DIATREME RESOURCES LIMITED — Annual Report 2018

Mar 26, 2019

DIATREME RESOURCES LIMITED ABN 33 061 267 061

FINANCIAL STATEMENTS

for the year ended 31 December 2018

CONTENTS

	Page
Directors’ Report	1
Auditor’s Independence Declaration	12
Consolidated Statement of Profit or Loss and Other Comprehensive Income	13
Consolidated Statement of Financial Position	14
Consolidated Statement of Changes in Equity	15
Consolidated Statement of Cash Flows	16
Notes to the Consolidated Financial Statements	17
Directors’ Declaration	39
Independent Auditor’s Report	40

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

The Directors present their report on Diatreme Resources Limited (“Diatreme” or “the Company”) and its subsidiaries (the “Group”) for the year ended 31 December 2018.

Current Directors

The following persons were directors of Diatreme Resources Limited during the whole year and up to the date of this report:

G B Starr (Appointed Non-executive Chairman on 31 May 2018) C Wang Y Zhuang

Past director that resigned during the year:

A Tsang Non-executive Director Appointed 23 January 2009 Mr Tsang resigned as Non-executive Director on 12 December 2018.

PRINCIPAL ACTIVITIES

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

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 2018.

REVIEW OF OPERATIONS

During the past 12 months, the Company has made substantial progress towards the advancement of its major projects comprising the Cyclone Zircon Project (Cyclone), Cape Bedford Silica & HM Sands Project (Cape Bedford Project) and the Tick Hill Gold Project.

Significant milestones have been achieved, the most notable being the completion of a positive Definitive Feasibility Study (DFS) for Cyclone. The DFS was undertaken by China ENFI Engineering, a subsidiary company of the China Minmetals Group. The DFS confirmed the Cyclone Project’s robust economics with an estimated post-tax net present value of AUD$113 million, an internal rate of return of 27% , estimated project development costs (capex) of AUD$135 million and with an estimated mine life of 13.4 years. Previous studies, undertaken by engineering firm Sedgman in 2016, outlined estimated capex at AUD$161 million.

In addition to the favourable DFS results, the Company has concurrently advanced further defining the prospectivity of its Cape Bedford Project in Northern Queensland, by completing a maiden inferred mineral resource for the Nob Point prospect contained within the tenement area. The resource spans an area of around 1 square kilometre within a tenement area of over 500 square kilometres and confirms the presence of a world-class, high-grade silica sand deposit.

The above significant achievements were underpinned by continuing support from both existing and new shareholders. The Company undertook various capital raisings during the year and in particular the October placement program, which raised $2,137,523 (before costs) demonstrating clear support for the Company and its current programs.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

Major Activities

Key operational highlights, in chronological order during the year in review include:

Cyclone

• Replacing the previous non-binding Memorandum of Understanding announced on 11 September 2017, Diatreme and China ENFI Engineering (ENFI) signed in January 2018 two contracts comprising:

• A Cooperation Agreement , under which ENFI will use its network within China’s state-owned enterprise (SOE) and banking sectors to assist the company in sourcing project investors, offtakers and project debt funding;

• A Consulting Services Agreement , detailing the remaining definitive feasibility study (DFS) aspects to be completed by ENFI, including project costings and economics, engineering studies and implementation planning.

Cyclone DFS

The DFS undertaken by ENFI confirmed that the Cyclone Zircon Project is economically viable.

The DFS identified significant cost savings compared to previous project studies. Project development costs (capex) are now estimated at $136 million, including significant contingencies, and with a rapid capital payback period post-production commencement of 2.7 years (life of mine estimate of 13.2 years). This compares to the $161 million capex estimate provided in the 2016 study by independent engineering firm Sedgman (refer ASX announcement 15 June 2016).

The DFS also generated positive after-tax financial results, including estimated net present value (NPV) of $113 million, internal rate of return (IRR) of 27%.

The key outcomes of the DFS are summarised in Tables 1 and 2 below:

Base DFS Assumptions (Table 1)

USD:AUD Exchange Rate	0.735
CNY:USD Exchange Rate	6.8
Financial Model Discount Rate	10%
HMC Product Price	85% of final product value
Study accuracy	15%
Contingency	10%
Mining Rate	10 million tonnes per annum (Mtpa)
HMC Annual Production Rate	147,700 tonnes (average)
Mine life	13.2 years
Construction period	2 years

The project evaluation was completed using US dollars and the exchange rate used in the study for Australian cost inputs to the study was AUD$1 = US$0.735. The US$ results of the DFS have been converted to AUD using this exchange rate. All financial results are presented as after-tax values.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

Financial Results & Data (AUD$) (Table 2)

Net Present Value	$113.3m
Internal Rate of Return	27.2%
Payback period (production years)	2.7 years
Construction Capital (capex)	$135.7m
Average Annual Revenue	$130.1m
Average Annual operating expenditure (opex)	$75.5m
Working Capital *	$11.7m in Year 1
Sustaining Capital *	$18.7m ($10.2m in Year 1)
Average Annual Company Tax (30%)	$11.6m
Average Annual After-Tax Profit	$26.6m
Average Annual Depreciation	$9.9m
Average Annual State Royalty	$6.5m

*Note: Working capital and sustaining capital contingencies at $11.7m and $10.2m ($21.9m total for first year) respectively for first year of operations are relatively high by Australian standards but compliant with Chinese bankable study standards. Removal or reduction of these contingencies could potentially enhance project returns and economics.

Cape Bedford

On 2 March 2018 the company released results from initial metallurgical testwork. The testwork achieved 80% recovery of a primary silica sand product ranging from 99.6% to 99.9% silicon dioxide with less than 0.02% iron, easily meeting the specifications for glass-grade silica sand.

Other operational highlights include:

• In a major company milestone, the Company announced on 13 August 2018 a Maiden Inferred Mineral Resource for the Cape Bedford Project, confirming the presence of a world-class, highgrade silica sand deposit. The maiden inferred resource is an estimated 21.6 million tonnes grading at more than 99% silica. The resource spans an area of around 1 square kilometre. The resource estimate also found open dune extensions to the immediate north and west, highlighting the potential for additional exploration to expand the silica sand deposit.

• On 16 August 2018 the Company announced that bulk sample process test-work confirms Nob Point Prospect capable of producing high-quality silica sand product (99.9% SiO2) suitable for premium, high end glass manufacturing

• In early December 2018 the Company announced the launch of the Galalar Silica Project (Galalar) following consultations with the traditional owners, Hopevale Congress. The name change from the previous Nob Point Prospect reflects the backing of Hopevale Congress and the Company’s desire for maximum local economic benefit from the establishment of a new high-grade silica sand mine.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

Tick Hill Gold Project

• In June, the Company entered into a term sheet to sell its Tick Hill Gold Project (Tick Hill) into an Initial Public Offering (IPO) by Carnaby Resources Limited (Carnaby). Under the term sheet, the Company was scheduled to receive shares to be allocated in a successful public float by Carnaby. However, the IPO did not proceed and the term sheet has now been superseded by the following event:

• On 11 March 2019, the Company executed a binding, conditional Heads of Agreement to sell its interest in Tick Hill, to Berkut Minerals Limited (Berkut) (ASX: BMT). As consideration for the sale, the Company will be issued with shares in the capital of BMT to the value of $562,500 and will be reimbursed for the associated tenement bonds totalling $ 336,844.

Fundraising

During the year $660,000 was received from the exercise of unlisted options and completion of various private placements to sophisticated investors raised $3,852,322.

Rollover of Convertible Note

The Company reached an arrangement with the holder of the $3 million convertible note facility (Note) that was due for repayment on the 31[st] of July 2018. Subsequently at an extraordinary general meeting 11 October 2018, shareholders approved the following:

• (i) Extension of the maturity date from 31 July 2018 to 31 July 2020 for the $1.5 million cash component of the Note with interest of 5.20% p.a. payable quarterly in arrears;

• (ii) Conversion of $1.5 million equity component of the Note into fully paid ordinary shares of the Company at $0.02 per share, and

• (iii) all outstanding interest up to maturity date of 31 July 2018, on both the equity and cash component of the Note were converted into ordinary shares of the Company, at the prevailing share price as at the date of conversion.

Corporate

On 31 May 2018 the Company announced the appointment of experienced mining industry executive and current Non-Executive Director, Mr Gregory Starr, as the Company’s independent Chairman. Former Chairman, Mr William Wang will remain on the Board as a Non-Executive Director.

Outlook

Cyclone

The mineral sands industry generally is showing a sustained recovery and increasing sustainable pricing following a period of low commodity product prices evidenced between 2013 and 2016. These increasing product prices particularly with reference to zircon appear underpinned by a genuine return to sustainable longer term pricing trends. Further underpinning this are supply constraints as a lack of new investment in heavy minerals mining projects constrains production levels and current producers of major mines start to enter development periods where typically ore body grades decline and extraction becomes more expensive.

This lack of new supply entering the Heavy Minerals (HM) market and a sustained period of favourable commodity pricing creates a window of opportunity for the Company’s Cyclone Project to be developed.

In order to advance the Project toward mining activity and following completion in December 2018 of the Cyclone Project DFS studies the Company has now retained the services of a specialist advisory firm Blackbird Partners to advise and assist the company through the process of attracting suitable development partners to advance the Project to development of mining activity.

The range of these discussions includes potential product offtake, formation of a joint venture or suitable investor entry structure, and complete divestment of the project. The Company at all times whilst reviewing the various potential options for the project is focussed on achieving the best outcome for the Company and its shareholders.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

We remain cautiously optimistic that the current favourable trends within the heavy minerals sector driven by sustainable product pricing increases will enhance our Cyclone Project economics along with early signs of improved capital market sentiment will give us the impetus needed to secure the right development partners to deliver the project on favourable terms for the Company

Cape Bedford

We are further encouraged by the rapid progress on our Cape Bedford tenement following confirmation of the maiden inferred mineral resource of high quality silica sand, and confirm its potential end use products are suitable for high tech applications particularly in the manufacturing of photovoltaic (solar) panels which is a market showing the highest growth in terms of physical product demand.

Corporate

Capital markets continue to remain subdued and the Company is actively and continuously reviewing its corporate and project profiles to ensure good levels of support as it undertakes various capital raising programs to advance its high value projects.

OPERATING RESULTS

The net loss of the Group for the financial year ended 31 December 2018 was $2,749,202 (2017: loss of $1,418,526). The main contributor to the increase in the net loss was the impairment charge of $1,242,071 to the Tick Hill Project in 2018.

During the year the Group utilised its cash resources to undertake exploration and evaluation activities within its tenement portfolio, with 18% expenditure on Cape Bedford and 78% on Cyclone. 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.

SIGNIFICANT CHANGES IN STATE OF AFFAIRS

There were no significant changes in the state of affairs of the Group during the financial year not otherwise dealt with in this report.

EVENTS SUBSEQUENT TO REPORTING DATE

On 11 March 2019, the Company executed a binding, conditional Heads of Agreement to sell its interest in the Tick Hill Gold Project, to a nominee of Berkut Minerals Limited (Berkut) (ASX: BMT). Berkut itself has entered into a series of interdependent agreements whereby it will first acquire Carnaby Resources Limited (Carnaby), and then through Carnaby (as its nominee) will further acquire 100% of the legal and beneficial interest in the Project. As consideration for the sale, the Company will be issued with shares in the capital of BMT to the value of $562,500 and will be reimbursed the associated tenement bonds totalling $336,844.

On 25 March 2019 the ASX granted the Company a trading halt in its securities for two days pending an announcement relating to a capital raising.

FUTURE DEVELOPMENTS

The Group intends to continue its exploration activities on its existing projects, and progress development of the Cyclone Project.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

INFORMATION ON DIRECTORS

Name: Gregory Barry Starr Title: Non-executive Chairman Qualifications: BBus, CPA Experience: Mr Starr was appointed Director in October 2017. He is a highly experienced corporate leader in the resources sector, with over 25 years of executive management experience across a number of Australian and International companies. This includes roles as Managing Director of KBL Mining Limited (ASX), Managing Director of Crater Gold Mining Company Limited (ASX), President and Director of Kenai Resources Limited (TSX), Chief Executive Officer of Golden China Resources (TSX) and Managing Director of Emperor Mines Limited. Other current directorships: BIR Financial Limited Azure Health Technology Limited Former directorships (last 3 years): KBL Mining Limited Special responsibilities: Chair of audit committee and remuneration committee Interests in shares: None Interests in options: None Name: Cheng (William) Wang Title: Non-executive Director Qualifications: MBA Experience: Mr Wang was appointed Director in May 2011. For 15 years he held senior management positions in several major Chinese state owned companies, with most recent role being in charge of an international commodities trading arm with group assets exceeding $1.5 billion. Having worked across most provinces in China and understanding Chinese politics and government systems, he has developed wide business connections within China. Now domiciled in Australia, he has over recent years been active with Australian companies including directorships with China Century Capital Limited, Jupiter Mines Limited, and Gulf Alumina Limited. Mr Wang was appointed Non-executive Chairman on 1 July 2014. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of audit and remuneration committee Interests in shares: 4,267,255 ordinary shares (held indirectly) Interests in options: 1,000,000 unlisted options (held directly) Name: Yufeng (Daniel) Zhuang Title: Non-executive Director Qualifications: BA (Bejing, China), MSc (New Jersey, USA) Experience: Mr. Zhuang was nominated to the Board by the former association of Chinese shareholders Messrs Zhensheng Zhuang, Chenfei Zhuang and Qi Lin, to represent their significant investment and ongoing corporate commitments towards the Company. He has worked for Ping An Securities in Beijing and Fujian Minxing Group in Zhangzhou, China. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of audit committee Interests in shares: 160,983,890 ordinary shares (held directly) Interests in options: None

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

COMPANY SECRETARY

Mr Tuan Do was appointed Company Secretary in May 2011 and is also the CFO.

MEETINGS OF DIRECTORS

The number of meetings of the board of Directors held during the year ended 31 December 2018, and the number of meetings attended by each Director was:

Name	Board	Board	Audit Committee	Audit Committee	Remuneration Committee	Remuneration Committee
	Held	Attended	Held	Attended	Held	Attended
A Tsang	4	-	-	-	-	-
CWang	4	4	2	2	-	-
Y Zhuang	4	2	2	-	-	-
GBStarr	4	4	2	2	-	-

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 Group performance

• C Details of remuneration

• D Employment contracts

• E Share-based compensation

• F Equity instruments held by key management personnel

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.

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.

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 Group 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.

	Unit	2014	2015 (restated)	2016 (restated)	2017	2018
Share price at year end	$/share	0.01	0.01	0.01	0.02	0.02
Market capitalisation	$	7,264,157	8,097,490	8,767,327	15,916,953	21,284,871
Revenue	$	267,799	153,374	62,944	13,814	15,053
Total assets	$	15,237,360	13,545,426	14,060,241	14,441,405	17,214,636
Net loss after tax	$	7,252,709	3,793,703	1,850,962	1,418,526	2,749,202

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

C Details of remuneration

The key management personnel of the Group include the Directors as per the “Directors” sections above and the following persons:

N J McIntyre – Chief Executive Officer T Do – CFO & Company Secretary

Details of the remuneration of the key management personnel of the Group are set out in the following tables. No performance based remuneration was paid or payable during the period.

2018	Short-term benefits	Post- employment benefits	Long- term benefits	Share- based payments
Name	Cash salary & fees $	Superannuation $	Long service leave $	Options $	Total $
Non-executive Directors A Tsang (i) C Wang Y Zhuang G B Starr Other key management personnel N J McIntyre T Do	32,000 32,000 90,000 47,937 220,000 129,000	3,040 3,040 8,550 4,554 20,900 12,255	- - - - - -	- - - - - -	35,040 35,040 98,550 52,491 240,900 141,255
Total	550,937	52,339	-	-	603,276

(i) Represents remuneration from 1 January 2018 to 12 December 2018 (date of resignation).

2017	Short-term benefits	Post- employment benefits	Long- term benefits	Share- based payments
Name	Cash salary & fees $	Superannuation $	Long service leave $	Options $	Total $
Non-executive Directors A Tsang C Wang Y Zhuang G B Starr # Other key management personnel N J McIntyre T Do	32,000 32,000 90,000 6,926 179,256 129,000	3,040 3,040 8,550 658 8,550 12,255	- - - - - -	- - - - - -	35,040 35,040 98,550 7,584 187,806 141,255
Total	469,182	36,093	-	-	505,275

Appointed on 12 October 2017

The group also paid $131,374 (2017: $51,532) for specialist market and consultancy services from Fortune Corporation Australia Pty Limited, a director-related entity of William Wang.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

D Employment contracts

The employment conditions of other key management personnel, including the Chief Executive Officer and CFO & Company Secretary are formalised in employment contracts. Employment contracts are not of a fixed term. Employment contracts specify a range of notice periods.

E Share-based compensation

Options provided as remuneration and shares issued on exercise of such options

No new options or performance rights were granted as compensation to Directors and other key management personnel during the 2017 and 2018 financial years. All options disclosed below have vested.

2018	Beginning balance	Granted as remuneration	Exercised during the year	Options lapsed	Balance at end of year
A Tsang C Wang Y Zhuang N J McIntyre T Do	1,000,000 1,000,000 - 1,000,000 1,000,000	- - - - -	- - - - -	- - - - -	1,000,000 1,000,000 - 1,000,000 1,000,000

F Equity instruments held by key management personnel

The following table details the number of fully paid ordinary shares in the Company that were held during the financial year by key management personnel of the Group, including their close family members and entities related to them.

Shareholding

	Balance at the start of theyear	Received as part of compensation	Additions	Disposals/ other	Balance at the end of the year
Ordinary shares A Tsang C Wang Y Zhuang G B Starr N J McIntyre T Do	116,536,110 4,067,255 140,983,890 - 208,041 -	- - - - - -	- 200,000 20,000,000 - 463,441	(116,536,110) - - - - -	- 4,267,255 160,983,890 - 671,482 -
Total	261,795,296	-	20,663,441	(116,536,110)	165,922,627

• Disposals/other represents shares held at resignation date

Option holding

There were no listed options over ordinary shares in the company held during the financial year by any of the directors and other members of key management personnel of the Group, including their personally related parties.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

Unlisted Option holding

	Balance at the start of the year	Received as part of compensation	Additions	Exercised	Lapsed	Balance at the end of the year
A Tsang C Wang Y Zhuang G B Starr N J McIntyre T Do	6,000,000 1,000,000 20,000,000 - 1,000,000 1,000,000	- - - - - -	- - - - - -	- - (20,000,000) - - -	(5,000,000) - - - - -	1,000,000# 1,000,000 - - 1,000,000 1,000,000
Total	29,000,000	-	-	(20,000,000)	(5,000,000)	4,000,000

All 1,000,000 options subsequently lapsed on 12 January 2019. All unlisted options are vested and exercisable.

END OF AUDITED REMUNERATION REPORT

SHARES UNDER OPTION

Unissued ordinary shares of the Company under option as at 31 December 2018 are as follows:

			Number
Issue/grant date	Expiry date	Exercise price	under option	Type
16 October 2018	16 December 2019	3.0 cents	60,847,327	Listed
31 May 2013	30 April 2019	10 cents	3,000,000	Unlisted
15 March 2013	30 April 2019	10 cents	4,000,000	Unlisted

No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company.

ENVIRONMENTAL REGULATION

The Group is subject to environmental regulation in relation to its exploration activities. There are no matters that have arisen in relation to environmental issues up to the date of this report.

INDEMNITY AND INSURANCE OF OFFICERS

The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith.

During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of liability and the amount of the premium.

INDEMNITY AND INSURANCE OF AUDITOR

The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor.

During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity.

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

DIRECTORS’ REPORT

PROCEEDINGS ON BEHALF OF THE COMPANY

No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings.

NON-AUDIT SERVICES

William Buck (Qld), the Company’s current auditor, did not perform any other services in addition to their statutory audit duties.

AUDITOR’S INDEPENDENCE DECLARATION

A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 12.

This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001.

On behalf of the directors

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Gregory B. Starr Non-executive Chairman

Brisbane, 26 March 2019

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DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

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AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF DIATREME RESOURCES LIMITED

I declare that, t o the best of my knowled g e and belie f , during the year ended 31 De c ember 201 8 , there have been:

• no contraventions of the auditor ind e pendence r e quirements as set out i n the Corporations Act 2001 i n relation to t he audit; a n d

• no contraventions of an y applicable c ode of prof e ssional conduct in relat i on to the audit.

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William Buck (Qld) AB N 21 559 71 3 106

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J A Latif A M ember of th e Firm

Bri s bane, 26 M a rch 2019

CHARTERED ACCOUNTANTS & ADVISORS Level 21, 307 Queen Street Brisbane QLD 4000 GPO Box 563 Brisbane QLD 4001 Telephone: +61 7 3229 5100 Williambuck.com

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William Buck is an association of firms, each trading under the name of William Buck across Australia and New Zealand with affiliated offices worldwide. Liability limited by a scheme approved under Professional Standards Legislation other than for acts or omissions of financial services licensees.

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CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the year ended 31 December 2018

Note Revenue 2 Other income 2 Employee benefit expenses Depreciation expenses 11 Exploration assets written off 12 Impairment of exploration asset (Tick Hill) 8 Other expenses 3 Finance costs Loss before income tax Income tax benefit 5 Net Loss for the year 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 4 Diluted earnings per share 4	2018 $ 2017 $ 15,053 13,814 40,830 17,196 (554,759) (752,974) (31,370) (37,537) - (11,321) (1,242,071) - (747,989) (405,756) (228,896) (241,948)
	(2,749,202) (1,418,526) - -
	(2,749,202) (1,418,526) - -
	(2,749,202) (1,418,526)
	Cents Cents (0.2) (0.2) (0.2) (0.2)

The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

13

CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2018

Note Current Assets Cash and cash equivalents 14 Trade and other receivables 7 Non-current assets classified as held for sale 8 Total Current Assets Non-current Assets 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 9 Borrowings 15 Provisions 10 Total Current Liabilities Non-current Liabilities Borrowings 15 Provisions 10 Total Non-current Liabilities Total Liabilities Net Assets Equity Issued capital 16 Reserves 17 Accumulated losses 18 Total Equity	2018 $ 2017 $ 858,299 158,011 76,448 120,813
	934,747 278,824 562,500 -
	1,497,247 278,824
	145,640 130,369 15,154,429 13,988,080 417,320 44,132
	15,717,389 14,162,581
	17,214,636 14,441,405
	1,498,507 353,568 32,429 1,752,959 9,238 9,238
	1,540,174 2,115,765
	1,500,000 - 272,000 272,000
	1,772,000 272,000
	3,312,174 2,387,765
	13,902,462 12,053,640
	55,979,231 49,979,066 255,496 1,657,637 (42,332,265) (39,583,063)
	13,902,462 12,053,640

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

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2018

Note Balance at 31 December 2016 Total comprehensive income: Loss for the year Transactions with owners in their capacity as owners: Shares issued Share issue costs Convertible note draw down Balance at 31 December 2017 Total comprehensive income: Loss for the year Transactions with owners in their capacity as owners: Shares issued Share issue costs Convertible note conversion to shares Balance at 31 December 2018 16 to 18	Issued capital $ Share- based payment reserve $ Convertible note reserve $ Accumulated losses $ Total $ 48,750,812 191,938 1,334,601 (38,164,537) 12,112,814 - - - (1,418,526) (1,418,526) 1,295,000 - - - 1,295,000 (66,746) - - - (66,746) - - 131,098 - 131,098
	49,979,066 191,938 1,465,699 (39,583,063) 12,053,640 - - - (2,749,202) (2,749,202) 4,815,147 - - - 4,815,147 (314,982) 63,558 - - (251,424) 1,500,000 - (1,465,699) - 34,301
	55,979,231 255,496 - (42,332,265) 13,902,462

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

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

15

CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2018

Note Cash flows from operating activities Receipts in the course of operations Payments to suppliers and employees Interest received Finance costs Net cash used in operating activities 6 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 Refund of security deposits Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Payments for share issue costs Proceeds from drawdowns of borrowings Net cash from financing activities Net increase/(decrease)in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 14	2018 $ 2017 $ 12,923 13,464 (1,291,730) (1,139,445) 980 313 (1,996) (1,715)
	(1,279,823) (1,127,383)
	(46,641) (1,121) (1,860,958) (527,328) - 22,727 (375,688) - 2,500 2,500
	(2,280,787) (503,222)
	4,512,322 1,245,000 (251,424) (66,746) - 300,000
	4,260,898 1,478,254
	700,288 (152,351) 158,011 310,362
	858,299 158,011

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

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

Contents

A CORPORATE INFORMATION

B BASIS OF PREPARATION

C RESULTS

1 Operating segments 2 Revenue and other income 3 Other expenses 4 Earnings per share 5 Taxation 6 Reconciliation on net profit/(loss) to net cash flow used in operating activities

D WORKING CAPITAL AND OTHER ASSETS AND LIABILITIES

7 Trade and other receivables 8 Non-current assets classified as held for sale 9 Trade, other payables and employee benefits 10 Provisions

E TANGIBLE ASSETS

11 Property, plant and equipment 12 Exploration and evaluation assets 13 Other non-current assets

F CAPITAL STRUCTURE AND FINANCIAL RISKS

14 Cash and cash equivalents 15 Borrowings 16 Issued capital 17 Reserves 18 Accumulated losses 19 Financial instruments

G GROUP STRUCTURE

20 Interests in subsidiaries 21 Parent entity information

H OTHER ITEMS

22 Commitments 23 Contingent liability 24 Share-based payments 25 Related parties 26 Remuneration of auditors 27 Events subsequent to balance date 28 New accounting standards and interpretations

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

A. CORPORATE INFORMATION

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 of business is Unit 8, 61 Holdsworth Street, Coorparoo, Queensland 4151. The Group financial statements as at and for the year ended 31 December 2018 comprise the Company and its subsidiaries (together referred to as the “Group”).

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.

B. 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 Group is a for-profit entity for financial reporting purposes under Australian Accounting Standards.

The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

The financial statements were approved by the Board of Directors on 26 March 2019.

(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) Accounting policies

Accounting policies have been applied consistently by all of the Group’s entities and to all periods presented in the consolidated financial statements. Specific significant accounting policies are described in the note to which they relate. The following accounting policy applies to the consolidated financial statements as a whole:

Good 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 ANNUAL FINANCIAL STATEMENTS 2018

18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

(e) Adoption of new and revised accounting standards

A number of new and revised standards became effective for the first time to annual periods beginning on or after 1 January 2018.

The following Accounting Standards and Interpretations are most relevant to the Group:

AASB 9 Financial Instruments

The Group has adopted AASB 9 from 1 January 2018. The standard introduced new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows which arise on specified dates and that are solely principal and interest. A debt investment shall be measured at fair value through other comprehensive income if it is held within a business model whose objective is to both hold assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling the asset on the basis of its fair value. All other financial assets are classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading or contingent consideration recognised in a business combination) in other comprehensive income ('OCI'). Despite these requirements, a financial asset may be irrevocably designated as measured at fair value through profit or loss to reduce the effect of, or eliminate, an accounting mismatch. For financial liabilities designated at fair value through profit or loss, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available.

AASB 15 Revenue from Contracts with Customers

The Group has adopted AASB 15 from 1 January 2018. The standard provides a single comprehensive model for revenue recognition. The core principle of the standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduced a new contract-based revenue recognition model with a measurement approach that is based on an allocation of the transaction price. This is described further in the accounting policies below. Credit risk is presented separately as an expense rather than adjusted against revenue. Contracts with customers are presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Customer acquisition costs and costs to fulfil a contract can, subject to certain criteria, be capitalised as an asset and amortised over the contract period.

Adoption of these new and revised standards did not have a material impact on the financial report.

(f) Going Concern

The financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the normal course of business.

The Group has incurred a net loss after tax for the year ended 31 December 2018 of $2,749,202 and a net cash outflow from operations of $1,279,823. At 31 December 2018, the Group’s current liabilities exceeded its current assets by $42,927.

During the year ended 31 December 2018 the Group raised $4,512,322 from private placements and exercise of unlisted options.

The Group’s ability to continue as a going concern and pay its debts as and when they fall due, is dependent upon the successful future raising of necessary funding through equity, successful exploration and subsequent exploitation of the Group’s tenements, securing product offtake agreements for the Cyclone Project, and/or sale of non-core assets.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

The Directors have reviewed the business outlook and cash flow forecasts and are of the opinion that the use of the going concern basis of accounting is appropriate as they believe the Group will achieve the matters set out above. As such, the Directors believe that they will continue to be successful in securing additional capital through debt or equity issues as and when the need to raise working capital arises.

The reliance on securing additional capital through debt or equity gives rise to the existence of a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern and therefore whether it will be able to realise its assets and extinguish its liabilities in the ordinary course of business.

The Directors believe that they will continue to be successful in securing additional funds through the issue of securities as and when required. Accordingly, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, nor to the amounts and classification of liabilities that may be necessary should the Group be unable to continue as a going concern.

(g) Critical accounting estimates and judgements

The preparation of the consolidated 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 are reviewed on an ongoing basis and any revisions to estimates are recognised prospectively.

Key judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are described in the following notes:

1. Rehabilitation provision

2. Exploration and evaluation assets

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

C. RESULTS

This section sets out the results and performance of the Group.

1. Operating segments

The Group currently operates in one business segment and one geographical segment, namely explorer for heavy mineral sands, copper, gold and base metals in Australia. The revenues and results of this segment are those of the Group as a whole and are set out in the Consolidated Statement of Profit or Loss and Other Comprehensive Income.

2. Revenue and other income

Revenue is recognised at an amount that reflects the consideration to which the consolidated entity is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the consolidated entity: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Interest revenue is recognised on a time proportion basis using the effective interest method.

a) Revenue Interest Other b) Other income Gain on disposal of non-current assets Gain on fair value adjustment to borrowings 3. Other expenses Professional fees Rental expenses on operating leases Listing and share registry expenses Share-based payment expense (Note 24) Administration costs Impairment of financial asset	2018 $ 2017 $ 980 313 14,073 13,501
	15,053 13,814
	- 17,196 40,830 -
	40,830 17,196
	121,540 49,887 65,960 65,008 74,622 49,237 36,370 - 449,497 238,372 - 3,252
	747,989 405,756

4. Earnings per share

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.

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.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

Loss after income tax attributable to the owners of Diatreme Resources Limited Weighted average number of ordinary shares used in calculating basic earnings per share Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share	2018 2017 $ $ (2,749,202) (1,418,526)
	Number Number 1,123,597,912 903,627,303
	1,123,597,912 903,627,303
	Cents Cents (0.2) (0.2) (0.2) (0.2)

Options are considered to be potential ordinary shares but were anti-dilutive in nature and therefore the diluted loss per share is the same as the basic loss per share.

5. Taxation

The income tax expense or benefit 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.

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.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

(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% (2017: 27.5%) Tax effect of amounts which are not deductible in calculating taxable income: Other Deferred tax assets not recognised Total income tax benefit (b) Tax losses Unused tax losses Potential tax effect at 30% (2017: 27.5%)	2018 $ 2017 $ (2,749,202) (1,418,526)
	(824,761) (390,095) 755 23,200
	(824,006) (366,895) 824,006 366,895
	- -
	65,287,850 60,781,341
	19,586,355 16,714,869

The Group has not recognised the deferred tax assets arising from unused tax losses in the financial statements as it is not considered probable that sufficient taxable amounts will be available in future periods with which to be offset.

6. Reconciliation on net profit/(loss) to net cash flows used in operating activities

Loss for the year Non-cash items Depreciation Capitalised exploration expenditure written-off Impairment of exploration asset Impairment of financial asset Share based payment expense Gain on fair value adjustment to borrowings (Profit)/loss on sale of fixed assets Movements in operating assets and liabilities (Increase)/decrease in receivables Increase / (decrease) in payables Increase / (decrease) in provisions Net cash used In operating activities

2018 $ 2017 $ (2,749,202) (1,418,526) 31,370 37,537 - 1,242,071 11,321 - - 3,252 36,370 - (40,830) - - (17,196) (75,174) 12,851 275,572 239,686 - 3,692

(1,279,823) (1,127,383)

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

D. WORKING CAPITAL AND OTHER ASSETS AND LIABILITIES

This section sets out information relating to the working capital and other assets and liabilities of the Group. Working capital includes the assets and liabilities that are used in the day-to-day trading operations of the Group.

7. 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. An ‘expected credit loss’ (ECL) model is used to recognise an allowance. Impairment is measured using the lifetime ECL method.

Trade receivables(1) Other receivables(1)	2018 $ 2017 $ - 68,274 76,448 52,539
	76,448 120,813

(1) Receivables do not contain impaired assets and are not past due.

8. Non-current assets classified as held for sale

On 5 June 2018, the Company signed a binding term sheet to sell its Tick Hill Gold Project (Project) into an Initial Public Offering (IPO) by Carnaby Resources Limited (Carnaby). Under the term sheet, the Company was scheduled to receive a minimum of 3,225,000 shares and a maximum of 4,500,000 shares dependent on total subscriptions received priced at $0.25 each (valued from $806,250 to $1,125,000) to be allocated in a successful public float by Carnaby. However, the IPO did not proceed and the term sheet has now been superseded by the following event:

On 11 March 2019, the Company executed a binding, conditional Heads of Agreement to sell its interest in the Tick Hill Gold Project, to a nominee of Berkut Minerals Limited (Berkut) (ASX:BMT). Berkut itself has entered into a series of interdependent agreements whereby it will first acquire Carnaby, and then through Carnaby (as its nominee) will further acquire 100% of the legal and beneficial interest in the Project. As consideration for the sale, the Company will be issued with shares in the capital of BMT to the value of $562,500. Accordingly, as this value is less than the carrying amount, an impairment charge of $1,242,071 has been recorded.

9. Trade, other payables and employee benefits

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

Employee benefits - 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.

Unsecured Trade payables # Other payables and accruals Employee benefits # Include $923,000 of unpaid costs relating to the Cyclone DFS	2018 $ 2017 $ 1,103,133 32,822 341,746 254,004 53,628 66,742 1,498,507 353,568

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

10. Provisions

Employee benefits - 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 corporate 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.

Rehabilitation provision

A provision for rehabilitation is recognised when there is a present obligation to rehabilitate an area disturbed, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. An asset is created as part of the exploration and evaluation assets which is offset by a provision for rehabilitation.

The Group's exploration activities are subject to various laws and regulations governing the protection of the environment. The Group recognises management's best estimate for assets retirement obligations and site rehabilitations in the period in which they are incurred. Actual costs incurred in the future periods could differ materially from the estimates. Additionally, future changes to environmental laws and regulations, life of mine estimates and discount rates could affect the carrying amount of this provision.

Current liabilities Long service leave Non-current liabilities Rehabilitation	2018 $ 2017 $ 9,238 9,238
	272,000 272,000

E. TANGIBLE ASSETS

This section sets out the non-current tangible assets of the Group and the method used to assess the recoverable amount of these assets

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 ANNUAL FINANCIAL STATEMENTS 2018

25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

11. 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 Motor vehicles Plant and equipment Year ended 31 December 2017 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 31 December 2017 Cost Accumulated depreciation Net book amount	20% 20% 20-40% Furniture and fittings $ Motor vehicles $ Plant and Equipment $ Total $ 4,810 19,685 147,821 172,316 - - 1,121 1,121 - (5,531) - (5,531) (962) (3,325) (33,250) (37,537)
	3,848 10,829 115,692 130,369
	134,723 99,172 1,064,251 1,298,146 (130,875) (88,343) (948,559) (1,167,777)
	3,848 10,829 115,692 130,369

Year ended 31 December 2018 Opening net book amount Additions Depreciation charge Closing net book amount At 31 December 2018 Cost Accumulated depreciation Net book amount	Furniture and fittings $ Motor vehicles $ 3,848 10,829 - 44,978 (770) (4,219)	Plant and Equipment $ Total $ 115,692 130,369 1,663 46,641 (26,381) (31,370)
	3,078 51,588	90,974 145,640
	134,723 144,150 (131,645) (92,562)	1,065,914 1,344,787 (974,940) (1,199,147)
	3,078 51,588	90,974 145,640

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

12. Exploration and evaluation assets

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 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.

Exploration and evaluation assets – at cost less impairment Opening balance Costs capitalised during the year Costs written off during the year Impairment of Tick Hill Project Transfer Tick Hill Project to non-current assets classified as held for sale Closing balance	2018 $ 2017 $ 15,154,429 13,988,080
	13,988,080 13,417,168 2,970,920 582,233 - (11,321) (1,242,071) - (562,500) -
	15,154,429 13,988,080

Exploration and evaluation costs have been capitalised on the basis that the Group will commence commercial production in the future, from which time the costs will be amortised in proportion to the depletion of the mineral resources. Key judgements are applied in considering costs to be capitalised which includes determining expenditures directly related to these activities and allocating overheads between those that are expensed and capitalised. In addition, costs are only capitalised that are expected to be recovered either through successful development or sale of the relevant mining interest. Factors that could impact the future commercial production at the mine include the level of reserves and resources, future technology changes, which could impact the cost of mining, future legal changes and changes in commodity prices. To the extent that capitalised costs are determined not to be recoverable in the future, they will be written off in the period in which this determination is made.

At balance date the carrying amount of exploration and evaluation assets was $15,154,429 of which $13,494,533 is attributable to the significant exploration of the Group’s Cyclone Zircon Project.

Farm-out Arrangement

On 20 March 2015, the Department of Natural Resources and Mines approved the transfer of the three mining leases comprising the Tick Hill Project (MLs 7094, 7096 and 7097) from Mount Isa Mines Limited (MIM) to the Company.

This event satisfied the final milestone under the Tick Hill Gold Project “Exploration Farm-in and Joint Venture Agreement”, dated 17 June 2013 (JVA), between Diatreme Resources Limited and Superior Resources Limited (SPQ).

In addition, on 30 January 2015, SPQ and the Company confirmed that the remaining conditions of the JVA had been waived and as a result, SPQ rights and obligations in relation to the Tick Hill Gold Project commenced from that date.

Under the JVA, SPQ has the right to earn a 50% interest in the project by:

• spending a minimum of $750,000 on exploration;

• making a payment to the Company of $100,000; and

• lodging 50% of the Queensland Government security bond on the tenements.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

All costs incurred by the Company for the Tick Hill Gold Project are recognised as exploration and evaluation assets. Reimbursement from SPQ is offset against the exploration and evaluation assets. At 31 December 2018, SPQ has earned 25% interest in the project.

13. Other non-current assets

13. Other non-current assets
Rent guarantee deposit Security deposits	2018 $ 2017 $ 13,365 13,365 403,955 30,767
	417,320 44,132

F. CAPITAL STRUCTURE AND FINANCIAL RISKS

This section sets out the capital structure of the Group and its exposure to financial risks. The capital structure consists of debt and equity. This section also sets out the financial risks to which the Group is exposed as a result of its operating, investing and financing activities.

14. Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, on-demand deposits and short-term highly liquid investments that are readily convertible to known amounts of cash and are subject to insignificant changes in value.

in value.
	2018	2017
	$	$
Cash at bank and in hand	858,299	158,011

15. Borrowings

Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the loans and borrowings using the effective interest method.

The component of the convertible notes that exhibits characteristics of a liability is recognised as a liability in the statement of financial position, net of transaction costs.

On the issue of the convertible notes the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond and this amount is carried as a liability on the amortised cost basis until extinguished on conversion or redemption. The increase in the liability due to the passage of time is recognised as a finance cost. The remainder of the proceeds are allocated to the conversion option that is recognised and included in shareholders equity as a convertible note reserve, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years. The corresponding interest on convertible notes is expensed to profit or loss.

All borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

During the year ended 31 December 2015, as part of the capital raising exercise, the Company entered into a funding agreement with a private investor for the provision of a $3 million facility (Note).

The facility terms are as follows:

• Six $500,000 tranches drawn quarterly over a 15 month period, starting from receipt of the deposit (1[st] tranche) to comprise a fully drawn facility of $3 million.

• Interest rate – 5.20% pa.

• Term – 36 months from first note drawdown date.

• Repayment: o 50% of notes ($1.5 million) convertible to ordinary shares at maturity at fixed price of $0.02. o 50% of notes ($1.5 million) in cash by the Company at maturity.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

During the year ended 31 December 2017, the convertible notes facility was drawn down. The Note matured on 31 July 2018.

After reaching an agreement with the holder of the Note on 25 July 2018, at an extraordinary general meeting held on 11 October 2018, shareholders approved the following:

• (i) Extension of the maturity date from 31 July 2018 to 31 July 2020 for the $1.5 million cash component of the Note with interest of 5.20% p.a. payable quarterly in arrears;

• (ii) Conversion of $1.5 million equity component of the Note into fully paid ordinary shares of the Company at $0.02 per share, and

• (iii) all outstanding interest up to maturity date of 31 July 2018, on both the equity and cash component of the Note will be converted into ordinary shares of the Company, at the prevailing share price as at the date of conversion.

Accordingly on 24 October 2018, 75,000,000 shares were issued pursuant to item (ii) and 12,171,308 shares were issued pursuant to item (iii).

Total borrowings are as follows:

Unsecured loan Total borrowings Current liability Non-current liability		2018 $ 2017 $ 1,532,429 1,752,959
		1,532,429 1,752,959
		32,429 1,752,959 1,500,000 -
		1,532,429 1,752,959

Accounting standards require the separate recognition of the debt and equity components of the convertible note facility. At the date of recognition of the convertible note, the debt and equity components of the facility were separated according to their fair values. The convertible notes are presented in the statement of financial position as follows:

Borrowings* Convertible note reserve	2018 $ 2017 $ 1,532,429 1,752,959 - 1,465,699
	1,532,429 3,218,658

• Subsequent to the share conversion on 24 October 2018, the Note only has a debt component and is recognised as borrowings.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

16. 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.

1,330,304,442 (Dec 2017 994,809,591) ordinary shares (a) Movements in ordinary share capital Date Details 1 Jan 2017 Opening balance Sep(1) Shares issued(4) Nov(2) Shares issued Nov(3) Exercise of unlisted options Shares issue costs 31 Dec 2017 Balance Jan(3) Exercise of unlisted options Jan(1) Shares issued Feb(3) Exercise of unlisted options Mar(3) Exercise of unlisted options Apr(3) Exercise of unlisted options May(1) Shares issued Aug(1) Shares issued Oct(1) Shares issued Oct(5) Shares issued Oct(6) Shares issued Oct(7) Shares issued Shares issue costs 31 Dec 2018 Balance	Number of shares 876,732,679 75,000,000 28,076,912 15,000,000 -	2018 $ 55,979,231	2017 $ 49,979,066
		Issue price $ 0.010 0.013 0.012 0.012 0.020 0.012 0.012 0.012 0.018 0.020 0.020 0.020 0.020 0.026	$ 48,750,812 750,000 365,000 180,000 (66,746)
	994,809,591 10,000,000 24,500,000 20,000,000 5,000,000 20,000,000 13,888,889 11,375,000 141,741,154 1,818,500 75,000,000 12,171,308 -		49,979,066 120,000 490,000 240,000 60,000 240,000 250,000 227,500 2,834,823 36,370 1,500,000 316,454 (314,982)
	1,330,304,442		55,979,231

• (1) During both the 2017 and 2018 financial years the Company completed several placements to sophisticated and professional investors.

(2) The Company completed a Share Purchase Plan in November 2017.

(3) Options attached to the share placement completed in September 2017.

(4) The Company made an announcement to the ASX on the inadvertent breach of ASX Listing Rule 10.11 on 7 February 2018. The Company had issued 25,000,000 shares and 25,000,000 unlisted options to a director and an entity associated with a director in September 2017 without prior shareholders’ approval, resulting in an inadvertent breach of ASX Listing Rule 10.11. The Company subsequently cancelled the options and shareholder approval was obtained at an extraordinary general meeting (EGM) held on 5 April 2018 for the buy-back and cancellation of the shares at their issue price. At the EGM, shareholders’ approval was also obtained for the issue of the same number of shares and unlisted options to a director and the entity associated with a director.

• (5) 1,818,500 shares (and 909,250 free attaching listed options) issued as full consideration in lieu of the payment of fees of $36,370 by the Company to a supplier in connection with public relations assistance provided to the Company in carrying out its October 2018 Placement.

• (6) Shares issued from conversion of $1.5 million equity component of the $3 million Note (Refer to Note 15 above).

• (7) Shares issued from conversion of all outstanding interest up to maturity date of 31 July 2018, on both the equity and cash component of the $3 million Note (Refer to Note 15 above).

Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. 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.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

(b) Share Options

(b) Share Options
		Number at	end of year
Expiry date	Exercise Price	2018	2017
16 December 2019 (listed)(1)	$0.030	60,847,327	-
28 February 2018 (unlisted)(2)	$0.012	-	60,000,000
30 April 2019 (unlisted)	$0.100	7,000,000	8,000,000

(1) Issued from the October 2018 Placement. As of 31 December 2018, none of these listed options have been exercised.

(2) 75,000,000 options attached to the 75,000,000 shares from the September 2017 Placement, of which 15,000,000 options were exercised in November 2017 and 35,000,000 options were exercised between January 2018 and February 2018 (refer also to Note 16 (a) above). 25,000,000 options were issued to a director and an entity associated with a director in September 2017 without prior shareholders’ approval. These unlisted options were subsequently cancelled on 7 February 2018 and reissued after shareholders’ approval was obtained on 5 April 2018. Of the 25,000,000 options reissued, 20,000,000 options were exercised and 5,000,000 lapsed on 12 April 2018.

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.

Movement in unlisted share options Opening balance Issued 21 September 2017 Exercised Lapsed Balance Movement in listed share options Opening balance Issued 16 October 2018 Exercised Lapsed Balance	Number at end of year 2018 2017 68,000,000 8,000,000 - 75,000,000 (55,000,000) (15,000,000) (6,000,000) -
	7,000,000 68,000,000
	Number at end of year 2018 2017 - - 60,847,327 - - - - -
	60,847,327 -

17. Reserves

17. Reserves
Balance 31 December 2016 Equity component of convertible note drawdowns Balance 31 December 2017 Options issued to broker as success fee for share placement Transfer to share capital on conversion of convertible note Balance 31 December 2018	Share based payment reserve Convertible note reserve Total $ $ $ 191,938 1,334,601 1,526,539 - 131,098 131,098
	191,938 1,465,699 1,657,637 63,558 - 63,558 - (1,465,699) (1,465,699)
	255,496 - 255,496

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 and options issued to broker as success fee for share placement.

Nature and purpose of convertible note reserve

The convertible note reserve is used to recognise the fair value of the equity component of the convertible loan facility as described in Note 15 above.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

18. Accumulated losses

Accumulated losses at the beginning of the year Net loss for the year Accumulated losses at the end of the year	2018 $ 2017 $ (39,583,063) (38,164,537) (2,749,202) (1,418,526) (42,332,265) (39,583,063)

19. Financial instruments

The Group’s principal financial instruments comprise cash, short-term deposits, trade payables and borrowings. 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 Total financial assets Financial liabilities Trade and other payables Borrowings Total financial liabilities	2018 2017 $ $ 858,299 158,011 76,448 120,813 417,320 44,132
	1,352,067 322,956
	2018 2017 $ $ 1,498,507 353,568 1,532,429 1,752,959
	3,030,936 2,106,527

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)	2018 2017 $ $ 858,299 158,011

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

(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 manages any credit risk associated with its trade and other receivables by regular monitoring of exposures against the credit limits and monitoring of the financial stability of significant customers and counterparties.

(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 31 Dec 2017 Trade and other payables Borrowings Consolidated 31 Dec 2018 Trade and other payables Borrowings	Carrying amount Contractual cash flow < 6 months 6-12 months 1-3 years > 3 years $ $ $ $ $ $ 353,568 353,568 353,568 - - - 1,752,959 1,792,167 - 1,792,167 - -
	2,106,527 2,145,735 353,568 1,792,167 - -
	Carrying amount Contractual cash flow < 6 months 6-12 months 1-3 years > 3 years $ $ $ $ $ $ 1,498,507 1,498,507 1,498,507 - - - 1,532,429 1,656,000 58,500 39,000 1,558,500 -
	3,030,936 3,154,507 1,557,007 39,000 1,558,500 -

(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.

Non-current assets classified as held for sale have been valued at cost less allowance for impairment.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

G. GROUP STRUCTURE

This section sets out the legal structure of the Group.

20. Interests in subsidiaries

The Group financial statements consolidate those of the Company and all of its subsidiaries as of 31 December 2018. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a Group controls another entity. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intragroup asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.

Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. Set out below are details of the subsidiaries held directly by the Group:

	Country of		Ownership	Ownership
Name of subsidiary	Incorporation	Principal activity	Interest
			2018	2017
Regional Exploration Management	Australia	Logistical support	100%	100%
Pty Ltd
Chalcophile Resources Pty Ltd *	Australia	Metals exploration	100%	100%
Lost Sands Pty Ltd	Australia	Mineral sands	100%	100%
		exploration

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

21. 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 Reserves Accumulated losses Total equity Loss for the year Total comprehensive loss for the year		2018 $ 2017 $ 1,491,806 273,555 17,976,566 16,414,929
		19,468,372 16,688,484
		1,310,475 1,772,000 1,910,362 272,000
		3,082,475 2,182,362
		16,385,897 14,506,122
		55,979,231 49,979,066 255,496 1,657,637 (39,848,830) (37,130,581)
		16,385,897 14,506,122
		(2,718,248) (1,404,733) (2,718,248) (1,404,733)

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

Non-Current Assets

Non-current assets include $14,003,773 (2017: $11,693,832) of intercompany receivables balances with recoverability of the debt based on successful exploitation of various tenement sites.

Contingent Liabilities

The parent entity does not have any contingent liability.

Contractual commitments

The parent entity does not have any contractual commitments for property, plant and equipment at 31 December 2018.

Guarantees

The parent entity does not have any guarantees at 31 December 2018.

H. OTHER ITEMS

This section sets out other disclosures that may be relevant to understanding the financial position and performance of the Group.

22. 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	2018 $ 2017 $ 731,783 1,771,741 1,420,951 1,420,951
	2,152,734 3,192,692

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. In 2018 cash security bonds totalling $403,955 were held by the relevant governing authorities to ensure compliance with granted tenement conditions (2017: $30,267).

(b) Operating lease commitments

Payable within 1 year Payable between one and five years	2018 $ 2017 $ 24,582 50,071 - 25,073 24,582 75,144

The Company has leasing arrangements for the rental of office space expiring on 30 June 2019.

23. Contingent Liability

The Group does not have any contingent liability at 31 December 2018.

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

24. Share-based payments

The Group provides benefits in the form of share-based payment transactions as follows:

Type	Holder(s)	Services provided
Employee share option plan	Employees, consultants, directors and Chief Executive Officer	Employment
Options and shares to a supplier	Supplier	Publicrelations assistance
Options to a broker	Broker	Successfeeforshare placement

Services are rendered in exchange for options and/or shares in the company (equity-settled transactions).

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled.

Employee Share Option Plan

The Company established an employee share option plan (ESOP 2012) which was approved by shareholders at the AGM on 24 May 2012. The purpose of the scheme was to give an additional incentive to Directors, employees and consultants, to provide dedicated and on-going commitment and effort to the Company.

Information of options issued to the Company’s employees and consultants is as follows:

	Grant date	Expiry date	Exercise price	Balance at start of **the year **	Granted	Exercised	Expired/ **other **	Balance at end of **the year **
2018	15/03/2013	30/04/2019	$0.10	5,000,000	-	-	(1,000,000)	4,000,000
2017	15/03/2013	30/04/2019	$0.10	5,000,000	-	-	-	5,000,000

The remaining contractual life of the above share options outstanding at the end of the period was 0.3 years.

Information of options issued to the Company’s directors and Chief Executive Officer is as follows:

	Grant date	Expiry date	Exercise price	Balance at start of **the year **	Granted	Exercised	Expired/ **other **	Balance at end of **the year **
2018	31/05/2013	30/04/2019	$0.10	3,000,000	-	-	-	3,000,000
2017	31/05/2013	30/04/2019	$0.10	3,000,000	-	-	-	3,000,000

The remaining contractual life of the above share options outstanding at the end of the period was 0.3 years.

Options and Shares to a Supplier

1,818,500 shares and 902,250 free attaching listed options were issued as full consideration in lieu of the payment of fees of $36,370 by the Company to a supplier in connection with public relations assistance provided to the Company in carrying out its October 2018 placement.

Information of options issued to the supplier is as follows:

	Grant date	Expiry date	Exercise price	Balance at start of **the year **	Granted	Exercised	Expired/ **other **	Balance at end of **the year **
2018	16/10/2018	16/12/2019	$0.03	-	902,250	-	-	902,250

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

Options to a Broker

6,500,000 listed options were issued to a broker as success fee for share placement.

Information of options issued to the supplier is as follows:

	Grant date	Expiry date	Exercise price	Balance at start of **the year **	Granted	Exercised	Expired/ **other **	Balance at end of the **year **
2018	16/10/2018	16/12/2019	$0.03	-	6,500,000	-	-	6,500,000

Set out below are the options exercisable at the end of the financial year:

	2018	2017
Grant date Expiry date	Number	Number
16/10/2018 16/12/2019	60,847,327	-
21/09/2017 28/02/2018	-	60,000,000*
15/03/2013 30/04/2019	4,000,000	5,000,000
31/05/2013 30/04/2019	3,000,000	3,000,000

• 25,000,000 options were subsequently cancelled 7 February 2018 and reissued on 5 April 2018 (refer to Note 16).

25. Related parties

(a) Parent entity

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

(b) Subsidiaries

Interests in subsidiaries are set out in Note 20.

(c) Key management personnel

Disclosures relating to key management personnel are set out below and remuneration report in the directors' report.

Compensation

The aggregate compensation made to directors and other members of key management personnel of the Group is set out below:

Short-term employee benefits Post-employment benefits (d) Transactions with related parties The following transactions occurred with related parties: Payment for specialist market and consultancy services from Fortune Corporation Australia Pty Limited (director-related entity of William Wang).		2018 $ 2017 $ 550,937 469,182 52,339 36,093 603,276 505,275 2018 $ 2017 $ 131,374 51,532

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2018

26. Remuneration of auditors

26. Remuneration of auditors
William Buck (Qld) Audit and review of the financial statements The auditors did not provide any other services.	2018 $ 2017 $ 20,000 20,000

27. Events subsequent to balance date

On 11 March 2019, the Company executed a binding, conditional Heads of Agreement to sell its interest in the Tick Hill Gold Project, to a nominee of Berkut Minerals Limited (Berkut) (ASX: BMT). Berkut itself has entered into a series of interdependent agreements whereby it will first acquire Carnaby Resources Limited (Carnaby), and then through Carnaby (as its nominee) will further acquire 100% of the legal and beneficial interest in the Project. As consideration for the sale, the Company will be issued with shares in the capital of BMT to the value of $562,500 and will be reimbursed the associated tenement bonds totalling $336,844.

On 25 March 2019 the ASX granted the Company a trading halt in its securities for two days pending an announcement relating to a capital raising.

No other matters or circumstances have arisen since the end of the financial year that have 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 2018.

28. 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, including AASB 16 Leases, have not been adopted in the preparation of the financial report for the year ended 31 December 2018. None of these Standards and Interpretations are expected to have significant effect on the consolidated financial statements of the Group,

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 ANNUAL FINANCIAL STATEMENTS 2018

38

DIRECTORS’ DECLARATION for the year ended 31 December 2018

In the directors' opinion:

• the attached financial statements and notes thereto comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements;

• the attached financial statements and notes thereto comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note B to the financial statements;

• the attached financial statements and notes thereto give a true and fair view of the consolidated entity's financial position as at 31 December 2018 and of its performance for the financial year ended on that date; and

• 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 directors have been given the declarations required by section 295A of the Corporations Act 2001.

Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001.

On behalf of the directors

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Gregory B. Starr Non-executive Chairman

Brisbane, 26 March 2019

DIATREME RESOURCES LIMITED ANNUAL FINANCIAL STATEMENTS 2018

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Diatreme Resources Limited In d epende n t audito r ’s report to the m e mbers Report on the Audit of the Financial Report

Opinion

We have audite d the financi a l report of D iatreme Re s ources Limited (the Co m pany and its subsidia r ies (the Group)), which c omprises t h e consolida t ed stateme n t of fina n cial positio n as at 31 D e cember 20 1 8, the cons o lidated stat e ment of pr o fit or los s and other comprehensi v e income, t h e consolid a ted statement of chang e s in equity and the consolidated statement o f cash flows for the year t hen ended, and not e s to the fin a ncial statements, includi n g a summ a ry of significant accounting poli c ies and oth e r explanatory informati o n, and the directors’ de c laration.

In our opinion, t h e accompa n ying financ i al report of t he Group, i s in accorda n ce wit h the Corpor a tions Act 2 0 01, includin g :

• (i) giving a true and fai r view of the Group’s fin a ncial position as at 31 Decem b er 2018 an d of its finan c ial perform a nce for the y ear ended o n that date; a n d

• (ii) complyi n g with Australian Acco u nting Stand a rds and the Corporatio n s Regulations 2001.

Basis for Opinion

We conducted o ur audit in accordance w ith Australi a n Auditing S tandards. Our res p onsibilities u nder those standards a r e further de s cribed in th e Auditor’s Re s ponsibilities for the Audi t of the Fina n cial Report section of o u r report. W e are ind e pendent of t he Group in accordanc e with the au d itor indepe n dence req u irements of the Corpor a tions Act 20 0 1 and the e thical requir e ments of t h e Accounting Pro f essional an d Ethical Sta n dards Boa r d’s APES 1 1 0 Code of E thics for P rofessional Accountant s (the Code) that are rel e vant to our a udit of the fina n cial report in Australia. W e have al s o fulfilled our other ethic a l responsib i lities in a c cordance w ith the Cod e .

We confirm that the independence decl a ration requi r ed by the C o rporations A ct 2001, which ha s been given to the direc t ors of the C o mpany, wo u ld be in the same ter m s if given to the director s as at the ti m e of this a u ditor’s repo r t.

We believe that the audit ev i dence we h a ve obtaine d is sufficien t and appro p riate to provide a ba s is for our opinion.

Material Uncertainty Related to Going Concern

We draw attenti o n to Note B (f) in the fin a ncial report , which indic a tes that th e Group incurred a net loss af t er tax of $2 , 749,202 du r ing the year ended 31 De c ember 201 8 and had ne t cash outflo w s from op e rations of $1,279,823, a n d, as of t h at date, the Group’s current liabilitie s exceeded i ts current a s sets by $42,927. As s tated in No t e B(f), thes e events or c o nditions, al o ng with oth e r matters a s set fort h in Note B(f), indicate that a materia l uncertainty exists that m ay cast sig n ificant doubt on the Gr o up’s ability to continue a s a going c o ncern. Our opinion is n o t mo d ified in respect of this matter.

CHARTERED ACCOUNTANTS & ADVISORS Level 21, 307 Queen Street Brisbane QLD 4000 GPO Box 563 Brisbane QLD 4001 Telephone: +61 7 3229 5100 Williambuck.com

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40

William Buck is an association of firms, each trading under the name of William Buck across Australia and New Zealand with affiliated offices worldwide. Liability limited by a scheme approved under Professional Standards Legislation other than for acts or omissions of financial services licensees.

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Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

CARRYING VALUE OF EXPLORATION COSTS
Area of focus Refer also to note 12	How our audit addressed it
Capitalised exploration and evaluation assets represent over 88% of the Group’s total assets. The carrying value of exploration and evaluation assets is impacted by the Group’s ability, and intention, to continue to explore and evaluate these assets. The results of these activities then determine the extent to which it may or may not be commercially viable to develop and extract identified reserves. Due to the significance of this asset and the subjectivity involved in determining its carrying value and recoverable amount, this is a key audit matter.	Our audit procedures included: —A review of the directors’ assessment of the criteria for the capitalisation of exploration and evaluation expenditure and their assessment of whether there are any indicators of impairment to capitalised costs; —Considering the Group’s intention and ability to continue activities necessary to support a decision to develop the exploration and evaluation assets, which included an assessment of the Group’s ability to fund such activities and a review of their future budgets; —Performing an assessment of whether any indicators of impairment existed in line with requirements of Australian Accounting Standards_,_including a review of the integrity of tenement title status and total commitments value; and —We assessed the adequacy of the Group’s disclosures in respect of the carrying value of exploration costs.

41

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Other Information

The directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 31 December 2018, but does not include the financial report and the auditor’s report thereon.

Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors 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 preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Financial Report

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.

A further description of our responsibilities for the audit of these financial statements is located at the Auditing and Assurance Standards Board website at:

http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf

This description forms part of our independent auditor’s report.

Report on the Remuneration Report Opinion on the Remuneration Report

We have audited the Remuneration Report included in pages 7 to 10 of the directors’ report for the year ended 31 December 2018.

In our opinion, the Remuneration Report of Diatreme Resources Limited, for the year ended 31 December 2018, complies with section 300A of the Corporations Act 2001 .

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Responsibilities

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.

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William Buck (Qld) ABN 21 559 713 106

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Junaide Latif Director

Brisbane, 26 March 2019

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