DIATREME RESOURCES LIMITED ABN 33 061 267 061

ANNUAL FINANCIAL REPORT

for the year ended 31 December 2011

CONTENTS

	Page
Directors’ Report	1
Auditor’s Independence Declaration	9
Consolidated Statement of Comprehensive Income	10
Consolidated Statement of Financial Position	11
Consolidated Statement of Changes in Equity	12
Consolidated Statement of Cash Flows	13
Notes to the Consolidated Financial Statements	14
Directors’ Declaration	35
Independent Auditor’s Report	36

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 H 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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

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, Corporate Advisory 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 A J Fawdon D H Hall G H White A Tsang C Wang N J McIntyre	Fully paid ordinary shares Number Share options Number 3,524,577 243,179 2,800,000 320,000 216,667 516,667 77,177,551 35,832,933 2,537,822 804,903 - -
	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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

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:

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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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

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 yearend	$/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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

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.

	Short-term employee benefits	Post- employment benefits
			Long-term benefits	Share-based payments
2011
			Long service leave $		Total $
		Superannuatio n $
	Salary & fees $			Options $
Name
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 # Other key management personnel D Jelley # L Stanley # T Do(3)#	254,351 230,625 188,550 30,000 128,000	22,892 20,756 13,162 - 11,520	15,889 14,415 - - -	- - - -	293,132 265,796 201,712 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.

	Short-term employee benefits	Post employment benefits
			Long-term benefits	Share-based payments
2010
		Superannuatio n $	Long service leave $		Total $
	Salary & fees $			Options $
Name
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 # LStanley #	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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

REMUNERATION REPORT (Continued)

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

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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

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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

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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

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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

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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

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

D Jelly, Exploration Manager

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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

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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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

REMUNERATION REPORT (Continued)

L Stanley, Co-Company Secretary

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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	Board	Audit Committee	Audit Committee	Remuneration Committee	Remuneration Committee
	Held	Attended	Held	Attended	Held	Attended
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
CWang	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 .

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

DIRECTORS’ REPORT

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 9.

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

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AJ Fawdon Executive Chairman/CEO Brisbane, 29 March 2012

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

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

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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

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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

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

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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2011

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

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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

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

Balance at 1 January 2010 Total comprehensive income: Loss for the year Transactions with owners in their capacity as owners: Shares issued Share issue costs Balance at 31 December 2010	Note	Issued capital $ Share option reserve $ Accumulated losses $ Total $ 28,724,912 87,670 (7,271,524) 21,541,058 - - (4,000,451) (4,000,451) 5,179,535 - - 5,179,535 (582,960) - - (582,960)
		33,321,487 87,670 (11,271,975) 22,137,182

Total comprehensive income: Lossforthe year
		- - (4,377,262) (4,377,262)

Transactions with owners in theircapacity as owners:

Shares issued		7,092,003 - - 7,092,003
Share issue costs		(560,248) - - (560,248)
Transfer from reserve	18	- (87,670) 87,670 -
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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

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

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

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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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:

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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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

(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 of liabilities 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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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:

==> picture [11 x 13] intentionally omitted <==

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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

(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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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

7. INCOME TAX (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 Prima facie income tax benefit at 30% (2010: 30%) Tax effect of amounts which are not deductible in calculating taxable income: Entertainment Deferred tax assets not recognised Recognition of research & development tax claim Total income tax benefit (b) The components of income tax benefit: Current tax Deferred tax Research & development tax claim Total income tax benefit	Consolidated 2011 $ 2010 $ (4,667,287) (4,316,054)
	(1,400,186) (1,294,816) 2,818 -
	(1,397,368) (1,294,816) 1,397,368 1,294,816
	- - (290,025) (315,603)
	(290,025) (315,603)
	- - - - (290,025) (315,603)
	(290,025) (315,603)

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

7. INCOME TAX (Continued)

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

8. CURRENT ASSETS – CASH AND CASH EQUIVALENTS	Consolidated
Cash at bank and in hand 9. CURRENT ASSETS – TRADE & OTHER RECEIVABLES Trade receivables Other receivables Prepayments	2011 $ 2010 $ 3,650,010 1,602,313
	Consolidated 2011 $ 2010 $ 72,139 1,319 102,890 79,905 56,995 83,146
	232,024 164,370

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

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

10. NON-CURRENT ASSETS – AVAILABLE-FOR-SALE	Consolidated	Consolidated
FINANCIAL ASSETS
	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 Year ended 31 December 2010 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 31 December 2010 Cost Accumulated depreciation Net book amount	Furniture and fittings $ Motor vehicles $ Leased Motor vehicles $ Plant and Equipment $ Total $ 57,484 170,984 197,967 775,665 1,202,100 - 444 - 23,379 23,823 - - - (5,805) (5,805) (16,422) (34,266) (39,593) (191,324) (281,605)
	41,062 137,162 158,374 601,915 938,513
	135,198 245,301 287,346 1,104,136 1,771,981 (94,136) (108,139) (128,972) (502,221) (833,468)
	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)
Closingnet 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 Exploration and evaluation assets – at cost less impairment Opening balance Costs capitalised during the year Costs written off during the year # Closing balance	Consolidated 2011 $ 2010 $ 19,379,377 18,791,274
	18,791,274 17,820,255 3,007,822 3,008,713 (2,419,719) (2,037,694)
	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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

13. NON-CURRENT ASSETS – OTHER

Rent guarantee deposit Security deposits

Consolidated	Consolidated
2011	2010
$	$
105,669	105,669
595,525	577,444
701,194	683,113

14. CURRENT LIABILITIES – TRADE & OTHER

Consolidated

PAYABLES

Unsecured Trade payables Other payables and accruals Employee benefits	2011 $ 2010 $ 190,802 145,782 85,592 68,631 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 Secured Finance lease liabilities - current Finance lease liabilities – non-current	Consolidated 2011 $ 2010 $ 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 Employee benefits 17. ISSUED CAPITAL 354,597,423 (Dec 2010: 265,947,384) fully paid ordinary shares		Consolidated 2011 $ 2010 $ 124,979 89,519 2011 $ 2010 $ 39,853,242 33,321,487

(a) Movements in ordinary share capital

(a) Movements in ordinary share capital
Date Details 1 January 2010 Opening balance March Shares issued April Shares issued June Shares issued August Shares issued November Shares issued December Shares issued Share issue costs 31 December 2010 Balance	Number of shares 202,191,209 3,300,000 20,350,000 200,000 8,823,525 25,082,650 6,000,000 -	Issue price $ 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)
	265,947,384		33,321,487
April 2011(1) Sharesissued	88,650,039	0.0800	7,092,003
Shareissue costs	-		(560,248)
31 December 2011 Balance	354,597,423		39,853,242

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

(1) In April 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

Expiry date Exercise Price 30 June 2011 (unlisted) $0.47 31 July 2011 (unlisted) $0.47 30 September 2013 (listed) $0.15	Number at end of year 2011 2010 - 16,800,000 - 3,000,000 88,650,039 -
	88,650,039 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 Share-based payment reserve Opening balance Transfer to accumulated losses for expired options(1) Closing balance	Consolidated 2011 $ 2010 $ 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 Accumulated losses at the beginning of the year Loss attributable to owners of Diatreme Resources Limited Transfer from reserve Accumulated losses at the end of the year	Consolidated 2011 $ 2010 $ (11,271,975) (7,271,524) (4,377,262) (4,000,451) 87,670 -
	(15,561,567) (11,271,975)

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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

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

Cash and cash equivalents (variable interest rates) Security deposits (fixed interest rates)	Consolidated 2011 2010 $ $ 3,650,010 1,602,313 595,525 577,444
	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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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 (313,078) (313,078) - - -

	130,050 (133,232) (133,232) - - -
	443,128 (446,310) (446,310) - - -
Consolidated 31 Dec 2010 Trade and other payables Interest bearing liabilities	Carrying amount Contractual cash flow < 6 months 6-12 months 1-3 years > 3 years $ $ $ $ $ $ 255,914 (255,914) (255,914) - - - 175,157 (192,083) (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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

21. KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) Key management personnel compensation

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

(b) Key management personnel equity holdings

(i) Option holdings

2011	Balance at the start of theyear	Granted as remuneration	Lapse	Rights Issue (4)	Purchases	Other Changes	Balance at the end of theyear	Vested and exercisable
Directors
A J Fawdon	5,000,000	-	(5,000,000)	243,179	-	-	243,179	243,179
D H Hall	4,100,000	-	(4,100,000)	250,000	70,000	-	320,000	320,000
G H White	2,500,000	-	(2,500,000)	16,667	500,000	-	516,667	516,667
A Tsang	-	-	-	35,832,933	-	-	35,832,933	35,832,933
C Wang(1)	-	-				804,903	804,903	804,903
N J McIntyre (2)
	-	-	-	-	-	-	-	-

Other key management personnel
D Jelley	1,500,000	-	(1,500,000)	-	-	-	-	-
L Stanley	-	-	-	-	-	-	-	-
T Do	-	-	-	-	-	-	-	-
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 D H Hall L J Litzow(3) G H White A Tsang Other key management personnel D Jelley LStanley	5,000,000 4,100,000 2,500,000 2,500,000 - 1,500,000 -	- - - - - - -	- - - - - - -	- - - - - - -	- - - - - - -	- (2,500,000) - - - -	5,000,000 4,100,000 - 2,500,000 - 1,500,000 -	5,000,000 4,100,000 - 2,500,000 - 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)

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

21. MANAGEMENT PERSONNEL DISCLOSURES (Continued)

(ii) Share holdings

	Balance at the start of theyear	Options exercised	Net purchased / (sold)	Rights Issue (4)	Other changes	Balance at the end of theyear
2011
Directors
A J Fawdon	3,281,821	-	-	243,179	(423)	3,524,577
D H Hall	2,550,000	-	-	250,000	-	2,800,000
G H White	50,000	-	150,000	16,667	-	216,667
A Tsang	41,344,618	-	-	35,832,933	-	77,177,551
C Wang(1)	-	-	-	-	2,537,822	2,537,822
N J McIntyre(2)	-	-	-	-	-	-

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 3,231,398 - D H Hall 2,513,667 - L J Litzow(3) 4,461,785 - G H White - - A Tsang 34,802,428 - Other key management personnel D Jelley - - LStanley - -			50,000 36,333 - 50,000 6,542,190 - -	- - - - - - -	423 - (4,461,785) - - - -	3,281,821 2,550,000 - 50,000 41,344,618 - -
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 Amounts received by the Company’s former auditor – Hacketts DFK: - Audit and review of the financial statements Amounts received, or due and receivable, by the Company’s current auditor – BDO Audit (QLD) Pty Ltd: - Audit and review of the financial statements	Consolidated 2011 $ 2010 $ - 4,135 30,000 31,000 30,000 35,135

The auditors did not provide any other services.

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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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:

Payable within 1 year Payable between one and five years	Consolidated 2011 $ 2010 $ 298,656 809,603 3,355,335 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

(b) Operating lease commitments
Payable within 1 year Payable between one and five years	Consolidated 2011 $ 2010 $ 290,542 285,225 1,085,051 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

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

The Group leases five motor vehicles under finance lease agreements.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

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:

Management fee charged to Director related entities ( Opal Horizon Ltd, Superior Resources Ltd) Rental office sub-lease charged to Director related entities (Opal Horizon Ltd, Superior Resources Ltd) 26. GROUP ENTITIES Country of Incorporation Subsidiaries Regional Exploration Management Pty Ltd Australia Chalcophile Resources Pty Ltd Australia Lost Sands Pty Ltd Australia This entity is 100% owned by Regional Exploration Management Pty Ltd.	Consolidated 2011 $ 2010 $ 5,542 6,201 57,141 62,839
	Ownership Interest 2011 2010 100% 100% 100% 100% 100% 100%

Management fee charged to Director related entities ( Opal
Horizon Ltd, Superior Resources Ltd)
Rental office sub-lease charged to Director related entities
(Opal Horizon Ltd, Superior Resources Ltd)
26. GROUP ENTITIES
Country of
Incorporation
Subsidiaries
Regional Exploration Management Pty Ltd
Australia
Chalcophile Resources Pty Ltd
Australia
Lost Sands Pty Ltd
Australia
This entity is 100% owned by Regional Exploration Management Pty Ltd.

Consolidated
2011
$
2010
$
5,542
6,201
57,141
62,839

Ownership Interest
2011
2010
100%
100%
100%
100%
100%
100%

27. RECONCILIATION OF NET PROFIT/(LOSS) TO NET CASH FLOW
FROM OPERATING ACTIVITIES
Loss for the year
Non-cash items
Depreciation
Capitalised exploration expenditure written-off
Loss / (profit) on sale of fixed assets
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
Net cash outflow from operating activities

Consolidated
2011
$
2010
$
(4,377,262)
(4,000,451)
213,628
281,605
2,419,719
2,037,694
79
2,804
(45,904)
110,309
315,603
(315,603)
(4,261)
-
(45,024)
63,468
35,460
10,761

(1,487,962)
(1,809,413)

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

28. EARNINGS PER SHARE Basic earnings per share (loss) Diluted earnings per share (loss) 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 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share		Consolidated 2011 2010 Cents Cents (1.4) (1.8)
		(1.4) (1.8)
		2011 2010 Number Number 309,975,140 227,551,989





		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).

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2011

30. PARENT ENTITY INFORMATION Financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders’ equity Contributed equity Option reserve Accumulated losses Total equity Loss for the year Total comprehensive loss for the year	2011 $ 2010 $ 3,721,155 1,719,211 25,291,267 22,958,819
	29,012,422 24,678,030
	131,944 171,606 124,979 89,519
	256,923 261,125
	28,755,499 24,416,905
	39,853,242 33,321,487 - 87,670 (11,097,743) (8,992,253)
	28,755,499 24,416,905
	2011 $ 2010 $ (2,193,160) (2,343,462)
	(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 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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 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.

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

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.

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A J Fawdon

Executive Chairman/CEO

Brisbane, 29 March 2012

Diatreme Resources Limited and its subsidiaries Annual Financial Report 2011

Tel: +61 7 3237 5999 Level 18, 300 Queen St Fax: +61 7 3221 9227 Brisbane QLD 4000, www.bdo.com.au GPO Box 457 Brisbane QLD 4001 Australia

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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 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 entity’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 entity’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.

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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 4 to 7 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 accordance with section 300A of the Corporations Act 2001 . Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian 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

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C J Skelton

Director

Brisbane: 29 March 2012

AI assistant

DIATREME RESOURCES LIMITED — Annual Report 2011

64787_rns_2012-03-28_53b78185-d351-4481-b810-2d31801f34e8.pdf

ANNUAL FINANCIAL REPORT

for the year ended 31 December 2011

DIRECTORS

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

Experience

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

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

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

Experience

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

Andrew Tsang ( Non-executive Director)

Experience

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

Experience

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

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

Experience

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

Directors’ Interests

COMPANY SECRETARY

Leni Pia Stanley CA, B.Com.

Tuan Quy Do CA, B.Com.

PRINCIPAL ACTIVITIES

REVIEW OF OPERATIONS

OPERATING RESULTS

DIVIDENDS

SIGNIFICANT CHANGES IN STATE OF AFFAIRS

EVENTS SUBSEQUENT TO REPORTING DATE

FUTURE DEVELOPMENTS

REMUNERATION REPORT - AUDITED

A Principles used to determine the nature and amount of remuneration

(i) Executive Directors

(ii) Non-executive Directors

(iii) Directors’ fees

B Relationship of remuneration with Company performance

C Details of remuneration

REMUNERATION REPORT (Continued)

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

Included as one of the 5 highest paid executives of the Group. There are no other executives ^ Resigned on 30 November 2010

REMUNERATION REPORT (Continued)

D Share-based compensation

E Service agreements

A J Fawdon, Executive Chairman/CEO

D H Hall, Executive Director - Operations

G H White, Non-executive Director

A Tsang, Non-executive Director

C Wang, Non-executive Director

N J McIntyre, Non-executive Director

D Jelly, Exploration Manager

T Do, Group Financial Controller/Co-Company Secretary

REMUNERATION REPORT (Continued)

L Stanley, Co-Company Secretary

END OF AUDITED REMUNERATION REPORT

MEETINGS OF DIRECTORS

SHARES UNDER OPTION

ENVIRONMENTAL REGULATION

INDEMNIFICATION OF OFFICERS AND AUDITORS

PROCEEDINGS ON BEHALF OF THE COMPANY

AUDITOR

Non-audit services

AUDITOR’S INDEPENDENCE DECLARATION

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

C J Skelton

BDO Audit (QLD) Pty Ltd

Contents of the notes to the consolidated financial statements

1. REPORTING ENTITY

2. BASIS OF PREPARATION

(a) Statement of compliance

(b) Basis of measurement

(c) Functional and presentation currency

(d) Adoption of new and revised accounting standards

(e) Uncertainty regarding going concern

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of consolidation

(b) Revenue

DIATREME RESOURCES LIMITED Annual Report 2011