Tsang C Wang (1) N J McIntyre (2)	5,000,000 4,100,000 2,500,000 - - -	- - - - - -	(5,000,000) (4,100,000) (2,500,000) - -	243,179 250,000 16,667 35,832,933 -	- 70,000 500,000 - -	- - - - 804,903 -	243,179 320,000 516,667 35,832,933 804,903 -	243,179 320,000 516,667 35,832,933 804,903 -
Other key management personnel
D Jelley L Stanley T Do	1,500,000 - -	- - -	(1,500,000) - -	- - -	- - -	- - -	- - -	- - -
Total	13,100,000	-	(13,100,000)	36,342,779	570,000	804,903	37,717,682	37,717,682
2010 Directors A J Fawdon	5,000,000	-	-	-	-	-	5,000,000	5,000,000
D H Hall L J Litzow (3) G H White A Tsang	4,100,000 2,500,000 2,500,000 -	- - - -	- - - -	- - - -	- - - -	- (2,500,000) -	4,100,000 - 2,500,000 -	4,100,000 - 2,500,000 -
Other key management personnel						-
D Jelley L Stanley	1,500,000 -	- -	- -	- -	- -	-	1,500,000 -	1,500,000 -
Total	15,600,000	-	-	-	-	(2,500,000)	13,100,000	13,100,000

(1) Appointed to Board 27 May 2011 and net other changes relate to holdings at date of appointment as Director

(2) Appointed to Board 27 July 2011

(3) Resigned from Board 30 November 2010 and net other changes relates to holdings at date of resignation

(4) Refer also to Note 17(b)

21. MANAGEMENT PERSONNEL DISCLOSURES (Continued)

(ii)Share holdings

	Balance at the start of the year	Options exercised	Net purchased / (sold)	Rights Issue (4)	Other changes	Balance at the end of the year
2011 Directors
A J Fawdon D H Hall G H White A Tsang C Wang ( 1) N J McIntyre (2)	3,281,821 2,550,000 50,000 41,344,618 - -	- - - - - -	- - 150,000 - - -	243,179 250,000 16,667 35,832,933 - -	(423) - - - 2,537,822 -	3,524,577 2,800,000 216,667 77,177,551 2,537,822 -
Other key management personnel
D Jelley L Stanley T Do	- - -	- - -	- - -	- - -	- - -	- - -
Total	47,226,439	-	150,000	36,342,779	2,537,399	86,256,617
2010 Directors
A J Fawdon D H Hall L J Litzow (3) G H White A Tsang	3,231,398 2,513,667 4,461,785 - 34,802,428	- - - - -	50,000 36,333 - 50,000 6,542,190	- - - - -	423 - (4,461,785) - -	3,281,821 2,550,000 - 50,000 41,344,618
Other key management personnel
D Jelley L Stanley	- -	- -	- -	- -	- -	- -
Total	45,009,278	-	6,678,523	-	(4,461,362)	47,226,439

(1) Appointed to Board 27 May 2011 and net other changes relate to holdings at date of appointment as Director

(2) Appointed to Board 27 July 2011

(3) Resigned from Board 30 November 2010 and net other changes relates to holdings at date of resignation

(4) Refer also to Note 17(b)

22. REMUNERATION OF AUDITORS

	Consolidated
	2011	2010
	\$	\$
Amounts received by the Company's former auditor – Hacketts DFK: - Audit and review of the financial statements	-	4,135
Amounts received, or due and receivable, by the Company's current auditor – BDO Audit (QLD) Pty Ltd:
- Audit and review of the financial statements	30,000	31,000
	30,000	35,135

23. CONTINGENCIES

• (a) On transfer of the Tick Hill mining tenements to the Group there will be a requirement to pay \$100,000 option exercise fee.
• (b) Remediation of contaminated soil resulting from a field camp diesel spill at one of its exploration sites has been completed as at February 2012.

24. COMMITMENTS

(a) Tenement expenditure commitments

So as to maintain current rights to tenure of exploration tenements, the Group will be required to outlay amounts in respect of tenement rent to the relevant governing authorities and to meet certain annual exploration expenditure commitments. These outlays (exploration expenditure and rent), which arise in relation to granted tenements, inclusive of tenement applications are as follows:

	Consolidated
	2011	2010
	\$	\$
Payable within 1 year Payable between one and five years	298,656 3,355,335	809,603 1,824,976
	3,653,991	2,634,579

The outlays may be varied from time to time, subject to approval of the relevant government departments, and may be relieved if a tenement is relinquished. Cash security bonds totalling \$593,925 (2010: \$577,444) are currently held by the relevant governing authorities to ensure compliance with granted tenement conditions.

(b) Operating lease commitments

		Consolidated
	2011	2010
	\$	\$
Payable within 1 year Payable between one and five years	290,542 1,085,051	285,225 1,362,222
	1,375,593	1,647,447

Leasing arrangements for the rental of office space expiring on 31 July 2016.

(c) Finance leases/commitments

	Consolidated
	2011	2010
	\$	\$
Payable within 1 year Payable between one and five years Payable later than five years	133,232 - -	58,851 133,232 -
Minimum lease payments Future finance charges	133,232 (3,182)	192,083 (16,926)
Recognised as a liability	130,050	175,157
Representing interest-bearing liabilities (Note 15): Current Non-current	130,050 -	45,107 130,050
	130,050	175,157

The Group leases five motor vehicles under finance lease agreements.

25. RELATED PARTY TRANSACTIONS

(a) Parent entity

The ultimate parent entity in the Group is Diatreme Resources Limited.

(b) Subsidiaries

Interests in subsidiaries are set out in Note 26.

(c) Key management personnel

Disclosures relating to key management personnel are set out in Note 21.

(d) Transactions with related parties

The following transactions occurred with related parties:

	Consolidated
	2011	2010
	\$	\$
Management fee charged to Director related entities (Opal Horizon Ltd, Superior Resources Ltd)	5,542	6,201
Rental office sub-lease charged to Director related entities (Opal Horizon Ltd, Superior Resources Ltd)	57,141	62,839

26 GROUP ENTITIES

	Country of Incorporation	Ownership Interest 2011	2010
Subsidiaries
Regional Exploration Management Pty Ltd	Australia	100%	100%
Chalcophile Resources Pty Ltd *	Australia	100%	100%
Lost Sands Pty Ltd	Australia	100%	100%

* This entity is 100% owned by Regional Exploration Management Pty Ltd

27. RECONCILIATION OF NET PROFIT/(LOSS) TO NET CASH FLOW FROM OPERATING ACTIVITIES

	Consolidated
	2011	2010
	\$	\$
Loss for the year	(4,377,262)	(4,000,451)
Non-cash items Depreciation Capitalised exploration expenditure written-off Loss / (profit) on sale of fixed assets	213,628 2,419,719 79	281,605 2,037,694 2,804
Movements in operating assets and liabilities (Increase)/decrease in receivables (Increase)/decrease in current tax asset (Increase)/decrease in other assets Increase / (decrease) in payables Increase / (decrease) in provisions	(45,904) 315,603 (4,261) (45,024) 35,460	110,309 (315,603) - 63,468 10,761
Net cash outflow from operating activities	(1,487,962)	(1,809,413)

28. EARNINGS PER SHARE

		Consolidated
	2011	2010
	Cents	Cents
Basic earnings per share (loss)	(1.4)	(1.8)
Diluted earnings per share (loss)	(1.4)	(1.8)

	2011	2010
	Number	Number
Weighted average number of shares used as the denominator
Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share	309,975,140	227,551,989

Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 309,975,140 227,551,989

Information concerning earnings per share

Earnings for the purpose of the calculation of basic earnings per share and also diluted earnings per share, is the loss attributable to owners of Diatreme Resources Limited of \$4,377,262 (2010: loss \$4,000,451).

Options granted are usually considered to be potential ordinary shares and taken into account in the determination of diluted earnings per share and are not included in the determination of basic earnings per share. In the circumstances of the Group, the options are not dilutive and are therefore not used in the calculation of diluted earnings per share. Details of the options are set out in Note 17(b).

29. SHARE-BASED PAYMENTS

Share-based payments are granted at the discretion of the Board and provide long term incentives for Directors and employees of the Group.

Each option issued converts to one ordinary share of Diatreme Resources Limited on exercise. No amounts are paid or payable by the recipient on receipt of the option. Options neither carry rights or dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry.

Set out below are summaries of the share-based payment arrangements:

Options grant date	Expiry date	Exercise price	Balance at the start of the year	Granted during the year	Exercised during the year	Forfeited during the year	Balance at the end of the year
July 2006 August 2006 June 2007 June 2008	30 Jun 2011 30 Jun 2011 30 Jun 2011 30 Jun 2011	\$0.47 \$0.47 \$0.47 \$0.47	6,500,000 100,000 4,300,000 5,900,000	- - - -	- - - -	(6,500,000) (100,000) (4,300,000) (5,900,000)	- - - -
Total			16,800,000	-	-	(16,800,000)	-

In accordance with the terms of the share-based arrangements all options issued vested prior to 1 January 2009.

(a) Expenses arising from share-based payment transactions

Total expense arising from share-based payment transactions recognised during the year was nil (2010: nil).

30. parent entity information

	2011	2010
	\$	\$
Financial position
Current assets Non-current assets	3,721,155 25,291,267	1,719,211 22,958,819
Total assets	29,012,422	24,678,030
Current liabilities Non-current liabilities	131,944 124,979	171,606 89,519
Total liabilities	256,923	261,125
Net assets	28,755,499	24,416,905
Shareholders' equity
Contributed equity Option reserve	39,853,242 -	33,321,487 87,670
Accumulated losses	(11,097,743)	(8,992,253)
Total equity	28,755,499	24,416,905

	2011 \$	2010 \$
Loss for the year	(2,193,160)	(2,343,462)
Total comprehensive loss for the year	(2,193,160)	(2,343,462)

Contingencies

The parent entity has a contingency as disclosed in Note 23 (a) above.

Contractual commitments

The parent entity does not have any contractual commitments for property, plant and equipment at 31 December 2011.

Guarantees

The parent entity does not have any guarantees at 31 December 2011.

31. events subsequent to reporting date

In relation to the Gilbert River Project tenements, the Queensland government in January 2012, advised that three of the Projects' five granted tenements may be impacted by a proposed gazettal of national park. At this stage it is not practical to quantify the financial impact of this government action. The carrying value of the Group's exploration and evaluation assets on the potentially affected areas is \$926,206.

On 23 January 2012, the Company announced a review and upgrade of the Heavy Mineral resource estimate for the Cyclone Zircon Deposit.

On 7 February 2012, the Company announced a maiden ore reserve estimate for the Cyclone Zircon Project as part of the Prefeasibility Study ("PFS").

On 20 March 2012, the Company announced positive PFS results for the Cyclone Zircon Project. The PFS has shown the potential for the project to mine 10 million tonnes per annum of ore for 10 years, yielding approximately 147,000 tonnes per annum of heavy mineral (HM) concentrate.

On 27 March 2012, the Company announced details of a proposed farm-in agreement signed with Antofagasta Minerals S.A. over the Clermont Copper Project in central Queensland.

No other matter or circumstance has arisen since the end of the financial year that has 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 financial years subsequent to 31 December 2011.

32. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS

At the date of authorisation of the financial report, certain Standards and Interpretations were on issue but not yet effective. These Standards and Interpretations have not been adopted in the preparation of the financial report for the year ended 31 December 2011. None of these Standards and Interpretations is expected to have significant effect on the consolidated financial statements of the Group, except for AASB 9 Financial Instruments, which becomes mandatory for the Group's 2015 consolidated financial statements and could change the classification and measurement of financial assets.

The Group does not plan to adopt this Standard early and the extent of the impact has not been determined.

The Group expects to first apply these Standards and Interpretations in the financial report of the Group relating to the annual reporting period beginning after the effective date of each pronouncement.

DIRECTORS' DECLARATION

The Directors declare that the attached financial statements and notes are in accordance with the Corporations Act 2001 and:

(a) comply with Accounting Standards and the Corporations Regulations 2001; and

(b) give a true and fair view of the consolidated entity's financial position as at 31 December 2011 and of its performance for the year ended on that date.

The consolidated entity has included in the notes to the financial statements an explicit and unreserved statement of compliance with International Financial Reporting Standards.

In the Directors' opinion, given reasonable assumptions in regards to the Company's ability to raise additional funds and/or scale back activities, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

The remuneration disclosures included in the Directors' Report (as part of the audited Remuneration Report), for the year ended 31 December 2011 comply with Section 300A of the Corporations Act 2001.

The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by Section 295A.

This declaration is made in accordance with a resolution of the Directors.

A J Fawdon Executive Chairman/CEO

Brisbane, 29 March 2012

Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au

Level 18, 300 Queen St Brisbane QLD 4000, GPO Box 457, Brisbane QLD 4001 Australia

INDEPENDENT AUDITOR'S REPORT

To the members of Diatreme Resources Limited

Report on the Financial Report

We have audited the accompanying financial report of Diatreme Resources Limited, which comprises the consolidated statement of financial position as at 31 December 2011, the consolidated statement of comprehensive income, the consolidated statement of 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' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year.

Directors' Responsibility for the Financial Report

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 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 error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards.

Auditor's Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company's preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Diatreme Resources Limited, would be in the same terms if given to the directors as at the time of this auditor's report.

BDO Audit (QLD) Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (QLD) Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

Diatreme Resources Limited

Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au

Level 18, 300 Queen St Brisbane QLD 4000, GPO Box 457, Brisbane QLD 4001 Australia

Opinion

In our opinion:

• (a) the financial report of Diatreme Resources Limited is in accordance with the Corporations Act 2001, including:
• (i ) giving a true and fair view of the consolidated entity's financial position as at 31 December 2011 and of its performance for the year ended on that date; and
• (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and
• (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Material Uncertainty Regarding Going Concern

Without modification to the opinion expressed above, we draw attention to the matters set out in Note 1. The financial statements have been prepared on a going concern basis which contemplates the continuity of normal business activities and the realisation of assets and discharge of liabilities in the ordinary course of the business. The ability of the consolidated entity to maintain continuity of normal business activities and to pay their debts as and when they fall due, is dependent upon the ability of the consolidated entity to successfully raise additional funding and/or the successful exploration and subsequent exploitation of their areas of interest through sale or development. As a result of these factors, there exists a materiality uncertainty regarding the ability of the consolidated entity to continue as a going concern and therefore may be unable to realise its assets and extinguish its liabilities in the normal course of business.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 36 to 38 of the directors' report for the year ended 31 December 2011. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordanwce 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 Auditing Standards.

Opinion

In our opinion, the Remuneration Report of Diatreme Resources Limited for the year ended 31 December 2011 complies with section 300A of the Corporations Act 2001.

BDO Audit (QLD) Pty Ltd

C J Skelton Director

Brisbane: 29 March 2012

BDO Audit (QLD) Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (QLD) Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

Shareholder Information

The information set out below was applicable at 22 March 2012.

A DISTRIBUTION OF ASX QUOTED EQUITY SECURITIES

Analysis of numbers of equity security holders by size of holding:

Ordinary Shares

Range	Holders	%	Shares	%
1 to 1,000	710	24.50	161,158	0.05
1,001 to 5,000	331	11.42	973,988	0.27
5,001 to 10,000	326	11.25	2,761,487	0.78
10,001 to 100,000	1,135	39.16	47,412,632	13.37
100,001 and Over	396	13.67	303,288,158	85.53
Total	2,898	100.00	354,597,423	100.00

The number of security investors holding less than a marketable parcel of 5,000 securities on 22/03/2012 was 1,137 and they held 1,723,828 securities.

Options (listed) – exercise price of 15 cent, exercisable on or before 30 September 2013

Range	Holders	%	Options	%
1 to 1,000	24	4.94	9,232	0.01
1,001 to 5,000	92	18.93	268,614	0.30
5,001 to 10,000	69	14.20	559,103	0.63
10,001 to 100,000	191	39.30	7,920,840	8.94
100,001 and Over	110	22.63	79,892,250	90.12
Total	486	100.00	88,650,039	100.00

B ASX QUOTED EQUITY SECURITY HOLDERS

The names of the twenty largest holders of ordinary shares (ASX:DRX) are listed below:

Rank	Name	Number of Ordinary shares held	Percent (%)
1	MR ANDREW TSANG	38,295,600	10.80%
2	MS LAI YOU	26,307,647	7.42%
3	DORAL LTD	23,500,000	6.63%
4	MR ZHANGXI ZENG	14,876,638	4.20%
5	XIANG RONG (AUSTRALIA)
	CONSTRUCTION GROUP PTY LTD	8,574,304	2.42%
6	HUNTLEY CUSTODIANS LIMITED	6,842,860	1.93%
7	MR CHAOHUI ZHANG	6,316,309	1.78%
8	MR GUOZHONG YU	5,133,333	1.45%
9	MS CHUNXIANG ZENG	4,000,000	1.13%
10	TERRA SEARCH PTY LTD	3,444,340	0.97%
11	HSBC CUSTODY NOMINEES
	(AUSTRALIA) LIMITED	3,155,750	0.89%
12	MR CHENFEI ZHUANG	3,096,667	0.87%
13	DR RICHARD KENNETH HART
	& MS LYNETTE MARY HART	3,000,000	0.85%
14	LAWRENCE JAMES LITZOW	2,925,526	0.83%
15	IMAGE RESOURCES NL	2,600,000	0.73%
16	MR JUNYONG CHEN	2,580,000	0.73%
17	MR GUOZHAN ZENG	2,568,831	0.72%
18	MRS WENZHEN ZHANG	2,537,822	0.72%
19	MR STEPHEN JOHN RYAN	2,230,000	0.63%
20	TROPIC INVESTMENTS PTY LTD	2,200,270	0.62%
TOTAL		164,185,897	46.30%
	Balance of Share Register	190,411,526	53.70%
	Total ordinary shares on issue (22-03-2012)	354,597,423	100.00%

Rank	Name	Number of Options held	Percent (%)
1	MS LAI YOU	23,115,457	26.07%
2	MR ANDREW TSANG	9,573,900	10.80%
3	MR CHAOHUI ZHANG	6,760,808	7.63%
4	XIANG RONG (AUSTRALIA)
	CONSTRUCTION GROUP PTY LTD	2,143,576	2.42%
5	MR ZHANGXI ZENG	1,650,000	1.86%
6	MR SIMON ROBERT EVANS	1,258,579	1.42%
7	MR SPIROS GABRIEL	1,200,000	1.35%
8	ABN AMRO CLEARING SYDNEY
	NOMINEES PTY LTD	1,001,294	1.13%
9	MR WILLIAM JOHN ROSEN
	& MRS DIANE ROSEN	1,000,000	1.13%
9	PRIVATE EQUITY SERVICES PTY LTD	1,000,000	1.13%
9	MS CHUNXIANG ZENG	1,000,000	1.13%
10	BUTLER GIBPAT LTD	923,371	1.04%
11	MR GUOZHAN ZENG	920,000	1.04%
12	MR ERIC ROBERT TERACE
	& MRS JUDITH FAY TERACE	900,000	1.02%
13	MR MIN HU & MRS JIAN WANG	800,000	0.90%
14	MR RODERICK LESLIE MCFARLAND	753,636	0.85%
15	MR JOHN GREENWOOD	750,000	0.85%
16	POT OF GOLD ENTERPRISES PTY LTD	737,000	0.83%
17	MRS WENZHEN ZHANG	666,956	0.75%
18	FW HOLST & CO PTY LTD	600,000	0.68%
18	GOFFACAN PTY LTD	600,000	0.68%
19	MR FANQIU ZENG	551,127	0.62%
20	MR LAWRENCE BROWN & MRS LYNDA BROWN	528,500	0.60%
TOTAL		58,434,204	65.92%
	Balance of Share Register	30,215,835	34.08%
	Total options on issue (22-03-2012)	88,650,039	100.00%

The names of the twenty largest holders of listed options (ASX:DRXO) are listed below:

D SUBSTANTIAL HOLDERS

Substantial holders of ordinary shares in the Company are set out below:

Name	Number held	Percentage of issued shares
Andrew Tsang (and related parties)	77,177,551	20.64%
Doral Mineral Industries Limited	23,500,000	6.63%
Zhangxi Zeng	14,876,638	4.20%
Huntley Custodians Limited	6,842,860	1.93%

E VOTING RIGHTS

The voting rights attaching to each class of equity securities are set out below:

Ordinary Shares

On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.

Options

No voting rights.

ABN 33 061 267 061

Registered and Principle Office Level 2, 87 Wickham Terrace, Spring Hill, Qld 4000 PO Box 10288, Brisbane Adelaide Street, Qld 4000

Telephone: 07 3832 5666 Facsimile: 07 3832 5300 Email: manager@diatreme.com.au Website: www.diatreme.com.au