DIATREME RESOURCES LIMITED — Capital/Financing Update 2011

Feb 23, 2011

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DIATREME RESOURCES LIMITED

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 manager@diatreme.com.au

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ASX : DRX

Company Announcement Office Australian Stock Exchange Limited Level 4, 20 Bridge Street Sydney NSW 2000

24 February 2011

LETTER TO SHAREHOLDERS – NON-RENOUNCEABLE RIGHTS ISSUE

Diatreme Resources Limited is pleased to confirm that it has today despatched the attached letter to all shareholders.

Yours sincerely Diatreme Resources Limited

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Leni Stanley Company Secretary

DIATREME RESOURCES LIMITED

ABN: 33 061 267 061

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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 manager@diatreme.com.au

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ASX : DRX

23 February 2011

Dear Shareholder

Non-renounceable rights issue – notice to shareholders

This letter is to notify you that on 23 February 2011 Diatreme Resources Limited ACN 061 267 061 ( Diatreme or the Company ) announced that it is seeking to raise up to approximately $7.1 million by undertaking a pro-rata non-renounceable entitlement issue of approximately 88,649,128 new fully paid ordinary shares ( New Shares ) and approximately 88,649,128 free attaching options ( New Options ) with an offer ratio of 1 (one) New Share and 1 (one) New Option for every 3 (three) shares held on the record date, at an offer price of $0.08 per New Share ( Offer ).

All shareholders are encouraged to consider the terms of the Offer and, if eligible, to participate in the Offer.

Shareholder approval is not required for Diatreme to make the Offer.

Purpose of the Offer

The majority of the funds raised will be used as follows:

• 1 Cyclone Project

• conduct flora, fauna surveys, environmental studies and hydrological drilling for water supplies;

• commence mining lease applications and licensing processes for infrastructure requirements inclusive of airstrip, water pipelines and transport corridors;

• conduct cultural heritage surveys;

• commence further detailed metallurgical testwork, along with mining and processing plant design;

• following completion of the prefeasibility study commence full feasibility studies to mine;

• conduct exploration in the vicinity of the Cyclone Project to establish further satellite resources;

• 2 Other Projects

• conduct further regional exploration for mineral sands; and

• progress Diatreme’s metalliferous projects through joint venture arrangements and/or targeted exploration over the next two years. The Company is currently in discussions with third parties regarding potential joint ventures for its Clermont and Tick Hill projects, however, no binding agreements have been reached.

Offer Fully Underwritten

The Offer is fully underwritten by Intersuisse Limited ( Intersuisse ) and Diatreme has agreed to pay a Management Fee of 2% and an Underwriting Fee of 4% to Intersuisse.

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DIATREME RESOURCES LIMITED

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Prospectus and Offer details

Details of the Offer are contained in a prospectus ( Prospectus ) which has been lodged with ASX and is available at www.asx.com.au (by searching Diatreme’s ASX code “DRX”) and at www.diatreme.com.au. The Offer is being made to Eligible Shareholders (as described below) and the Company will be despatching the Prospectus and Entitlement and Acceptance Form to Eligible Shareholders in accordance with the timetable below.

The Offer is non-renounceable, which means that rights to participate in the Offer cannot be sold and therefore to the extent that shareholders entitled to participate in the Offer do not take up their entitlement, they will not receive any value in respect of those entitlements not taken up. Eligible Shareholders may also apply for additional New Shares over and above their entitlement (see below).

Application for official quotation by ASX of the New Shares and New Options issued pursuant to the Offer will be made within seven days after the date of the Prospectus.

The New Shares will rank equally in all respects from the date of allotment with existing fully paid ordinary shares.

Fractional entitlements will be rounded up to the nearest whole New Share and New Option.

Additional shares

Eligible Shareholders who apply for their full entitlement may apply for additional New Shares and New Options in excess of their entitlement. Any additional New Shares and New Options will be allotted at the same time as other New Shares and New Options. Eligible Shareholders may apply for additional New Shares and New Options by completing the Entitlement and Acceptance Form that will accompany the Prospectus. There is no guarantee that shareholders will be successful in being allocated any additional New Shares and New Options.

Timetable

The New Shares will be offered in accordance with the following timetable:

Event	Date
Diatreme announces Offer	23 February 2011
Diatreme sends notice to security holders containing the information required by Appendix 3B (contained in this letter)	24 February 2011
Existing Diatreme shares quoted on an “ex” basis	28 February 2011
Record Date to determine Offer entitlements (7:00 pm Sydney time)	4 March 2011
Offer opens	10 March 2011
Prospectus dispatched to eligible shareholders	10 March 2011
Offer closes (5:00 pm Brisbane time)	31 March 2011
Deferred settlement trading begins	1 April 2011
Notice of under subscriptions to ASX	5 April 2011
Allotment of New Shares and New Options and dispatch of holding statements	8 April 2011
Commencement of trading on a normal settlement basis	11 April 2011

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DIATREME RESOURCES LIMITED

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All dates are subject to change and accordingly are indicative only. The Company reserves the right, subject to the Corporations Act 2001 (Cth) ( Act ) and the ASX Listing Rules and the consent of Intersuisse, to amend the indicative timetable and in particular, to extend the closing date or to withdraw the Offer without prior notice. Any extension of the closing date will have a consequential effect on the date of allotment of New Shares and New Options.

Shares

The effect of the Offer on the shares issued by the Company is set out below.

	Number
Shares on issue before Offer	265,947,384
New Shares to be issued under Prospectus*	88,649,128
Total shares on issue after completion of Offer*	354,596,512

*subject to rounding

Options

The effect of the Offer on the options issued by the Company is set out below.

	Number
Options exercisable at 47 cents expiring 30 June 2011	16,800,000
Options exercisable at 47 cents expiring 31 July 2011	3,000,000
Total Options on issue before Offer	19,800,000
New Options to be issued under Prospectus*	88,649,128
Total Options on issue after completion of the Offer*	108,449,128

*subject to rounding

The terms of the existing options do not entitle the optionholders to participate in the Offer unless they exercise their options and become shareholders by the record date. Diatreme has today sent notices to the optionholders of the Offer.

Eligible Shareholders

Shareholders registered at 7.00 pm (Sydney time) on 4 March 2011 ( Record Date ) as holders of shares with a registered address in Australia or New Zealand are entitled to participate in the Offer ( Eligible Shareholders ).

Ineligible Shareholders

All shareholders who are not Eligible Shareholders are ineligible shareholders ( Ineligible Shareholders ). Ineligible Shareholders will not be entitled to participate in the Offer.

The Company has determined that it would be unreasonable on this occasion to extend the Offer to Ineligible Shareholders having regard to the number of securities held by Ineligible Shareholders and the costs of complying with the legal and regulatory requirements that would apply to an offer of securities to Ineligible Shareholders in various jurisdictions. We trust you understand the Company’s position on this matter.

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DIATREME RESOURCES LIMITED

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Subject to ASIC's approval for the purposes of section 615 of the Corporations Act, the Company will issue to a nominee the New Shares (and attaching New Options) that could otherwise have been applied for by Ineligible Shareholders had they been Eligible Shareholders. The sale of those New Shares and New Options, held by a nominee, will be arranged and the net proceeds (if any) will be directed to the Company for distribution to the Ineligible Shareholders for whose benefit the New Shares and New Options have been sold in proportion to the number of New Shares they would have been entitled to apply for under the Entitlement Offer had they been Eligible Shareholders (after deducting the issue price of the New Shares, brokerage commission and other expenses).

The ability to sell New Shares and New Options on ASX, and the price at which New Shares and New Options can be sold, will depend on various factors, including market conditions. To the maximum extent permitted by law, neither the Company nor the Nominee will be liable for a failure to sell New Shares or New Options or to sell New Shares or New Options at any particular price.

Further Details

You should consider the Prospectus in deciding whether to participate in the Offer. Anyone who wants to participate in the Offer will need to complete the personalised Entitlement and Acceptance Form that will accompany the Prospectus.

The directors of the Company urge you to read the Prospectus carefully and seek advice from your professional advisers if you have any questions.

This notice is to inform you of the Offer. You are not required to do anything in response to this letter.

Yours faithfully

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Anthony J Fawdon Executive Chairman/CEO

Company contact details: Tel : +61 7 3832 5666 Fax : +61 7 3832 5300 Email : manager@diatreme.com.au

Important Information

Neither the Offer nor the New Shares have been, nor will be registered under the Securities Act of 1933 (United States) or the securities laws of any State or other jurisdiction of the United States and is not being made in the United States, or to, or for the account or benefit of “US Persons” (as defined in the Securities Act of 1933 ). Without limitation, neither the Prospectus nor the Entitlement and Acceptance Form may be sent to investors in the United States or other distributed in the United States.

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