DIATREME RESOURCES LIMITED - Audit Report / Information 2011

DIATREME RESOURCES LIMITED

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ABN: 33 061 267 061

Postal Address: P.O Box 10288 Brisbane Adelaide Street QLD 4000 Registered Office: Level 2 87 Wickham Terrace Spring Hill QLD 4000 PH: +61 (0)7 3832 5666 FX: +61 (0)7 3832 5300 www.diatreme.com.au [email protected]

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ASX : DRX

21 June 2011

UPDATED INDEPENDENT TECHNICAL REVIEW AND VALUATION OF THE CYCLONE DEPOSIT – EUCLA BASIN

Diatreme Resources Limited (“DRX”) is pleased to release the attached report entitled “Independent Technical Review and Valuation of the Cyclone Deposit – Western Australia” by Terrence Willsteed & Associates, Consulting Mining Engineers (“TWA”).

This report has been prepared as a replacement to the TWA report released 17 January 2011. The report takes into account all relevant data previously discussed, but is updated with the current trends for mineral pricing, supply and demand as at June 2011. The review does not provide an opinion on share value or corporate capital value of DRX.

Over the past five months significant developments have occurred in the pricing of mineral sand products, with zircon prices in particular increasing to levels above $1,600 per tonne. With the Company continuing its pre-feasibility studies over the zircon rich Cyclone Deposit, these developments are seen to have an important impact upon the project’s economic credentials.

Based upon a range of criteria detailed in the report, TWA have suggested the following current value range for the Cyclone Project (equivalent January 2011 value comparisons in brackets):

Low:

$270 million indicated by the base case after-tax value ($142 million) and allowing for Pre-development Study bases and medium risk levels.

High: $330 million to provide for suggested revenue ($170 million) improvement, resource increase and lower risk levels, and for current comparative project values.

Most Likely: $300 million ($156 million)

Most Likely: $300 million

It is to be noted that this valuation would be adjusted as technical and economic criteria are further confirmed and the project studies proceed to acceptable feasibility study levels.

DRX is confident that the Cyclone Project can develop into a major zircon mine and that the Eucla Basin mineral sands province as a whole will be recognised as a world class mineral sands supplier to the Asian and further overseas markets.

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Tony Fawdon Executive Chairman/CEO

Attachment: “Independent Technical Review and Valuation of the Cyclone Deposit Western Australia” by Terence Willsteed & Associates, 21 June 2011.

TERENCE WILLSTEED & ASSOCIATES

CONSULTING MINING ENGINEERS

POSTAL ADDRESS: P O BOX N284 GROSVENOR PLACE, SYDNEY NSW 1220 13/1, THE QUAY, 2 PHILLIP STREET, SYDNEY NSW 2000

E-mail: [email protected]

Telephone: [02] 9251 3804 Facsimile : [02] 9251 3788

PRINCIPAL: T V WILLSTEED, BE(MIN)HONS BA FAUSIMM MSME MAICD

T V WILLSTEED & ASSOCIATES PTY LTD

ABN : 44 001 859 712

21 June 2011

The Directors Diatreme Resources Limited Level 2, 87 Wickham Terrace SPRING HILL QLD 4000

Dear Sirs,

INDEPENDENT TECHNICAL REVIEW AND VALUATION OF THE CYCLONE DEPOSIT WESTERN AUSTRALIA

Terence Willsteed & Associates [TWA] has been requested to prepare an Independent technical review and valuation report on the Cyclone mineral sands deposit held by Diatreme Resources Limited [Diatreme]. The Report will be available to assist the directors and shareholders of Diatreme in the estimation of the value of the Cyclone Deposit. The review does not provide an opinion on share value or corporate capital value of Diatreme. This report is prepared to replace the report “Independent Technical Review of the Cyclone Deposit and Valuation Report” dated 17 January 2011, prepared by TWA.

Diatreme has suggested that a revised TWA valuation take into account all relevant data previously discussed in the January 2011 public report, but also be updated with the current trends for mineral pricing, supply and demand as at June 2011.

Diatreme [ASX code:DRX] is a diversified Australian mineral explorer with projects in heavy mineral sands, copper, base metals and gold.

The technical review and valuation has been prepared by T V Willsteed, Consulting Mining Engineer, BE[Min]Hons BA FAusIMM MSME MAICD and H Sandercock, Consulting Mining Engineer, BE[Min]Hons, MAusIMM MSME based on the technical and geological data provided by Diatreme. The Review Report is prepared to generally conform to the JORC and VALMIN Codes of AusIMM.

The Report is prepared to:

be of a general nature, and cover location, geology, resource, mineralogy and include proposed assumptions of mining throughput, wet plant processing, concentrate transport and options for dry mineral separation plant location.
consider Zircon and Titanium markets and potential and forward projections [information provided by Diatreme as appropriate].
give financial considerations and valuation to the current position and future possible valuations of a going concern nature [year 2014].

To complete the assessment, we have requested from Diatreme and its advisors:

The most recent reported results of investigations for the project.
Copies of recent independent assessments of the project including resource statements and projections.
Details of agreements relating to transactions and joint venture interests involving the projects.
Current and previous investigations and economic analyses.
Records of DRX expenditure on the project areas and by previous tenement holders.
Data on proposed expenditure commitments and budgets for the project areas.
Diatreme financial results.

The review has not included site visits for the assessment but has included inspection and discussion on the project data in the Diatreme office, and relies on information supplied by Diatreme, and on assessments prepared by TWA and other independent consultants for equivalent projects. Reliance is placed on the Diatreme resource estimation and geological interpretation and description, as well as on preliminary technical studies and financial analyses. The data supporting these estimates and interpretation have been reviewed by TWA in the preparation of this Report but an audit of the information and estimates has not been carried out.

Diatreme has confirmed that:

All material information currently available has been provided for a proper assessment to be carried out and that the information is complete, accurate and true.
A status report and tenement schedule is available relating to the property title, and to agreements entered into by Diatreme.
Information relating to current and future indigenous interests, taxation and royalties, market restrictions, environmental impacts, legal claims and other similar issues of economic importance, as far as they are known to Diatreme is made available.
Specific data has been compiled and provided by Diatreme for the exploration areas, including:
project description and geological background
environmental management plans
assay and petrology records for the project
project maps and lease outlines
geological map for the area
processing test work and engineering investigation
marketing studies
resource estimates
maps and report documents.

To conform with the VALMIN Code, Diatreme has confirmed that it will indemnify TWA for liability arising from our reliance on the information provided, or for available information not provided.

This report is prepared in accordance with the relevant requirements and listing rules of ASX Limited, the Australian Securities & Investments Commission [ASIC] and the VALMIN Code of the Australasian Institute of Mining & Metallurgy. The VALMIN Code sets out the principles and matters, which should be taken into account in preparation of a technical expert report concerned with mining assets. ASIC Practice Note 42 provides guidance to ensure that the expert report is independent of the commissioning party and that the assessments contained within the report are at the highest possible level, in accordance with professional standards. TWA has considered the requirements of Regulatory Guide 112 Independence of Experts’ Reports issued by ASIC and confirms that it is not aware of any circumstance, which may compromise its independence to undertake this assignment.

Competent Person Statement

Information referred to in this report, insofar as it relates to Exploration Results and Mineral Resources is based on information compiled by company personnel and consultants, prepared under the supervision of Mr David Jelley, who is a Member of the Australasian Institute of Mining and Metallurgy and is a full time employee of Diatreme Resources Limited. Mr Jelley has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”. Mr Jelley consents to the inclusion in the report of the matters based on the information in the form and context in which they appear, all of which has been previously documented and submitted by Diatreme under continuous disclosure requirements in accordance with ASX Rule 3.1.

This statement fairly reflects the information prepared by Diatreme personnel and supervised by Mr Jelley. Mr Willsteed, BE[Min]Hons BA, FAusIMM as a Competent Person consents to the inclusion in this report of these matters in the form and context in which they appear.

CYCLONE MINERAL SANDS DEPOSIT

SUMMARY

The Cyclone Mineral Sands deposit occurs within E 69/1920, one of six contiguous exploration licences held by Diatreme in Western Australia within the northern area of the Eucla Basin and flanking the South Australia border. The tenements have been progressively granted since July 2006 and have different grant and expiry dates, with five tenement applications pending, as tabulated below. All six active tenements have been reconnaissance drilled, with further exploration awaiting cultural heritage surveys, Program of Works [POW] clearances, and clearance to proceed from the local Aboriginal group. Cultural heritage surveys were carried out over the majority of the area.

During the first round of exploration carried out in 2007, a large heavy mineral [HM] sand resource was discovered which has been called Cyclone. This resource has undergone a number of drilling programmes along with continual update of resource estimates and is currently estimated to be at a JORC resource of 132 million tonnes [t] at 2.3% heavy minerals [HM], as detailed in the table on page 11. The tenements are held in the name of Lost Sands Pty Ltd [LSPL], which is a company wholly owned (100%) by Diatreme.

Exploration drilling has been carried out to the north and east of the Cyclone Deposit over the Hurricane and Zephyr prospects and Wanna East and South tenements [E69/2408 and E69/2425]. Mineralisation was noted during this drilling, confirming the prospectivity of the region, but mineralisation identified to date is generally relatively low grade [1 to 2% HM). Reconnaissance drilling was also undertaken over the Jubilee and Willeri tenements [E69/2222 and E69/2429 respectively] west of Cyclone, but these have since been relinquished.

The Zephyr mineralisation was originally discovered in a regional drilling program undertaken in 2008 within the Wanna East tenement [E69/2408]. With further evaluation of drilling results, the Company has been able to delineate the Zephyr Deposit, which is located within the Barton shoreline feature, approximately 2 km north-east of the Cyclone Deposit.

A JORC Inferred Resource for the Zephyr Deposit is estimated at 106 million t at 1.5% HM using a 1% HM cut-off grade, as detailed in the table on page 11. The resource exhibits very low slimes [clay] and oversize contents.

The Eucla Basin is a large sedimentary basin located in the central part of the southern region of Australia. It extends over a vast area stretching from the southeast coast in Western Australia and from the southwest coast of South Australia northward through to the boundary of the Nullarbor Plain with the Great Victoria Desert.

During the prevailing palaeo climatic conditions and the west to east longshore drift of the sediment derived from the basement hinterlands and discharged into the Basin from the extensive palaeoriver systems, accumulations of heavy minerals and formation of beach strandlines and associated deposits occurred on a number of shorelines.

Mineralisation at Cyclone has been deposited during a number of transgressive and regressive sea level events. These have left a series of HM strands that have been separated both laterally and vertically over large areas with the western most strands being of a more continuous and higher grade nature than the other strands within the area. Nearshore mineralisation, related to the beach deposits from which they are sourced, is also developed.

Mineralogical studies have been carried out over the Cyclone deposit. These determinations have shown the HM suite at Cyclone to be particularly valuable, being high in zircon and leucoxene, and low in less valuable and trash minerals.

The lower HM strandlines show good relationship of their position relative to palaeotopography of the underlying offshore sediments. The upper level strandlines show no such relationship to the basal offshore facies, which illustrates that the upper strands were deposited onto beach facies which no longer had topography similar to the basal offshore facies. This was likely due to time series alteration of the sea level and hence marine environment between deposition of the upper and lower HM strandlines.

TENEMENTS

The tenements are in the name of LSPL which is wholly owned by Diatreme.

Current DRX and subsidiary Mineral Sands Tenement Holdings Eucla Basin WA

17 November 2010

Tenement Name	Tenement ID	Type	Area (km 2)	Holder	%	Sub- blocks	App. Date	Grant Date	Expiry Date
Wanna Lakes	E69/1920	E	210	LSPL	100	70	12/12/2003	19/07/2006	18/07/2011
Wanna Lakes East	E69/2408	E	210	LSPL	100	70	19/06/2007	17/07/2008	16/07/2013
Wanna-South	E69/2425	E	288	LSPL	100	97	14/08/2007	17/11/2008	16/11/2013
Serpentine Lake	E69/2426	E	178	LSPL	100	59	14/08/2007	17/11/2008	16/11/2013
Marble Gum	E69/2427	E	295	LSPL	100	98	14/08/2007	17/11/2008	16/11/2013
Jungooner	E69/2428	E	193	LSPL	100	64	14/08/2007	17/11/2008	16/11/2013
Ilma	69/2740	EL(A)	602	LSPL	100	200	09/12/2009
Boorabie West	69/2741	EL(A)	602	LSPL	100	200	09/12/2009
Boorabie East	69/2742	EL(A)	602	LSPL	100	200	09/12/2009
Forrest Lakes West	69/2743	EL(A)	602	LSPL	100	200	09/12/2009
Forrest Lakes East	69/2744	EL(A)	602	LSPL	100	200	09/12/2009

E: exploration licence

EL(A): exploration licence application

LOCATION AND ACCESS

Current access to and travel within the tenement is relatively difficult due to soft sand dunes and lack of infrastructure in this area of Western Australia. Access within the tenements is by way of graded tracks that the Company establishes, but only after cultural heritage surveys are completed and POW’s approved.

The small Aboriginal Community of Tjuntjuntjara is located 170 kilometres [km] to the southwest of Cyclone and the Ilkurlka roadhouse on the Anne Beadell Highway is located 130km west northwest.

Climate of the area is typical of inland Australia with an annual rainfall of approximately 250 millimetres [mm] spread evenly throughout the year. Summer day temperatures often exceed 40[o] C and cold winter nights frequently fall below 0[o] C.

The majority of the tenements lie within the Paupiyala Tjarutja Aboriginal Corporation [PTAC] tribal lands. LSPL has agreements for access to explore within the tenements, although this does not automatically confer road and track access or use. The Anne Beadell Highway is a public road within Aboriginal lands but still requires an access permit for its use. Aboriginal roads and tracks may be closed at very short notice for extended periods for purposes of Aboriginal Business.

GEOLOGY

Regional Geology

The LSPL tenements cover the northern margin of the Eucla Basin which contains a number of sub-surface ancient fossil shorelines that formed during the Tertiary period. The shorelines have high potential to contain deposits of HM, as evidenced by the Jacinth/Ambrosia HM mine in South Australia, and the Cyclone HM deposit in Western Australia.

The Eucla Basin is a large sedimentary basin located in the central part of the southern region of Australia. It extends over an area stretching from the southeast coast in Western Australia and from the southwest coast of South Australia northward through to the boundary of the Nullarbor Plain, largely within the Great Victoria Desert. The basin contains continental and marine Cainozoic sediments ranging in age from 140 million years to the near present time.

From near the centre of its northern most point in the middle of the basin and along its eastern edge the northern margin developed as a major fault bounded coastal shoreline during the Tertiary period.

Extending from the centre along the eastern edge of the basin a system of sand islands developed extending from headlands along this northern margin. These are similar to the current South Stradbroke Island and Fraser Island off the coast of Queensland. The basin margin, being fault controlled, would have lead to the coastal shoreline being fixed in a consistent position for very long periods of time. Accumulation of sediment by longshore drift occurred on the shoreline over large distances due to the prolonged existence of the fault bounded margin.

There have been several marine incursions into the basin with the last major incursion taking place 25 million years ago during the Eocene. Smaller marine transgressions occurred up to as late as 2 million years ago.

During this same period the increasing separation between Australia and Antarctica was enlarging the gap between the two continents in which increasing oceanic conditions were prevalent. Throughout this period conditions of west to east prevailing wave and wind conditions were becoming dominant. Large amounts of sediment were able to accumulate against the coastal shoreline over very large distances extending along most of the eastern edge of the northern margin of the basin as a result.

In the surrounding area onshore from the Eucla Basin paleo river systems flowed across the ancient hinterland eroding sediments and transporting it into the basin throughout the periods of marine incursions in the Miocene and Eocene. The hinterland includes the Yilgarn and Gawler Craton, the Musgrave Block and possibly the Arunta Province, all of which are composed of rock types that are the principle source of the heavy minerals zircon, ilmenite, rutile, leucoxene and monazite. These basement ancient hinterlands also host large numbers of other mineral occurrences and significant economic deposits which include gold, diamonds and sources of platinoid group metals and rare earth elements. The Yilgarn Craton hosts the largest gold producing region and accumulation of gold deposits in Australia. It is also host to the major nickel producing region in Australia, and platinoid metals are produced as a by-product from some nickel mines. The Gawler Craton in South Australia is host to the world’s largest polymetallic mineral deposit, Olympic Dam.

Sediment derived from the basement hinterlands discharged into the basin from the palaeorivers and the heavy minerals were concentrated as strandlines on the shorelines by longshore drift and wave/wind action. The longevity of the coastal shorelines allowed for the development of sand islands over extensive linear distances. The large size of the palaeoriver systems actively discharging sediment drained from the hinterlands, containing significant quantities of minerals, makes this part of the Eucla Basin prospective for economic deposits of HM due to the related mineralisation factors.

PROJECT GEOLOGY

Project Geology

The stratigraphy of Wanna Lakes region is presently known only from Diatreme’s drilling programmes and from inferred lateral relationships to the eastern Eucla Basin where published geology exists from more detailed information.

The oldest unit found during drilling of the Cyclone deposit is tentatively identified as Hampton Sandstone, which is present as offshore silty fine sand. This was commonly encountered in many drill holes and was generally used as a target for end of holes. Hampton Sandstone is of Middle Eocene age of 43 to 40 Ma.

Padinga Formation is penecontemporaneous with Hampton Sandstone and contains several sedimentary facies that were deposited through the Middle into Late Eocene age, 40 to 36 Ma. This material was not found in any other drill holes within the Wanna Lakes tenement [E69/1920].

Ooldea Sands are principally windblown dune deposits of Middle-Late Eocene age of 37 Ma but also have a younger analogue in the Barton Sands, which are a similar facies of 34 to 33 Ma age. Above the Barton Sands an unconformity has been mapped in eastern Eucla Basin. It is postulated that the main beach mineral sand accumulations at Wanna Lakes are within the Ooldea or Barton Sands and some mineralisation may be within the Hampton Sandstone. The host sediments for mineralisation are generally uncemented and preserved as a loose, well sorted, fine to medium, subangular sand. Surf zones have been logged as intertidal on the geological cross sections. These were commonly encountered in most drill holes within the Wanna Lakes tenement and in Cyclone there was often more than one intertidal unit. This is suggestive of multiple stacked beaches relating to two successive regression deposits and possibly also with an intermediary transgression deposit.

It is notable in the geological cross sections that assayed heavy minerals [AHM] occurrences show marked proximity and close relationship to beach and surf zone deposits, with some HM occurrences present in the nearshore silty fine sands and in the dune facies. Highest concentrations of HM are almost invariably associated with beach deposits in Cyclone.

Mineralisation has also been noted in what was previously thought of as Quaternary dune sands. Reinterpretation of these sands now puts much of the overburden red/brown ferruginised sands as Tertiary Eocene dune sands that are mineralised, with Tertiary Miocene sediments overlain. These Miocene sediments are generally mineralised [≈ 0.5% HM] which may be indicative of reworking of the underlying sediments through fluvial/estuarine process. Further work is required to understand if this Miocene unit is mineralised throughout the whole Wanna area.

Mineralisation

Heavy minerals have been located within both EL’s 69/1920 [Wanna Lakes], and 69/2408 [Wanna East] tenements. Much of the Wanna East mineralisation is generally low grade with grades of 1 to 2% HM under relatively deep cover in many places. The Cyclone HM resource was discovered by LSPL in the far lower southeast corner of the Wanna Lakes tenement. This resource was discovered in 2007 for which subsequent drilling has increased the size and continuity of the resource to an estimated 132 million t at 2.3% HM. Additional assaying of the samples between the surface and the current resource boundary has revealed the deposit is overlain by low grade mineralisation comprising clay and iron oxide coated HM grains. This mineralisation is being geologically assessed and may be included in to an updated resource estimate.

A resource estimate for the Zephyr Deposit is estimated at 106 million t at 1.5% HM at 1% HM cut-off grade, and is classified as Inferred. The resource exhibits very low slimes [clay] and oversize contents. The mineralogy of the Zephyr HM is different from that observed at Cyclone, as expected from the contrasting geological setting. Mineralisation within Zephyr is relatively uniform but low grade, and relatively deep when compared to Cyclone. The deposit is believed to have formed in a relatively low energy sedimentary environment, on a gently sloping beach within an estuarine/lagoon system behind the Cyclone barrier beach system.

Further sporadic mineralisation has been noted to the north of Cyclone which has been called the Hurricane Prospect. Mineralisation is interpreted to be confined to a number of small palaeo coastal bays that control mineralisation but are not laterally continuous for long distances. A programme of exploration was conducted to help define features of the Hurricane system, but further work is required in this area as the controls on mineralisation are not currently well defined and therefore require additional exploration.

The Zephyr Deposit is made up of flat lying mineralised estuarine sediments (sand and silty sand) deposited in a coastal environment during the Tertiary. The mineralised sands are free flowing with very little induration (rock) and low slimes contents which are favourable to conventional mineral sand dry mining techniques. However, an indurated horizon sporadically occurs in the overburden profile.

DRILLING AND SAMPLING PROCEDURES

The following drilling and sampling procedure has been carried out.

Hole locations were indicated by a handheld GPS at the time of drilling. Coordinates were recorded and the elevations were updated and levelled using SRTM data. The profiles were further validated using imagery and field notes. Hole collars at Cyclone were picked up by a DGPS system in 2009, this GPS unit has a quoted accuracy of 10 centimetres [cm] horizontal and 15cm vertical.

Drilling from 2007 to 2009 was carried out by a number of drilling contractors using air-core techniques. In 2010 Diatreme commissioned a custom built air-core drill rig owned and operated by Regional Exploration Management Pty Ltd, a wholly owned subsidiary of Diatreme. The rig is set-up to drill NQ air-core, although it can be converted to open-hole percussion to allow penetration of any shallow indurated horizons [e.g. Quaternary calcrete, silcrete].

Samples were collected from a rig-mounted cyclone via a rotary splitter, and panned and logged on site. During 2007 and 2008, only those samples estimated as greater than 0.5% HM were retained for analysis and reference.

During the 2009 drilling programmes all samples were collected and retained from the top to the bottom of the drill hole. This eliminates any possibility that low grade mineralisation might be overlooked in the field, and therefore all samples are available for assay if required. However, in regional areas, generally only those samples with estimated heavy mineral grade of >0.3% were sent for assay. Within the Cyclone Deposit, all available material was sent for assay.

EXPLORATION HISTORY

No other companies have previously explored in the vicinity of the tenements. Seismic lines were established some 50 km to the south and east in the 1990s but no drilling or geological mapping had been done prior to LSPL exploration in 2007.

The Wanna Lakes tenement [E69/1920] is located in the northern part of the Eucla Basin. It contains two named heavy mineral occurrences; Hurricane and Cyclone. Cyclone is located at the southeast end of E69/1920 and extends across the southern tenement boundary into Image Resources Ltd tenement. Hurricane is located on the north eastern side of E69/1920 north of Cyclone and continues into E69/2408 – Wanna East tenement also held by LSPL.

In 2007 LSPL completed its first air core drilling programme at Wanna Lakes with 519 drill holes totalling 23,132 metres [m] of drilling. Cyclone and Hurricane were discovered early in the programme. Following the discovery of these prospects, Cyclone was drilled to 200 to 600m line spacings within geologically continuous areas. It was expected that the deposit extended south into Image Resources’ tenement and possibly further south into LSPL’s neighbouring Wanna South tenement. Over the Cyclone deposit the 2007 hole spacings were generally at 50 to 200m centres, but averaged 500 to 1000m centres over the remainder of the tenement.

The Hurricane prospect in the northern and central parts of Wanna Lakes tenement was defined as a number of small discontinuous pods of mineralisation.

A total of 17 lines 200 to 600m apart were drilled over Cyclone, resulting in 335 drill holes totalling 16,328m and averaging 49m depth. Six holes could not penetrate though indurated silicified sand layers within the overburden at depths of 5m to 18m, but only two of these were within the Cyclone deposit.

During 2007 a suite of 57 individual samples from nine holes were analysed by QEMScan to identify the species and abundances of minerals in the HM fractions from Cyclone deposit, within Cyclone West and Cyclone strand. Results indicated that the Cyclone HM suite averaged 41% Zircon, 42% Leucoxene, 11% Ilmenite/Pseudorutile, 3% Rutile and 3% valueless minerals [trash]

In 2008 and 2009 drilling was undertaken in two campaigns, one in 2008 over the Cyclone Deposit in E69/1920 and Wanna East E69/2408. The total number of holes drilled during the period was 677 holes for 29,707m of air core drilling. The majority of was directed towards resource definition drilling over the Cyclone Deposit.

A programme of infill and re-drilling was carried out during 2009 over a selected area of the Cyclone deposit. This drilling highlighted that some low-grade mineralisation was not recognised in the field during the previous scout drilling programme. It is extremely difficult to see the heavy minerals from the top portion of the holes and on re-drilling this was identified in assay results but often still missed in the field. For this reason, the majority of the deposit was re-drilled and infill drilled in early 2009.

Bulk samples were taken over selected areas of the deposit and initially tested in pilot plant studies for heavy mineral separation characteristics and mineral quality. The bulk samples collected weigh approximately 6 t.

The drilling to this stage essentially achieved the following:

Increased the resource tonnes while maintaining HM grade
Reduced the overburden/ore stripping ratio considerably
Reduced the inter-burden within the resource
Increased the geological understanding, thereby increasing the confidence level of resource estimation.

During the reporting period 2009 to 2010, a total of 275 air core holes were drilled for 8,180m of which 119 holes for 3738m was drilled in the Wanna Lakes tenement.

Resource definition drilling over the Cyclone deposit, located in the southern portion of E69/1920 was concluded in 2009 and this allowed a revised resource estimate of 98.4 million t at 2.88% HM to be calculated in late 2009. This was expected to grow further with the inclusion of additional assay data.

Regional drilling was not successful in identifying additional mineralisation within the tenements and further work may be required following review and assessment of the results. The majority of the Wanna Lakes drilling was carried out along strike, north of the Cyclone deposit, to determine if additional mineralised strands occurred along the front of the barrier system. No significant mineralisation was identified during this drilling programme, however re-logging of chip trays of all existing drill holes was conducted in the latter part of the reporting year and this has identified areas where further drilling is needed to thoroughly investigate this prospective zone.

Additional drilling over the Hurricane barrier island [located north of the Cyclone barrier island] intercepted some prospective areas of mineralisation. Geological interpretation over the prospective zones suggests that the ‘Hurricane’ barrier sands are built up against older basement sediments [Officer Basin?] that may have formed sea cliffs [in the Late Eocene] with small sheltered bays along its length. It is therefore unlikely that there will be any significant mineralised strand development in this area. Further drilling over this area will be needed to determine whether this geological interpretation and mineralisation model is correct.

RESOURCE ESTIMATE

Geological Interpretations

Upgraded resource estimates for the Cyclone deposit have been carried out by Widenbar and Associates [September 2010]. Geological interpretations were prepared initially on a set of paper sections with outlines of near shore and beach mineralisation at a 1% HM cut-off. These interpretations were then digitised as Micromine string files. These strings were wireframed to produce solid models.

A second version of the 1% HM interpretation was provided by Diatreme, with expanded limits to the 1% HM outlines. These were separated into the west strand, east strand, nearshore strand and deep strand, which was actually a number of poorly mineralised strands to the east, and typically deeper, than the main mineralised strands. These domains were also wireframed to produce solid models.

A third surface-based interpretation was provided by Diatreme, which represented a variation on the original interpretations and which had additional domains. These strings were wireframed to produce surfaces:

Dune – material between the surface and dune base.
Beach – material between the dune base and beach base.
Surf Zone – material between the beach and surf zone base, although this zone does not always extend across the full width of the section.
Nearshore – material between the surf zone and/or beach and nearshore base, again this zone typically lenses out to the east and becomes smaller to the north.
Deep Beach – material between the nearshore and/or surf zone and/or beach and the deep beach base, this zone lenses out to the west and becomes broader towards the north.

This is referred to as the Surface Model.

A fourth interpretation was provided by Diatreme as a set of 3D wireframes in DXF format. This represents the final and definitive geological interpretation. This interpretation included East and West strands and Nearshore mineralisation domains.

Grade Estimation

Based on a combination of drill hole spacing, variography and mineralisation configuration, a block model setup was chosen.

In order to follow the variable geometry of the various domains, sub-blocks were generated to a minimum of 2m, 5m and 0.5m in the East, North and RL directions respectively.

A series of empty ‘Rock Models’ were generated for each set of wireframe models. These were coded with the mineralisation domains, and were constrained by a topographic surface generated from the drill hole collars.

After reviews of data spacing and variography, the following search and sample number parameters were used for all models.

	Orientation	Orientation		Samples	Samples

Search	East	North	RL	Minimum	Maximum
Pass 1	87.5	250	5	10	20
Pass 2	100	500	5	10	20

The long axis of the search ellipse for the main part of the mineralisation (to the north of 6 810 500 North) was oriented on a bearing of 330°. In the southern parts of the models, the long axis of the search ellipse was oriented north-south.

After the variographic analysis had only produced an incomplete set of useable variograms, it was decided that an Inverse Distance Squared interpolation method would be appropriate. The interpolation was carried out using the mineralisation domains as hard wired controls. Only data points falling within a particular mineralisation domain would be used in the estimation of that domain.

Percentages of HM%, Slimes [Slimes%] and Oversize [OS%] were estimated using Inverse Distance Squared interpolation.

Mineralogy breakdowns were estimated by Nearest Neighbour assignment by domain, with estimates being produced for Zircon, Rutile [> 95% TiO2], Hi-Ti Oxide [70 to 95% TiO2] and Altered Ilmenite [55 to 70% TiO2].

Density data has been provided by Diatreme and a value of 1.7 tonnes per cubic metre [t/cub m] has been used for mineralised material.

The block model was extensively reviewed in section, plan and 3D and compared to the original input data to ensure robust validation of the estimated grades

The Cyclone resource estimate has been classified in the Measured, Indicated and Inferred Resource categories, as defined in the 2004 edition of the Australasian Code for Reporting of Exploration Results, Minerals Resources and Ore Reserves [the JORC Code].

A series of factors has been considered in arriving at this classification, including:

Geological and mineralisation;
Data quality, which was assessed by Diatreme;
Drill hole spacing;
Modelling technique and parameters, and
Estimation properties including search strategy, number of informing composites, average distance of composites.

Following review of the available drill hole data for both assay and mineralogical parameters, and after discussions regarding geological and mineralisation continuity with Diatreme geologists, a resource classification was devised for the final resource model. The criteria used are as follows:

Geological Continuity Diatreme geologists are sufficiently confident in the continuity and volume of the mineralised solids as represented by the domain wireframes, and this is demonstrated and supported by statistical and spatial analysis.
Data Quality
Resource classification is based on information and data provided from the Diatreme Resources database. Descriptions of drilling techniques, survey, sampling/sample preparation, analytical techniques and database management/validation provided by Diatreme indicate that data collection and management is well within industry standards. It is considered that the database represents an accurate record of the drilling undertaken at the project.

Drill Hole Spacing
Drill hole location plots have been used to ensure that local drill spacing conforms to the minimum expected for the resource classification. Spacing varies, but is typically 100m to 250m along strike and 50m across strike in Measured and Indicated areas. Wider spaced drilling areas with section lines at 400m and greater spacing have been classified as Inferred. There is sufficient confidence in the location and continuity of the mineralisation to support the classification proposed.
Modelling Technique A conventional Inverse Distance Squared modelling technique was used. The modelling technique is suitable to the domains being estimated allowing reasonable expectation of mining selectivity across the mineralised domain.
Estimation Properties
Information from the estimation process, including search pass and number of composites used in the search are all used in conjunction with drill spacing to finalise classification domains

Final Model Resource Estimate

The summary resource estimate for the final model is shown:

==> picture [493 x 97] intentionally omitted <==

Zephyr Deposit Resource Estimate

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

Table Notes

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

There is potential for further satellite deposits to be located within close proximity to the Cyclone Deposit, which remains the focus of the Company’s attention. A number of other drill intersections and interpreted accumulations of heavy minerals exist between Cyclone and Zephyr. The Wanna area remains highly prospective and additional drilling is proposed.

HEAVY MINERAL STUDIES

Initial mineralogical studies using QEMScan in 2008 indicated that the Cyclone HM suite averaged 41% Zircon, 42% Leucoxene, 11% Ilmenite/Pseudorutile, 3% Rutile and 3% valueless minerals [trash].

SGS have subsequently used QEMScan to analyse an additional 103 HM samples from throughout the deposit, with the majority of samples taken from the Tertiary Beach Sands which is the main mineralised zone. Additionally, samples from the mineralised overburden and further samples from within the mineralised nearshore sediments directly beneath the beach sands were analysed.

The majority of the mineral within the primary mineralized zone is free of clay coatings and is therefore expected to meet premium specifications. The overburden minerals are mostly coated with clay but are believed to be amenable to acid washing for removal of the coating to produce marketable products.

The QEMSCan analysis uses specific classifications, particularly with reference to the TiO2 and SiO2 content within Leucoxene and other altered ilmenite products. The parameters used to define the various minerals have the following specifications.

Mineral	Previous Classification	Current Classification
Leucoxene	65-95% TiO2	85-95% TiO2
Hi Ti	Not classified (within Leucoxene)	70-85% TiO2
Altered Ilmenite	55-70% TiO2and in summary includedTioxideswithSilica	55-70% TiO2
Ti Oxide with Low Silica	Grouped together with Altered Ilmenite	Ti-Fe oxides with high Ti and lowSi(TiO2 = 75%)
Ti Oxide with High Silica	Grouped together with Altered Ilmenite	Ti-Fe oxides with high Ti and highSi(TiO2 =60%)
Ti Silicates	Grouped together with Altered Ilmenite	All other Ti Silicates

This has resulted in the following heavy mineral mineralogical estimates for the Cyclone deposit by SGS.

Mineral Mass %	Overburden	Tertiary Beach	Tertiary Nearshore	Average
Zircon	24	31	34	31
Rutile [TiO2: >=95%]	10	11	9	11
Leucoxene [TiO2: 85% - <95%]	2	2	1	2
Hi Ti oxide [TiO2: 70 - <85%]	12	15	20	15
Altered ilmenite [TiO2: >55% - <70%]	16	11	13	12
Ilmenite [TiO2: <55%]	5	0	0	1
Other Minerals[Trash]	31	30	23	28

Cyclone deposit commonly contains indurated material within the low grade overburden, but very little within the main body of mineralisation. Observations from air core drill holes indicate the near surface induration is common as calcrete and sandstone 2m to 5m thick with strong iron oxide colouration and some ironstone bands in the uppermost oxidation ones. Within and between the ore horizons there are sparse occurrences of thin [<0.3m] layers of silica cemented sandstone bands. These are pale grey-white or yellow in colour and represent the base of standing water tables where silica saturation has developed.

Preliminary HM grainsize analyses have been undertaken on samples from Cyclone by QEMSCAN and during metallurgical testwork.

HM grainsize in the Cyclone deposit was dominantly 120 microns [um] to 150um diameter, with some drillholes containing HM of 75um to 100um and some others with very coarse HM grainsize averaging 175um to 200um. The majority of HM within the Cyclone deposit is classified as medium to coarse grained.

The average sizes for Zircon and Zircon Composites are consistent between them, and range from 110um to 160um. The smallest variation in the average particle size is observed in the Leucoxene particles with sizes from 150um to 180um. Rutile/Anatase particles follow a similar trend with a range between 150um to 200um, while the reminder of the Ti bearing particles display a wider range in the average particle size through the samples from this area.

PRE-DEVELOPMENT STUDIES

Technical and economic estimates suitable for current financial analysis and valuations of the Cyclone project have been prepared by Diatreme technical staff and consultants as part of the Company’s ongoing project assessment and prefeasibility study.

The current resource estimate being used by Diatreme in its assessment process is 132 million t with an average grade of 2.3% HM [1% cut off grade] containing over 3.1 million tonnes t of HM. Slimes and oversize levels are 4.3% and 5.9% respectively.

A conceptual mining reserve has been developed. Mine pits have been modelled in Micromine to maximise extraction of the high grade sections of the resource and minimise dilution from low grade material around the resource while also controlling overburden ratio. The conceptual mining reserve being used in these studies is 98 million t of ore with a grade of 2.6% HM. A nominal cut off grade of 1.5% HM is used for the mining reserve, but mineralised overburden with a grade exceeding 1% HM is also included.

A 10 year life of mine production schedule using an annual ore mining rate of 9.8 million t has been developed based on the conceptual reserve. A series of mine blocks have been evaluated in Micromine to define higher grade mineralisation with lower overburden ratio for commencement of mining and also to provide details of the variations in grade and overburden ratio as the mine face progresses through the orebody.

A financial evaluation has been completed as part of these studies. The accuracy of cost estimates used in this evaluation are typical for a scoping study and are in the order of +/-30%.

The current project development schedule is targeting mine operation and mineral production to commence in 2014.

Mine Plan

A 10-year mining schedule has been developed based on a mine pit design using two alternative methods of mining. The bulldozer and dozer trap method has a low capital cost and higher operating costs. The bucketwheel excavator and screener hopper method has a high capital cost with significantly lower operating costs.

Preliminary financial modelling showed that both methods were equally attractive for the mining reserve used in this study based on NPV and IRR analysis. The dozer trap method has been selected for evaluation due to its lower capital cost and slightly faster payback of capital.

The conceptual mine pit evaluation has confirmed the ability to mine a reserve grade which is higher than the resource grade by using a 1.5% HM cut-off grade for the reserve. The mine pits evaluated include the core high grade sections of the resource and allow for the affect of dilution from low grade material that would have to be mined in a practical pit design. The overburden has also been modelled to provide realistic annual estimates of the varying quantities of overburden removal required over the 10 year life of the mine.

The mine plan is based on mining the conceptual reserve in 10 years and requires an annual ore mining rate of 9.8 million t.

		Preliminary Minin	Preliminary Minin	g Schedule
Year	Overburden bcm	Ore Mt	HM % of ore	Zircon % of HM	Rutile % of HM	HiTi % of HM	Alt Ilm % of HM
2014	3.2	9.8	2.77	33.1	11.9	17.1	11.6
2015	3.3	9.8	2.76	31.0	12.8	17.3	11.2
2016	3.3	9.8	2.6	33.2	13.5	16.6	8.5
2017	5.7	9.8	2.45	39.3	14.3	12.4	7.6
2018	7.6	9.8	2.30	39.9	14.7	11.5	6
2019	5.9	9.8	2.95	30.2	6.7	20.8	11.1
2020	5.1	9.8	2.80	27.0	7.8	21.6	12.3
2021	5.6	9.8	2.77	26.8	8.9	19.8	11.8
2022	4.1	9.8	2.11	31.3	11.3	15.5	14.2
2023	2.5	9.8	2.47	30.9	12.1	15.5	15.1

Processing

Preliminary mineral processing testwork has demonstrated that normal wet plant [WCP] recoveries can be expected from a standard design. Zircon recoveries will be good and recovery of titanium minerals will be average. The lighter lower grade titanium minerals have shown poor recovery on standard equipment and they are not considered as economic and have not been reported in the resource or mining reserve. Rutile, HiTi, and Altered Ilmenite recoveries have been conservatively estimated as marginally lower than normal. The current estimates of WCP recovery are estimated to be:

Wet Plant Recovery

Zircon 95% Rutile 90% HiTi 85% Altered Ilmenite 80%

A limited amount of testwork has been completed on dry mineral separation processing [MSP] and the MSP recoveries used in this study are based on available information and typical recoveries achieved for similar mineral assemblages in existing mineral separation plants. The MSP recoveries used in this study are estimated to be:

Dry Plant Recovery

Zircon 85% Rutile 85% HiTi 80% Altered Ilmenite 80%

PROPOSED OPERATIONS

The operations include the Western Australia operations for production of heavy mineral concentrate, transport of concentrate from the mine, concentrate storage and shiploading, shipping the concentrate from Australia to China, transport from a Chinese port to the MSP located in China, and production of finished mineral products at the MSP. The details of the design and economic estimates are included in the Predevelopment Studies.

In summary the project operations would include:

Vegetation Removal and Return
Topsoil Removal and Return
Overburden Removal and Return

The overburden will be removed to expose the high grade ore zone for mining. The overburden will be directly returned to the mined out areas as backfill.

Ore Mining and In-pit screening and Pumping

A bulldozer and dozer trap method is proposed to mine the ore. Bulldozers will feed ore to a trap which conveys the ore at a consistent feed rate to a screener-hopper where oversize particles will be removed from the ore and water will be mixed with the ore to form a slurry. Slurry pumps will pump the screened slurry from the dozer trap to the WCP.

Wet Concentrator Plant

The WCP will be centrally located to avoid excessive pumping distances for both feed and tailings. Slurried ore will be pumped from the dozer trap in the mine pit to the WCP where a standard heavy mineral concentration process will be used to produce a heavy mineral concentrate. The WCP process will be a totally wet slurry process and will include screening and several stages of gravity separation to concentrate the valuable heavy minerals. The majority of silica minerals, low grade titanium minerals, and trash minerals will be rejected to tailings from the WCP. A high grade mineral concentrate will be produced containing the valuable zircon and titanium minerals.

Power Supply

A small remote area power station will be required for the project. Based on the diesel powered earthmoving model used in this study the average demand for the site including WCP is estimated to be less than 5MW.

Water Supply

A borefield is planned to be constructed in a paleochannel approximately 25 km to the east of the mine. The estimated water supply requirement for the operations is 240 litres per second. A dedicated generator will supply electricity for operation of the bore pumps and the transfer pumps. A pipeline will be constructed to link the borefield to the mine.

Concentrate Stockpiling

HM concentrate will be pumped from the WCP as slurry and will be dewatered and stockpiled close to the WCP using dewatering cyclones.

Tailings Deposition

Tailings will be pumped from the WCP as high density slurry and deposited as backfill in the mined out pit. The low level of slimes in the ore provides confidence that tailings management will be a conventional procedure.

Tailings Completion and Rehabilitation

Concentrate Transport from the Mine to Port

A combination of road and rail transport will be required to transport the concentrate from the mine to the port. A gravel road will be constructed from the mine to a rail siding at Forrest, a distance of approximately 240 km. This road will be capable of handling multi-trailer road trains with a load carrying capacity up to 250 t. A front end loader will be used to load a train on the siding. The train will haul the concentrate for approximately 1,100 km to Esperance, the closest bulk mineral handling port.

Shipping

The mineral concentrate will be shipped from an Australian port (Esperance or Adelaide) to a port in China where it will be unloaded and transported by road to the MSP.

Mineral Separation Plant

A MSP will be constructed in China close to the port being used for unloading the shipped bulk mineral concentrate. Locating the MSP in China will provide the project with a benefit of lower capital cost and lower operating costs for processing the concentrate to final product. The MSP will be a conventional mineral sand separation process with the addition of a hot acid leach process to improve magnetic and electrostatic separation and provide higher quality products. Finished products would predominantly be sold from the MSP to Chinese customers and any surplus production would be exported.

VALUATION OF PROJECTS

VALUATION METHODOLOGY

The range of values which can be estimated for the mineral interests are based on current market prices for equivalent properties, the geological potential of the properties taking into account the possibility of outlining potential resources, and the probability of present value being derived from recognised areas of mineralisation and production. The valuation also takes account of previous and planned expenditure and commitments, and the expenditures and investment made by other parties to earn, acquire or retain their interests. The range of value estimated for each project allows for the sensitivity of the project values to expected variations in commodity prices and exchange rates, and for the changes in property market value with changing investment expectations, and valuations estimated for acquisition and listing for similar projects in the same geological environment.

Where production is in progress or planned based on quantified reserves and resources, financial analyses derive the net present value for the projects. The valuation of exploration tenements, particularly those without any quantifiable resource, is highly subjective but a number of value indicator methods have been developed and are outlined below. To determine a fair market value for the mineral exploration interests under review, various methods are normally considered including Appraised Value Method, Comparable Transaction Method, Farm-In Commitment Method, and In-situ Mineral Valuation.

Appraised Value Method

The expenditure on a project considered to be effective in terms of advancing the prospectivity of the areas can be used, in conjunction with a subjective prospectivity enhancement multiplier, to derive a value of the project, which takes into account the valuer's judgment of prospectivity and the value of the database. Future planned committed expenditure is also considered as a measure of the estimated investment value of the property, to which a future exploration multiplier can be applied. The appraised value takes into account expenditure of previous explorers and their joint venture partners and also past and current expenditure on the Project.

Comparable Transaction Method

One of the better methods in determining property value is by conducting a comparable transaction analysis with other recent transactions on equivalent properties, preferably within similar geographic and geological environments, with the same exploration potential and style of mineralisation, and at the same stage of development. Such a transaction should be between parties dealing at arms length. The date of the comparable transactions should be as close as possible to the property’s valuation date as the time-related factors can affect the value. These transactions can be through a direct cash payment, a farm-in or option agreement or a combination of the above. Similar transactions can be compared and expressed in a number of ways, for instance, dollars per unit area, price paid per unit of mineral commodity in the ground, or on expenditure commitments.

Comparison of recent transactions of equivalent properties provides one of the better yardsticks to measure the value of the property because it relates the price to that which an informed investor would be willing to pay to obtain a similar property. In those cases where the transactions were not directly comparable, either a premium or a discount to the value is made as deemed appropriate.

In-situ Mineral Valuation

This method consists of valuing the commodity content of a tenement before it is mined. It is subjective, and therefore it is important that the valuation is based on considerable experience. The current market price of the commodity is discounted for factors such as mining losses, complexity of mineralogy, mining conditions, political risk, regional infrastructure support, etc.

OTHER VALUATION CRITERIA

For the valuations the following factors are considered:

All tenements are granted or close to grant. The minimum commitment expenditures and working conditions are subject to the terms of title.
Prospectivity and exploration progress on the Cyclone projects are summarised in this report.
Estimates of previous attributable expenditure on the tenement areas, based on the accumulated information available from past exploration programmes and proposed future expenditure, are considered, as well as the terms of farm-in agreements entered into with joint venture partners.
Comparable project expenditure are assessed in the light of the equivalence to the project under review.
The grouping of tenements and contiguous tenure over the Cyclone project area provides additional advantage for a substantial exploration programme.
The sensitivity of the valuation, particularly relating to the risk factors listed above, is allowed for by estimating a range of valuation for each sector of the project.
A long-term exchange rate of US$0.80 to the Australian dollars is projected.

ESTIMATION RISKS

Estimation risks are to be taken into account in assessing mineral projects, the principal risks being summarised as follows:

Mining and Exploration Risks

The successful exploitation of mineral exploration resources and the design and construction of efficient mining facilities has inherent risks which can be hampered by force majeure circumstances, cost over-runs, inconsistent grades and other unforeseen events. The technical risks attached to resource project development and production is unknown until economic resources are outlined.

General Economic Conditions

Production from mineral resources is subject to international market conditions, exchange rates and normal cost inflation. These matters would be considered if economic resources are outlined.

Environmental Impact Constraints

Exploration and development of any resources will be dependent on the projects meeting environmental guidelines. Development permits are to be approved subject to compliance with the environmental management programme.

Traditional Owner Title and Heritage Site

The effect of various legislation is that mining tenement and exploration permit applications and any existing mining tenements or exploration permit renewal application may be affected by native title negotiation processes.

Land Access

A mining company will be required to seek consent of landholders to obtain access to resources and for exploration. Legislation could restrict access to tenements.

VALUATION OF CYCLONE PROJECT

For use in the valuation of the Cyclone project, the following valuation criteria have been summarised from the recorded data bases relating to the Project and for acquisition agreements, and for a range of valuation for projects which are similar to the Cyclone project. For the January 2011 Valuation estimates a number of comparable project valuations were reviewed based on Independent analyses carried out during 2009-2010. For the current valuation more recent project estimates are recorded, indicating a substantial increase in project valuation, as follows.

COMPARABLE VALUES

Mineral Deposits Limited [MDL]

An Independent Technical Report on the Grande Cote Project in Senegal, West Africa has been prepared on behalf of Mineral Deposits Limited [MDL] in 2007 and updated in 2010.

Grande Cote Project of MDL is located on a coastal mobile dune systems starting about 80 km north-east of Dakar and extending northward for more than 100 km. The mineralised dune system averages 4 km in width. Both the dunes and the underlying marine contain HMs, principally ilmenite with accessory zircon, rutile and leucoxene. Zircon and ilmenite are the main commodities of interest.

Mining will be carried out by dredging a continuous canal [dredge path] through the dunal orebody. The dredge will float in an artificial pond accompanied by a floating spiral concentrator WCP. To the rear of the WCP a tailings stacker will deposit the tailings to fill the mined canal and achieve a final landform. Tailings represents approximately 98% of all material mined by the dredge.

The heavy mineral concentrate [HMC] from the WCP will be pumped to the mineral separation plant where by it will be dewatered and stockpiled for batch processing in the MSP. Based on the drilling to date a mine dredge path for the first 14-years of the operation has been developed and the mineral reserve estimate is Proved and Probable 751 million t at 1.8% HM.

Testwork results indicate that a product mix of three to four zircon products, two ilmenite products and rutile and leucoxene products is feasible. Overall recovery for HM was 82.6% using a combination of spiral concentrators, wet high intensity magnetic separation, wet tables, high tension roll separators, rate earth roll magnetic separators, electrostatic plate separators and induced roll magnetic separators.

Detailed flowsheets, plant layouts and a plant design basis have been developed, based on a nominal feed tonnage [7,000 t/h] from the dredge and a plant feed HM grade of 2.0%. The MSP consists of three separate circuits. Wet Circuit, Zircon Dry Circuit and Ilmenite Dry Circuit.

Ilmenite will be transported in bulk by road to the loading facilities and then by rail to the Port of Dakar while zircon, rutile and leucoxene will be transported in shipping containers by road to the port.

The project generates revenue from the sale of:

		[tpa]
•	Premium Zircon	32,000
•	Intermediate Zircon	25,000
•	Standard Zircon	20,000
•	Secondary Zircon	5,000
•	Chloride/Sulphate Ilmenite	575,000
•	Rutile	6,000
•	Leucoxene	11,000

The average HMC feed processing rates at full production capacity are approximately:

240,000 tpa through the Wet Mill
105,000 tpa through the Dry Mill
680,000 tpa through the Ilmenite Dry Plant.

Total capital costs are US$406 million excluding working and sustaining capital and are spread over years 2011 to 2013. Total operating costs are US$1024.6 million to 2027.

The project is forecast to generate total gross revenue of US$2.687 billion to 2027. Net annual cash flow is positive in 2014 at US$42.3 million.

The total amount of saleable product over the first 15 years of mine life is 9.7 million t. Zircon sales contribute to 56.9% of total gross revenue, ilmenite 37.0%, leucoxene 3.5% and rutile 2.5%.

The capital estimate is based on a single contract for EPCM totalling US$406 million. The level of accuracy of the estimate is +15%. The annual operating costs is totals US$75.3 million.

The Base Date for operating costs 15 April 2010. No contingency has been included on operating costs. Operating costs estimated by MDL have an accuracy of +/-15% and include a significant portion of real incountry costs. The Internal Rate of Return of the project to 2027, assuming 50% debt and 50% equity, is 21%. The Net Present Value [NPV] of the Project to 2027 is US$209 million.

Consolidated Rutile Limited [CRL]

In May 2009 the Unimin Australia Limited [Unimin] offered $0.45 cash for every CRL share. For compulsory acquisition the total cash consideration was to be approximately $133 million for the remaining 80% shareholding in CRL.

CRL is an Australian listed company involved in mineral sand mining. Consolidated Rutile’s operations comprise two operating mines on North Stradbroke Island and a dry mill processing facility in Brisbane. Minerals extracted include rutile, zircon and ilmenite which are sold principally to Asian buyers.

Consolidated Rutile’s extraction methods comprise both dry mining and dredge mining practices. Consoldiated Rule currently has two mines in operation, extracting about 35 million tpa of mineral sands containing about 280,000 t HM.

The total available mineral sand ore reserves of CRL in March 2009 were 679.9 million t at 0.86% HM grade and 5.9 in-situ HM million t.

The recent annual earnings record of CRL was:

Sales revenue Operating expenses Earnings	[$[1000] 125,996 [90,385] 38,780

The Independent Expert assessed the value of the mineral sands operations to be in the range of $154 million to $166 million based on a discounted cash flow analysis with discount rate range of 9% to 11% on a post tax basis, with an operating life of about 20-years.

New Zealand |ron Sands

New Zealand is known to have major coastal sand deposits comprising titanomagnetite, which are somewhat similar to Cyclone Project in the close association of titanium and magnetite. Resources at Waikato North Head total more than 1 billion t averaging 20% iron, with proven reserves of 70 million t grading 33.8% titanomagnetite. This would provide 19 million t of concentrate containing 59% iron. Sand is extracted by bucketwheel excavators and conveyed to gravity circuits and magnetic separators, which provide titanomagnetite concentrates, which is then pumped 18 km as a slurry to Glenbrook mill for processing to steel products by Bluescope Limited. Resources at Taharoa total 625 million t averaging 30% titanomagnetite, with proven reserves of around 10 million t grading 55% titanomagnetite. This would yield about 5 million t of concentrate containing 57.5% iron and 8% titanium dioxide. Taharoa titanomagnetite has been exported directly to the Asian market and reported NZ$53 million revenue for the year to 30 June 2008. An acquisition offer of NZ$258 million for the Taharoa iron sands operation was made in 2008, but withdrawn due to reduced demand for the product and deteriorated economic conditions.

Gunson Resources Limited

The Coburn Zircon Project [CZP] tenements cover 1,200 square kilometre [sq km] of fossil coastline approximately 700 km north of Perth. The CZP is mainly located on granted mining leases with environmental approvals in place. A definitive feasibility study assumes a 17.5 million tpa [mtpa] mining rate [23.5 year mine life], dedicated wet concentrator and mineral separation plant to produce 40,000 tpa zircon, 90,000 tpa ilmenite and 9,000 tpa rutile. Project estimates have been updated in May 2011. Capex is estimated at A$184 million. The estimated NPV is A$301 million at 8% discount rate, a 39% increase on Definitive Feasibility Study estimates reported in November 2010.

Iluka Resources Ltd

Iluka Resources has recorded substantial price rises for zircon, rutile and synthetic rutile prices during 2011. Revised mineral price projections estimates by independent analysts for new Iluka valuations have been included in the current financial analysis for the Cyclone Project. A recent valuation of the Iluka overall mineral sands projects has increased to $6.6 billion from an estimate of $4.4 billion at the end of 2010.

Included in these estimates, the valuation of the Eucla Basin Projects based on the upgraded project price forecasts has been increased to $3.1 billion from $1.95 billion at the end of 2010, which also allows for potential production increases supported by the listed price forecasts.

ECONOMIC ESTIMATE

Because they are near surface and unconsolidated, minerals sands deposits can be simply mined by wet or dry methods.

Dredging is the most commonly used wet mining method in current practice in the Industry. The sand is pumped to the wet concentrator where primary processing of the sands occurs. In the wet concentrator the heavy mineral fraction is recovered by screening and gravity separation. Typically concentrates with between 75% and 99% heavy minerals are produced and the quartz, clay and ‘trash’ components are rejected and returned to the mined out pond.

This concentrate is then sent to the dry plant which upgrades the mineral components using various combinations of magnetic and electrostatic techniques. The dry plant will produce separate concentrates of the individual mineral components of the orebody and products and quantities will vary mainly dependent upon the original mineralogical proportions of the individual orebody and wet and dry plant efficiencies in recovery of individual species. Production from the dry plant can also vary in grade depending upon market requirements.

The infrastructure support for the project includes transportation access, power supply, development facilities, operations support facilities including workshops, handling, ship loading, and personnel accommodation.

All the mined out land would be rehabilitated. As the proposed mining methods would use dry mining and non-chemical concentration methods there would not be any contamination or environmental impacts that could prevent a positive environmental qualification of the projects.

Diatreme engaged independent engineers to undertake Pre-development Studies for the Cyclone project to an accuracy of +30%, Consideration should be given to optimising these processes.

FINANCIAL ANALYSIS – CYCLONE PROJECT

An independent discounted cash flow [DCF] financial model was created to model the financial performance of the project, based on the conceptual mine plan and the assumed capital, operating and revenue parameters, which are summarized below in further detail.

A summary of the project capital cost estimate [without escalation] is as follows [$Australian]:

DESCRIPTION	CAPITAL COST $’000 [Unescalated estimate]
Pre-Feasibility Study (2011)	1,500
DefinitiveFeasibility Study	12,000
LandAcquisitionand Compensation	2,000
ProjectManagement and Start Up Costs	4,000
Airstrip	1,000
Workshop, Offices and CribRooms	2,000
AccommodationCamp	2,000
Mine SiteAccessRoads	500
Mine SiteWater Management Structures	2,000
PowerSupply System	10,000
WaterSupply System	8,000
MobileEquipment andLightVehicles	2,000
WetPlant	80,000
Haul Road	10,000
RailSiding andTrain Loading System	5,000
DryPlant (MSP)	20,000
EPCM	14,900
Contingency (15%)	24,600
TOTAL PROJECT CAPITAL	201,500

The capital estimate provides for the construction of the Wet Plant using Chinese supplied equipment and structures, and a lower cost MSP located in China using Chinese equipment wherever appropriate.

The capital cost estimate is based on 2011 costs. Project feasibility study costs have been scheduled to occur in 2011, definitive feasibility study costs in 2012, and all other project development costs in 2013.

A summary of the estimated annual cash operating costs for the first year of production [2014] is as follows:

DESCRIPTION	ANNUAL CASH OPERATING COST A$’000
Mine SitePersonnel	7,000
Vegetation removal&Return	50
Topsoil Removal&Return	83
Overburden&WasteRemoval&Return	7,912
OreMining, Screening,Pumping	8,820
Mine SitePower	8,088
Mine SiteMaintenance Consumables	1,450
Mess operation& consumables	657
Tails Management and Rehabilitation	500
RoadHaulage andHandling	3,778
RoadMaintenance	900
Loading andRail Transport	8,276
MSP Personnel	2,000
MSP Power, Gas,Maintenance	1,100
MSP AcidLeach Plant	600
RoadTransport (Waste)	21
Shiploading &handling	1,079
Shipping	7,196
Ship unloading &handling	540
Corporate Office (incMarketing)	1,260
Royalty (5% of Austrevenue)	5,278
2014CASH OPERATING COST	66,588

The main parameters which would cause variations in annual operating costs are variations in overburden ratio and ore grade.

Product Prices

Current forecast product pricing has been obtained from several sources including information released by TZMI, Iluka Resources, Intersuisse Holdings, and Ruidow Monthly. Prices used are based on the outlook for prices during the next few years. Market forces are causing increasing prices and different market outlooks are showing significant variations. The general outlook is consistent in that zircon and titanium mineral prices will escalate at a higher rate than operating costs, but this has not been included in TWA’s financial model.

A medium term average term average exchange rate of $1.02 [A$US] is projected to the year 2013. A long term outlook for the exchange rate of $0.80 [A$/$US] has been used from 2014 to convert forecast product prices into Australian dollars. The forecast annual product prices until the first year of production are shown in the following table.

Product price outlook until the first year of production [$US]

PRODUCT	2011	2012	2013	2014
Zircon	1,900	2,000	2,200	1,800
Rutile	900	950	950	800
HiTi	320	330	340	350
Altered Ilmenite	160	170	180	190

Revenue

The study cash flow model estimated revenue for the first year of production is as follows. Intermediate product stocks have not been considered in this study and all mineral produced in a year is assumed to be sold in that year.

Estimated Revenue for 2014 A$’000

Zircon	163,252
Rutile	24,712
HiTi	13,889
AlteredIlmenite	4,837
TOTAL	206,690

Financial Results

The financial analysis indicates that a good return on investment is indicated for the project and ongoing predevelopment work is planned to improve the accuracy of parameters used in the financial model.

A summary of the cash flow financial model base case follows. The cost and revenue values presented here are averaged and rounded to the nearest million dollars. A standard tax rate of 30% is used at this stage, without further resolution of proposed tax and royalty adjustments and the income from offshore production.

Capital investment including predevelopment $201.5 million
• Average annual sales revenue $187 million • Average annual cash operating costs $69 million • Average annual sustaining capital cost $2 million • Average annual tax payable $28 million • Average annual net operating cashflow after tax $88 million

The project net cashflow after tax is estimated to be $679 million and the initial capital investment is paid back in approximately 1.8 years of operation.

A rudimentary sensitivity analysis has been performed on the DCF financial analysis to obtain an understanding of the impact of variations to estimates of significant parameters used in the model. Predevelopment Studies, with an accuracy of 30%, are not normally intended to be of sufficient accuracy to provide a detailed assessment of the economic viability of a project and a sensitivity analysis is therefore useful for understanding how changes to capital cost, operating costs, and revenue could impact the financial result.

The table below shows the impact on NPV, IRR and Payback Period from variations to the estimates for capital cost, operating cost, and revenue. The range of variations shown is -10% to +10%. Discount rates of 5%, 7.5% and 10% have been used in the financial analysis.

Sensitivity Analysis

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Base Case Economics

The Base Case financial results generated by this DCF financial model for the Cyclone Project are as follows:

Total net cashflow after tax over the life of the project $679 million
• Payback period 1.85 years • IRR 45% • NPV [10.0%] $ 266 million

Note : no escalation of costs or revenue has been applied to the financial results.

CYCLONE PROJECT- RISKS ASSESSMENT

Risk Area	Likelihood	Consequence	Risk Rating	Comment
Loss of right to mine or explore	Unlikely	Minor	Low	Production areas within granted exploration tenure.
Lack of resources and reserves	Unlikely	Minor	Low	Production forecasts covered by measured resource, no geotechnical problems
Loss of production capacity	Unlikely	Minor	Low	Proven technology, equipment and methods.
Loss of transportation capacity	Unlikely	Minor	Low	Privately held, well maintained haul road. Existing rail and port facilities.
Environmental impacts	Unlikely	Minor	Low	All operations have approved practices and compliance procedures; good record of environmental practice.
Lack of Water supply	Possible	Moderate	Low	Target aquifer identified, water supplies to be delineated.
Safety and health hazards	Unlikely	Minor	Low	Substantial compliance activity will be practiced.
Operating costs exceed budget	Possible	Moderate	Medium	Production will be under established pricing arrangements; moderate short-term risk of fuel price increases.
Capital costs exceed budget	Possible	Moderate	Medium	Capital expenditure programmes yet to be detailed.
Product market and revenue below budget	Possible	Moderate	Medium	Market forecasts prepared by a number of independent market experts and generally in linewithcurrent trends.
Lack of expansion and development	Possible	Minor	Low	Exploration targets to be developed but not included in current valuation.

This assessment indicates that technical risks associated with the Cyclone Project have an overall low to medium risk. Because the overall plan is to continue to expand the database, the level of these risks, should be contained.

A summary of the results of the assessment is that for each of the areas a risk considered, the likelihood of occurrence is low, the consequences will be allowed for and their risk rating is low to medium.

SUMMARY VALUATION OF DIATREME MINERAL SANDS WESTERN AUSTRALIAN PROJECTS

The following valuation criteria are summarised for the Diatreme Projects:

Tenements Six granted exploration licenses 1374 sq km Five exploration license applications 3010 sq km Resources Cyclone 132 million t of Measured, Indicated and Inferred Resources at 2.3% HM 98 million t of Mineable Resources at 2.6% HM Zephyr 106 million t of Inferred Resource, at 1.5% HM. Expenditure: Previous Attributable $5.1 million for exploration and investigation. Feasibility Investment $ 14.9 million allowing for exploration, investigations and feasibility studies. Appraised Value - $8 million to $20 million allowing an enhancement factor of plus 3 to provide for the results and costs of investigation to date, planned expenditure and the defined prospectivity of the exploration areas. Comparative Project Values: $141 million to $301 million for similar mineral sand projects with equivalent products and output, but at advanced stages of feasibility or production as summarized above. Financial Analysis after tax Base Case $266 million [Net Present Value] Sensitivity range $208 million to $463 million.

Based on the above parameters, the following current value range is suggested for the Cyclone Project:

Low : $270 million indicated by the base case after-tax value and allowing for Pre-development Study bases and medium risk levels. High : $330 million to provide for suggested revenue improvement, resource increase and lower risk levels, and for current comparative project values. Most Likely : $300 million.

It is to be noted that this valuation would be adjusted as technical and economic criteria are further confirmed and the project studies proceed to acceptable feasibility study levels.

QUALIFICATIONS

Terence Willsteed & Associates is a Mining Engineering Consultancy, which has had considerable experience in the valuation of mining interests and investments, and in advising both prospective purchasers and sellers of such interests and investments. The persons responsible for this report are:

T V Willsteed BE[MIN]HONS, BA, FAUSIMM, MSME, MAICD

Consulting Mining Engineer

Mr Willsteed is the Principal of Terence Willsteed & Associates. He has had extensive experience in the mining industry over 50 years, the last 40 years of which have been as a consultant to the industry. He holds a First Class Mine Managers Certificate of Competency, and has been extensively involved in mineral project evaluation and management.

Heath Sandercock BE[MIN]HONS, FAUSIMM MSME

Consulting Mining Engineer

Mr Sandercock is the Principal of Sandercock & Associates. He has had over 35 years experience in the mining industry, the last 10 years of which have been as a consultant to the industry. He has been involved in development and management of a range of base metal and precious commodity projects in Australasia, the Pacific, Russia and South America.

DECLARATION

This report is designed to assist the directors and shareholders to assess the technical viability and the value of the Cyclone Project and was not prepared for any other purpose. The valuation does not provide an opinion as to share or corporate value of Diatreme but values the exploration and mine development projects only.

The statements and opinions contained in this report are given in good faith but, in the preparation of this report, TWA has relied substantially on information provided by the Directors and Management of Diatreme. We do not have reason to doubt the information so provided.

Neither the whole nor any part of this report, nor any references thereto, may be included in or with or attached to any document, circular, resolution, letter or statement without the prior written consent of TWA.

DISCLAIMER OF INTERESTS

At the date of this report, TWA and Terence Willsteed do not have, nor have had any relationship with Diatreme.

TWA has no relevant interest in, nor any interest in the acquisition or disposal of any securities or assets of Diatreme. TWA have no pecuniary or other interest that could be regarded as being capable of affecting its ability to give an unbiased opinion in relation to the valuation of the mineral interest of Diatreme.

Neither TWA nor T V Willsteed has received or may receive any pecuniary or other benefits, whether direct or indirect or in connection with the preparing of this report other than normal consultancy fees based on fee time at normal professional rates plus out-of-pocket expenses.

Yours faithfully,

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T V WILLSTEED Principal

REFERENCES

Annual Technical Report, 2/7/2009 to 1/7/2010,Diatreme Resources Limited.

Cyclone Deposit internal Diatreme ongoing assessments, December 2010.

Production of zircon product sampled [30 July 2010] , Downer EDI Mineral Technology.

Rougher & Scavenger Spiral Concentrator Performance Testwork on ROM sample, [8 November 2010], CPG Mineral Technologies.

Scoping Study – Overburden Processing [21 October 2010], Robbins Metallurgical.

Diatreme Resources ASX Reports: 23 September 2009, 3 March, 9 June and 5 October 2010.

Cyclone Mineral Sands Resource Estimate, September 2010, Widenbar and Associates.

Zircon Market, 2010 Iluka.

Mineral Sands Briefing Paper, August 2010, Iluka.

Price Forecast 2010, Interssuisse.

Mineral Sand Markets, 2010 TZMI/Iluka.

Australian Zircon Sand prices, [September 2010], Ruidow Zircon Industry Research Centre.

Risk Assessment, AS/NZS 4360:1999.

Mineral Deposits Limited Grande Cote Project Technical Report, 29 July 2010, AMC Consultants [Canada] for Canadian Securities Administration SEDAR lodgement.

Consolidated Rutile Limited Independent Experts Report, Ernst & Young, Iluka ASX Notice, 27 May 2009.

Coburn Zircon Project Gunson Resources Limited – Resource Capital Research, 17 November 2010.

Gunson Resources Coburn Zircon Mineral Sands Project, 20 May 2011.

2Qll Commodities Quarterly – Credit Suisse, 11 April 2011.

Mineral Sands Pricing Outcomes – Iluka Resources Limited, 6 June 2011.

Iluka Resources Limited Research Report – Bell Potter Securities, 7 June 2011.