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DIATREME RESOURCES LIMITED ABN 33 061 267 061

ENTITLEMENT OFFER PROSPECTUS

For a non-renounceable entitlement offer of one new share and one free attaching option for every three shares held by eligible shareholders registered at 7:00 pm (Sydney time) on 4 March 2011 at an issue price of $0.08 per share to raise approximately $7.1 million.

The free attaching options are exercisable at 15 cents each on or before 30 September 2013.

There is also an invitation to apply for Additional Shares.

The Entitlement Offer closes at 5:00pm (Brisbane time) on 31 March 2011.

Manager to the Entitlement Offer Underwriter Intersuisse Limited ACN 002 918 247 (AFS Licence 246827)

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Important notice

This is an important document and should be read in its entirety. If you do not understand its contents, you should consult your stockbroker, lawyer, accountant or other professional adviser before making an investment decision. You should have regard to all publicly available information concerning the Company.

The securities offered under this Prospectus should be considered as speculative.

IMPORTANT INFORMATION ................................................................................................................ 2 CHAIRMAN'S LETTER.......................................................................................................................... 5 COMPANY DIRECTORY ....................................................................................................................... 7 DETAILS OF THE ENTITLEMENT OFFER ........................................................................................... 8 HOW CAN YOU PARTICIPATE IN THE ENTITLEMENT OFFER? ..................................................... 10 PURPOSE AND EFFECT OF THE ENTITLEMENT OFFER ................................................................ 11 RIGHTS AND LIABILITIES ATTACHING TO THE NEW SHARES AND THE NEW OPTIONS .......... 13 RISKS .................................................................................................................................................. 15 ADDITIONAL INFORMATION ............................................................................................................. 17 GLOSSARY ......................................................................................................................................... 25

IMPORTANT INFORMATION

Investors should read this document in its entirety and, if in doubt, should consult their professional advisers before deciding whether to apply for New Shares offered under this Prospectus.

This Prospectus is dated 23 February 2011 and a copy of this Prospectus was lodged with ASIC on that date. Neither ASIC nor ASX takes any responsibility for the contents of this Prospectus or the merits of the investment to which this Prospectus relates.

The expiry date of this Prospectus is the date that is 13 months after the date of this Prospectus ( Expiry Date ). No New Shares or New Options will be allotted or issued on the basis of this Prospectus after the Expiry Date.

Electronic Prospectus

A copy of this Prospectus may be viewed online at the website of the Company at www.diatreme.com.au. No offer is made under the electronic form of this prospectus. Eligible Shareholders will be mailed a paper copy of this Prospectus with a personalised Entitlement and Acceptance Form.

The Corporations Act prohibits any person passing onto another person the Entitlement and Acceptance Form unless it is attached to the hard copy of the Prospectus or it accompanies the complete and unaltered version of the Prospectus.

Not investment advice

You should read this document carefully before you make a decision to apply for New Shares. An investment in the Company has risks, which you should consider before making a decision to invest. The New Shares offered under this Prospectus should be considered speculative.

This Prospectus is an offer of continuously quoted securities and options to acquire continuously quoted securities, and has been prepared in accordance with section 713 of the Corporations Act. It does not contain the same level of disclosure as an initial public offering prospectus. In preparing this Prospectus regard has been had to the fact that the Company is a disclosing entity for the purposes of the Corporations Act and certain information about the Company may reasonably be expected to be known to investors and professional advisers whom potential investors may consult.

The information in the Prospectus has been prepared without taking into account your investment objectives, financial circumstances, taxation circumstances or particular needs. Before deciding whether to apply for New Shares you should consider whether they are a suitable investment for you in light of your own investment objectives, taxation circumstances and financial circumstances and having regard to the merits or risks involved. If, after reading this Prospectus, you have any questions about the Offer, you should contact your stockbroker, lawyer, accountant or other professional advisor, before making an investment decision.

Disclaimer

No person is authorised to give any information or make any representation in connection with the Entitlement Offer that is not contained in this Prospectus. Any information or representation not

contained in this Prospectus may not be relied on and has not been authorised by the Company or the Directors. Neither the Company nor any other person warrants the future performance of the Company or any return on any investment made under this Prospectus.

Forward-looking statements

This Prospectus contains forward-looking statements that, despite being based on the Company's current expectations about future events, are subject to known and unknown risks, many of which are outside the control of the Company and the Directors. These known and unknown risks could cause actual results, performance or achievements to differ materially from future results, performance or achievements expressed or implied by forward-looking statements in this Prospectus. These risks include the risks outlined on pages 15 to 17. Forward-looking statements include those containing such words as "anticipate", "estimate", "opportunity", "plan", "intend", "aim", "seek", "believe", "should", "will", "may" or similar expressions.

No overseas offering

This Prospectus is being sent to all Eligible Shareholders. This Prospectus does not constitute an offer in any jurisdiction in which, or to any person to whom, it would not be lawful to make such an offer, and no action has been taken to register shares of the Company or otherwise permit a public offering of the shares in any jurisdiction outside of Australia and New Zealand. Return of the Entitlement and Acceptance Form will be taken by the Company to constitute a representation by you that there has been no breach of any such laws. The distribution of this document outside Australia and New Zealand may be restricted by law. In particular, this document or any copy of it must not be taken into or distributed or released to any US person or to any person acting for the account or benefit of a US person (within the meaning of the U.S. Securities Act of 1933). Persons who come into possession of this document should seek advice on and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of applicable securities laws.

Taxation

There will be tax implications associated with participating in the Entitlement Offer and receiving New Shares and New Options. The Company considers that it is not appropriate to give advice regarding the tax consequences of subscribing for New Shares and New Options under this document or the subsequent disposal of any such New Shares or New Options. You should consult your professional tax adviser in connection with the Entitlement Offer.

Privacy

The Company collects information about each applicant provided on an Entitlement and Acceptance Form for the purposes of processing the application and, if the application is successful, to administer the applicant‟s shareholding in the Company.

By submitting an Entitlement and Acceptance Form, you will be providing personal information to the Company (directly or through the share registry). The Company collects, holds and will use that information to assess your application. The Company may disclose your personal information for purposes related to your shareholding in the Company, including to its share registry, agents, contractors and third party service providers, and to ASX and regulatory bodies. To make a request for access to your personal information held by (or on behalf of) the Company, please contact the Company through its share registry.

Exposure Period

The Corporations Act prohibits Diatreme from processing applications in the seven day period after the date the Prospectus is lodged with ASIC. The period is known as the Exposure Period. This Exposure Period may be extended by the ASIC by up to seven days. The purpose of the Exposure Period is to enable this Prospectus to be examined by market participants before the raising of funds. Applications received during the Exposure Period will not be accepted until the Exposure Period has expired and no preference will be given to persons who lodge their Applications during the Exposure Period.

Governing law

The Prospectus and the contracts that arise on acceptance by the Company of applications are governed by the law of Queensland and each applicant submits to the exclusive jurisdiction of the courts of Queensland.

Glossary

A glossary of terms used in this Prospectus is included at the back of this Prospectus (page 25). In this Prospectus, references to „$‟ or cents are to Australian currency, unless otherwise stated.

KEY INFORMATION

The key information for the Entitlement Offer is summarised below.

The key information for the Entitlement Offer is summarised below.
Entitlement	One New Share and one free attaching New Option for every three Existing Shares held at the Record Date
Offer Price per New Share	$0.08
Shares on issue as at the date of this Prospectus	265,947,384
Existing Options on issue as at the date of this Prospectus *	19,800,000 (unlisted)
Maximum number of New Shares offered under this Prospectus*	88,649,128 New Shares (subject to rounding)
Total number of New Shares upon all New Shares being issued	354,596,512 (subject to rounding)
Total number of New Options upon all New Shares and all New Options being issued **	88,649,128 (subject to rounding)
Amount to be raised if all New Shares on offer are issued	Approximately $7.1 million

*As noted in the table, the Company has 19,800,000 unlisted options. Those option holders will, subject to the terms of their options, be entitled to exercise their options and will be able to participate in the Entitlement Offer in respect of Shares issued on exercise of those Options that are issued before the Record Date. The table assumes that no options are exercised before the Record Date.

** It is the intention of the Company to apply to the ASX to have the New Options listed on the ASX.

SUMMARY OF IMPORTANT DATES

The following are key dates relating to the Entitlement Offer that you need to be aware of:

ACTIVITY	DAY	DATE
Announcement of the Entitlement Offer	Wednesday	23 February 2011
Lodgment of Appendix 3B at ASX	Wednesday	23 February 2011
Lodgment of Prospectus at ASIC and ASX	Wednesday	23 February 2011
Despatch letter to Option holders advising of the Entitlement Offer	Wednesday	23 February 2011
Despatch letter to Shareholders containing the information in Appendix 3B	Thursday	24 February 2011
Shares quoted on „ex‟ basis	Monday	28 February 2011
Record Date for identifying Eligible Shareholders entitled to participate in the Entitlement Offer (7:00 pm Sydney time)	Friday	4 March 2011
Despatch Prospectus to Eligible Shareholders and announce despatch to ASX	Thursday	10 March 2011
Closing Date of Entitlement Offer (5:00 pm Brisbane time)	Thursday	31 March 2011
New Shares quoted on a deferred settlement basis	Friday	1 April 2011
New Options quoted on a deferred settlement basis	Friday	1 April 2011
ASX notified of any under subscriptions	Tuesday	5 April 2011
Despatch of New Share and New Option holding statements	Friday	8 April 2011
Trading of New Shares and New Options expected to commence	Tuesday	11 April 2011

The above dates are indicative only. The Company, reserves the right to vary the above dates without notice, including extending the Closing Date of the Entitlement Offer without notice, subject to the Corporations Act, the ASX Listing Rules and the agreement of the Underwriter.

CHAIRMAN’S LETTER

Dear Shareholder

On 23 February 2011, the Company announced its intention to raise capital through an entitlement offer.

On behalf of the Company I am pleased to now invite you to participate in the continuing growth of Diatreme Resources Limited ( Diatreme ) through a non-renounceable entitlements issue of New Shares, together with one free attaching New Option for every New Share subscribed for under the Entitlement Offer, to raise approximately $7.1 million.

The Issue Price of $0.08 represents a discount of 12% to the volume weighted average price of Shares of $0.091 over the period 17 January 2011 to 17 February 2011.

The majority of the proceeds from the Entitlement Offer 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 metalliferous projects, however, no binding agreements have been reached.

Independent Valuation of the Cyclone Project

On 18 January 2011 Diatreme released the Terrence Willsteed and Associates Independent Technical Review and Valuation Report in respect of the Cyclone Project. The report was prepared in accordance with the Valmin Code and included all data gathered up to 17 January 2011.

The report gave the following conclusions:

a likely valuation for the Cyclone Project of $156 million;
an average annual net operating cashflow after tax of $54 million per annum;
an estimated capital expenditure of $201.5 million for the Cyclone Project; and
a 10 year mine life with payback period of 3.5 years.

Opportunity for Shareholders

With the rapidly developing Chinese, Indian and South East Asian uses and applications for zircon in the industrial and building sectors, it is predicted by various industry expert groups that zircon production worldwide will not meet the demand in consumption over the medium to long term and that zircon will increase in price accordingly.

Diatreme is one of the few opportunities to invest in ASX listed companies operating within the zircon sector of the mineral sands industry. Also on a world scale there are very few sizeable zircon rich heavy mineral deposits in the pipeline progressing towards production over the next five years, which will add to the constriction of zircon supply.

As an Eligible Shareholder, you now have the opportunity to partake in an attractive offer and increase your holdings in the Company. This is at a time with zircon in burgeoning demand, for the growth of smelting, ceramics and general manufacturing industrial sector, in China and Asia generally. This puts Diatreme in a positive position with the potential to become an established supplier of zircon, at a time when industry experts are forecasting much higher prices of zircon product.

All Eligible Shareholders registered as at 7:00 pm (Sydney time) on 4 March 2011 will be entitled to participate in the Entitlement Offer.

The Entitlement Offer is fully underwritten by Intersuisse Limited.

Details of the Entitlement Offer and how to participate are set out in this Prospectus.

The Entitlement Offer closes at 5:00 pm (Brisbane time) on 31 March 2011. To participate, you need to ensure that your completed Entitlement and Acceptance Form and payment of your application money is received by the Company before this time.

The board commends the Entitlement Offer to you and looks forward to your continued support of the Company.

Yours sincerely

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Anthony Fawdon Executive Chairman/CEO

COMPANY DIRECTORY

Directors

Manager to the Entitlement Offer and Underwriter

Anthony Fawdon Executive Chairman David Hall Executive Director Intersuisse Limited ACN 002 918 247 George White Non-Exec Director (AFS Licence 246827) Andrew Tsang Non-Exec Director Level 37, 530 Collins Street Melbourne VIC 3000 Company Secretary Telephone (03) 9629 8288 Ms Leni Stanley www.intersuisse.com.au email: [email protected] Registered Office Share Registry*

Level 2 87 Wickham Terrace Link Market Services Limited Spring Hill QLD 4000 Level 15, 324 Queen St Brisbane QLD 4000 Telephone: (07) 3832 5666 Telephone: 1300 544 474 Facsimile: (07) 3832 5300 Solicitors Email: [email protected] Carter Newell Website: www.diatreme.com.au Level 13, 215 Adelaide Street Brisbane QLD 4000

Auditor*

BDO Audit (QLD) Pty Ltd Level 18, 300 Queen Street Brisbane QLD 4000

This party has been included for information purposes only. It has not been involved in the preparation of this Prospectus.

DETAILS OF THE ENTITLEMENT OFFER

Offer of New Shares and New Options

The Company is offering each Eligible Shareholder the right to participate in a non-renounceable rights issue of one New Share and one free attaching New Option for every three New Shares held at 7:00 pm (Sydney time) on 4 March 2011 ( Record Date ) at an issue price of $0.08 per New Share.

The New Options are exercisable at $0.15 each on or before 30 September 2013.

Where fractions arise in the calculation of an Entitlement, they will be rounded up to the nearest whole number of New Shares and New Options.

The Entitlement Offer is non-renounceable. This means the rights of each Eligible Shareholder to subscribe for his or her Entitlement may not be transferred to another person and there will be no trading of Entitlements on ASX.

The Entitlement Offer seeks to raise approximately $7.1 million before costs. The purpose of the Entitlement Offer and the use of funds raised are set out on page 11 of this Prospectus.

Based on the capital structure of the Company (and assuming no existing Options are exercised prior to the Record Date), the maximum number of New Shares to be issued pursuant to the Entitlement Offer is 88,649,128 and the maximum number of New Options to be issued pursuant to the Entitlement Offer is 88,649,128.

The Company has 19,800,000 Options on issue as at the date of this Prospectus that are exercisable at $0.47 per Option. The holders of those Options will, subject to the terms of their Options, be entitled to participate in the Entitlement Offer in respect of Shares issued on exercise of those Options that are issued prior to the Record Date.

Your Entitlement is set out in the personalised Entitlement and Acceptance Form that accompanies this Prospectus.

Eligible Shareholders who take up their Entitlement in full will not have their percentage shareholding in the Company diluted by the Entitlement Offer. The percentage shareholding of Eligible Shareholders who do not take up their Entitlement in full will be diluted.

The terms of the New Shares and the New Options are set out on pages 13 to 14 of this Prospectus.

The New Shares will, from the date of issue, rank equally in all respects with other Shares.

Underwriting

The Entitlement Offer is fully underwritten by Intersuisse Limited. Any Entitlements that are not subscribed to by Eligible Shareholders will lapse. Subject to allocations of Applications for Additional Shares and the Underwriting Agreement, the Underwriter will subscribe for the Shortfall.

A summary of the key terms of the Underwriting Agreement is provided on pages 19 to 22 of this Prospectus.

Sub-underwriting with an associate of a Director of Diatreme

Mr Andrew Tsang is a Director of the Company. The Underwriter has advised the Company that it has entered into a sub-underwriting agreement with Ms Lie You who is an associate of Mr Tsang. Ms You is sub-underwriting 50% of the Entitlement Offer.

Details of the sub-underwriting agreement with Ms You are set out on page 22 of this Prospectus.

A table showing the effect of the sub-underwriting on the interests of Mr Tsang and his associates in the Company is found on page 13 of this Prospectus.

Additional Shares

Any part of your Entitlement not taken up will form part of the Shortfall. If you apply for your full Entitlement you may also apply for more New Shares than the number shown on your Entitlement and Acceptance Form. To do this please complete the Additional Shares section in the Entitlement and Acceptance Form. Applications for Additional Shares may be considered if a Shortfall exists. Additional Shares will be issued to Eligible Shareholders at the discretion of the Company and the Underwriter. There is no guarantee that you will receive Additional Shares. Additional Shares will not be issued to Shareholders where to do so would involve a breach of the ASX Listing Rules or any applicable law.

Issue of New Shares and New Options

New Shares and New Options will be issued as soon as practicable after the Closing Date. Where the number of New Shares issued is less than the number applied for, or where no allotment is made, surplus application money will be refunded (without interest) to the Applicant as soon as practicable after the Closing Date.

ASX listing

Application for official quotation by ASX of the New Shares and New Options offered under this Prospectus will be made within seven days after the date of this Prospectus. If approval is not obtained from ASX to list the New Shares and New Options within three months after the date of this Prospectus, the Company will not issue any New Shares or New Options and will repay all application money for the New Shares (without interest).

The fact that ASX may grant official quotation to the New Shares or New Options is not to be taken in any way as an indication of the merits of the Company or the New Shares and New Options now offered for subscription.

Overseas Shareholders

This Prospectus does not constitute an offer of New Shares or New Options in any jurisdiction where, or to any person to whom, it would not be lawful to issue the Prospectus or make the Entitlement Offer.

The Entitlement Offer is not being extended to any Shareholder, as at the Record Date, whose registered address is not situated in Australia or New Zealand. The Company has determined that it would be unreasonable to make the Entitlement Offer of New Shares and New Options to Ineligible Shareholders having regard to the small number of such Shareholders, and the cost of complying with applicable regulations in jurisdictions outside Australia and New Zealand.

Securities are offered to Eligible Shareholders in New Zealand in reliance on the Securities Act (Overseas Companies) Exemption Notice 2001 (New Zealand).

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 will be directed (if any) to the Company.

The proceeds of sale (if any) will be distributed 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.

Withdrawal and early close of offer

Diatreme may in consultation with the Underwriter, withdraw or close the Entitlement Offer before the Closing Date, if permitted by the Corporations Act and the ASX Listing Rules. If the Entitlement Offer is withdrawn, any application money received will be refunded (without interest).

HOW CAN YOU PARTICIPATE IN THE ENTITLEMENT OFFER

What you may do

Your Entitlement is shown on the attached Entitlement and Acceptance Form.

As an Eligible Shareholders you may:

accept your Entitlement in full;
accept your Entitlement in full and apply for Additional Shares in excess of your entitlement;
accept part of your Entitlement; or
do nothing.

If you are in doubt as to the course you should follow, you should consult your stockbroker, accountant, solicitor or other professional adviser.

Accept your Entitlement in full

If you decide to take up all of your Entitlement, complete and return the Entitlement and Acceptance Form with payment by cheque, bank draft or money order. The Entitlement and Acceptance Form once lodged cannot be withdrawn. The Entitlement and Acceptance Form does not need to be signed to be binding.

Cheques, money orders or bank drafts should be made payable to " Diatreme Resources Limited – Share Offer Account " and crossed " Not Negotiable ".

All payments must be in Australian currency. The amount payable on Application will not be deemed to have been received until the Company receives clear funds.

Alternatively, you can pay your application money by Bpay® by following the instructions set out on the personalised Entitlement and Acceptance Form (which includes the biller code and your unique customer reference number). If you take no action you will not be taken to have applied for your Entitlement.

If you are paying by Bpay® you do not need to lodge your Entitlement and Acceptance Form with the share registry. However, by making a payment through Bpay®, you will be deemed to:

irrevocably accept the Entitlement Offer;
acknowledge that you have read and understood the terms of the Entitlement Offer as set out in this Prospectus;
apply to subscribe for New Shares and New Options in accordance with the terms of the Entitlement Offer; and
acknowledge that, other than as required by law, there is no right to withdraw or revoke your application once it is made.

Your Bpay® payment must be received no later than 5:00pm (Brisbane time) on the Closing Date.

Applicants should be aware that their own financial institutions may implement earlier cut-off times for electronic payments and these should be taken into consideration when making the payment.

Accept your Entitlement in full and apply for Additional Shares

If you wish to apply for Additional Shares, follow the instructions on the Entitlement and Acceptance Form and specify the total number of New Shares you wish to apply for. See page 11 for further details.

Accept part of your Entitlement

If you wish to take up part of your Entitlement, complete the Entitlement and Acceptance Form for the number of New Shares you wish to take up and follow the other steps set out above.

Do nothing

If you are an Eligible Shareholder and do not wish to apply for all or part of your Entitlement under this Entitlement Offer you are not obliged to do anything. As the Entitlement Offer is non-renounceable your Entitlement is not transferrable.

Any part of your Entitlement not accepted by you will form part of the Shortfall, which may be taken up as part of the Additional Shares offer or by the Underwriter under the Underwriting Agreement.

The number of existing Shares you hold at the Record Date and the rights attached to those existing Shares will not be affected if you choose not to accept any of your Entitlement. However, your percentage shareholding in the Company will be diluted. The extent to which your shareholding is diluted will depend on the number of New Shares issued under the Entitlement Offer.

Entitlement and Acceptance Forms

Completed Entitlement and Acceptance Forms with the application money may be mailed to the postal address, or delivered by hand to the delivery address, set out below:

Postal delivery	Hand delivery
Diatreme Resources Limited C/- Link Market Services Limited Locked Bag 3415 Brisbane QLD 4001	Diatreme Resources Limited C/- Link Market Services Limited Level 15, 324 Queen Street Brisbane QLD 4000

If you have any questions on how to complete the Entitlement and Acceptance Form or take up your Entitlement, you should contact the Diatreme Resources Limited Offer Information Line on 1300 857 499 (within Australia) or +61 2 8280 7753 (from outside Australia) between 8:30am and 5:30pm (Sydney time) Monday to Friday before the Closing Date.

All acceptances must be received by 5:00pm (Brisbane time) on 31 March 2011, being the Closing Date of the Entitlement Offer.

The Directors may at their discretion issue New Shares and New Options in response to Entitlement and Acceptance Forms received after the above date and time, but are under no obligation to do so.

If the Entitlement and Acceptance Form is not completed correctly, the Company in its absolute discretion can reject it or treat it as valid. The Company‟s decision as to whether to accept or reject an Entitlement and Acceptance Form or how to interpret an incorrectly completed Entitlement and Acceptance Form is final.

PURPOSE AND EFFECT OF THE ENTITLEMENT OFFER

The Company is a diversified mineral explorer, aiming to become a mine operator through development of its Cyclone Heavy Mineral Deposit located on the margin of the Eucla Basin within Western Australia. The Company is continuing to conduct mineral sands drilling programs over its granted tenement holdings (7,360 sq km) in the zircon rich Eucla Basin, seeking to replicate its early success at Cyclone.

Purpose

The purpose of the Entitlement Offer is to raise up to approximately $7.1 million. The Company intends to apply the funds raised from the Entitlement Offer as follows:

Application of funds	Amount
Cyclone heavymineral sand deposit -prefeasibilitystudyand exploration	$4.00M
Eucla Basin heavymineral sandproject –general exploration	$0.60M
Other heavymineral sand and metalliferousprojects –general exploration	$0.40M
Workingcapital	$1.62M
Costs of Entitlement Offer	$0.48M
Total	$7.1M

Funds raised from the exercise of the New Options will be applied towards the Company‟s working capital requirements at the time of exercise.

Effect on the capital structure – Shares

On completion of the Entitlement Offer the issued share capital of the Company will be:

Shares	No. of Shares
Shares on issue as at the date of this Prospectus	265,947,384
New Shares offered pursuant to this Prospectus **	88,649,128*
Total number of Shares on issue on completion of the Entitlement Offer	354,596,512*

*At the date of this Prospectus there are 19,800,000 existing options on issue. If any existing options are exercised then the number of New Shares on issue will increase. In the unlikely event that all of the existing option holders were to exercise their existing options and be registered as Shareholders on or before the Record Date then an additional 19,800,000 Shares would be on issue at the Record Date,- resulting in a total of 285,747,384 Shares. This would increase the number of New Shares on offer under this Prospectus to 95,249,128 and increase the total number of Shares on issue following completion of the Entitlement Offer to 380,996,512 (assuming full subscription).

** Subject to rounding

Effect on the capital structure – Options

On completion of the Entitlement Offer, the issued Options of the Company will be:

Options	No. of Options	Exercise Price	Expiry date

Unlisted Options	16,800,000	$0.47	30 June 2011
Unlisted Options	3,000,000	$0.47	31 July 2011
New Options offered pursuant to this Prospectus **	88,649,128*	$0.15	30 September 2013
Total number of Options on completion of the Entitlement Offer**	108,449,128*

* If any of the existing options are exercised then the number of New Shares and attaching New Options that will be offered under this Prospectus will increase in the manner set out in the note to the previous table.

** Subject to rounding

Effect of the Entitlement Offer on the control of the Company

As at the date of the Prospectus, Mr Andrew Tsang and his associates hold approximately 15.55% of the Shares on issue. If all Shareholders take up all of their Entitlements under the Entitlement Offer, the percentage interest in the Company held by Mr Tsang and his associates would not change and there would be no effect on the control of the Company.

However, if all Eligible Shareholders do not take up all of their Entitlements then there will be a Shortfall. As noted on page 8 of this Prospectus, an associate of Mr Tsang has sub-underwritten 50% of any Shortfall. Set out below are examples of the impact of a Shortfall on the interests of Mr Tsang and his associates in Diatreme. These are not indicative of the likely take up by Shareholders of their Entitlements.


	Interests of Mr Tsang and his associates after completion of the Issue*
Shortfall %

		Resulting % of issued capital
	No. of Shares


80	90,585,808	25.5
60	81,720,895	23.0
40	72,855,983	20.5

*This table assumes that Mr Tsang and his associates take up their Entitlements in full.

RIGHTS AND LIABILITIES ATTACHING TO THE NEW SHARES AND THE NEW OPTIONS

The following is a summary of the rights and liabilities attaching to the New Shares and the New Options to be issued under this Prospectus. The summary is not exhaustive and does not constitute a definitive statement of the rights and liabilities of Shareholders or option holders.

Full details of the rights and liabilities attaching to New Shares are set out in the Company‟s constitution, a copy of which is available for inspection free of charge at the Company‟s registered office during normal business hours.

Rights attaching to New Shares

The New Shares will be issued fully paid and will rank equally with the exiting Shares.

A summary of rights and liabilities attaching to New Shares follows:

1. Notice of meetings

Each Shareholder will be entitled to receive notice of, and to attend and vote at, general meetings of the Company and to receive all notices, accounts and other documents required to be furnished to Shareholders under the Constitution and the Corporations Act.

2. Voting

Subject to any rights and restrictions for the time being attached to any class of New Shares, at a meeting of Shareholders, each Shareholder entitled to vote may vote in person or by proxy or attorney or, being a corporation, by representative duly authorised under the Corporations Act, and has one vote on a show of hands and one vote for each Share on a poll.

A poll may be demanded by the chairman of a general meeting, by not fewer than five Shareholders who are present in person or by proxy, attorney or representative and who are entitled to vote, or by any one or more Shareholders holding not less than 5% of the total voting rights of all members having the right to vote.

3. Dividends

The profits of the Company that the Directors may from time to time determine to distribute by way of dividend are payable equally on all Shares.

4. Winding up

If the Company is wound up, the liquidator may, with the authority of a special resolution, divide among the Shareholder in kind, the whole or any part of the property of the Company and may, for that purpose, set a value as the liquidator considers fair upon the property to be so divided and may determine how the division is to be carried out between the Shareholders. The liquidator may, with the authority of a special resolution, vest the whole or any part of the property of the Company in trustees on trust for the benefit of Shareholders as the liquidators thinks fit.

If approved by special resolution, any division of the property of the Company may be otherwise than in accordance with the legal rights of the members of the Company.

5. Transfer of New Shares

Subject to the Constitution and the Corporations Act, Shareholders may transfer any or all of their Shares by any computerized or electronic system established or recognised by the ASX Listing Rules or by an instrument in writing or any other form approved by the Directors.

The Directors may refuse to register a transfer of shares only if the ASX Listing Rules permit, and must refuse to register a transfer of shares if the ASX Listing Rules require the Company to do so. Subject to the ASX Listing Rules, the Company may not prevent, delay or interfere with the generation of, or the registration of, a paper based transfer of shares in registrable form.

Rights attaching to New Options

The terms and conditions of the New Options are as follows:

No money is payable for the issue of the New Options.
Each New Option will entitle the holder to subscribe for one fully paid ordinary share in the capital of the Company for an exercise price of $0.15.
The New Options expire at 5:00 pm (Brisbane time) on 30 September 2013.
The New Options are exercisable by the delivery to the registered office of the Company of a notice in writing stating the intention of the option holder to exercise all or a specified number of New Options, accompanied by the relevant Option Certificate (if any) and a cheque made payable to the Company for the exercise price of each New Option.
The New Options may only be exercised during the months of April and September in each year commencing April 2011 and thereafter until 2013 when they may be exercised at any time from 1 April 2013 to 30 September 2013, the expiry date.
On being granted, application will be made to list the New Options on ASX.
An exercise of only some New Options will not affect the rights of the option holder under the balance of the New Options held by him or her.
Upon the valid exercise of a New Option the Company must issue the resultant Share and dispatch a holding statement within the time required by the ASX Listing Rules.
New Shares issued on an exercise of New Options will rank, from the date of issue, equally with existing Shares of the Company in all respects.
The Company will, in accordance with the ASX Listing Rules and subject to any restrictions by ASX, apply to have New Shares issued on exercise of New Options listed for official quotation.
The New Options will not give any right to participate in dividends until New Shares are issued on the exercise of the relevant New Options.
The holder of New Options will be permitted to participate in any new pro-rata issue of securities of the Company subject to the prior exercise of the New Options, in which case the option holder will be notified by the Company of the proposed pro-rata issue in accordance with the requirements of the ASX Listing Rules and afforded that period to exercise the New Options.
If the Company, while a New Option remains unexercised, reorganises its issued capital (including a consolidation of capital, subdivision of capital, return of capital, reduction of capital by cancellation of paid up capital that is lost or not represented by available assets where no securities are cancelled, a pro rata cancellation of capital or in any other case), the number or exercise price (or both) of New Options to which the option holder is entitled will be adjusted in accordance with ASX Listing Rule 7.22.

RISKS

The business activities of the Company are subject to various risks that may affect the future performance of the Company and the value of the New Shares and the New Options. The New Shares and New Options offered under this Prospectus are considered speculative.

A number of the material risk factors are set out below. This list is not exhaustive and prospective Applicants should consider the risks below, together with information contained elsewhere in this Prospectus and consult their professional advisers before deciding whether to apply for New Shares.

Speculative nature of investment

Any potential investor should be aware that subscribing for shares involves risks. An investment in the Company involves risks that may be higher than the risks associated with an investment in other companies.

The New Shares issued under the Entitlement Offer carry no guarantee with respect to the payment of dividends, return of capital or their market value.

Financing

The Company‟s ability to take advantage of opportunities may depend in part on its ability to raise additional funds. There can be no assurance that any such funding will be available to the Company on favourable terms or at all.

Mining and exploration risk

The business of exploration, mineral development and production by its nature is subject to risk. The success of the Company will depend on the successful development of resources and successful management of operations. There can be no assurance that the Company‟s attempts to develop and exploit its exploration activities will be successful.

Environmental regulation and risk

The Company‟s operations are subject to state and federal laws and regulation regarding environmental hazards. These laws and regulations set various standards regulating certain aspects of health and environmental quality and provide for penalties and other liabilities for the violation of such standards and establish, in certain circumstances, obligations to remediate current and former facilities and locations where operations are or were conducted. Significant liability could be imposed on the Company for damages, clean up costs, or penalties in the event of certain discharges into the environment, environmental damage caused by previous owners of property acquired by the Company or its subsidiaries, or non compliance with environmental laws or regulations.

The Company proposes to minimise these risks by conducting its activities in an environmentally responsible manner, in accordance with applicable laws and regulations and where possible, by carrying appropriate insurance coverage.

Native title risk

The effect of the Native Title Act 1993 (Commonwealth) is that existing and new tenements held by the Company may be affected by native title claims and procedures.

The Company has not undertaken the historical, legal or anthropological research and investigations at the date of this Prospectus that would be required to form an opinion as to whether any existing or future claim for native title could be upheld over a particular parcel of land covered by a tenement.

There is a potential risk that a determination could be made that native title exists in relation to land the subject of a tenement held or to be held by the Company or its subsidiaries, which may affect the operation of the Company‟s business and development activities. If it is determined that native title does exist or a native title claim is registered, the Company may need to comply with procedures under the Native Title Act 1993 (Commonwealth) in order to carry out its operations or to be granted any additional rights such as a mining lease. Such procedures may take considerable time, involve the negotiation of significant agreements, may involve a requirement to negotiate for access rights, and require the payment of compensation to those persons holding or claiming native title in the land that is the subject of a tenement. The administration and determination of native title issues may have a material adverse effect on the Company and its business.

Aboriginal Cultural Heritage

Aboriginal cultural heritage legislation imposes duties of care that require persons, including the Company, to take all reasonable and practical measures to avoid damaging or destroying Aboriginal cultural heritage. The Company is required to develop suitable internal procedures to discharge its duty of care in order to avoid exposure to substantial financial penalties if its activities damage items of cultural significance. Under this legislation, indigenous people can exercise control over land with respect to cultural heritage without necessarily having established the connection element (as required under native title law). This creates a potential risk that the tenement holder may have to deal with several indigenous individuals or corporations, where no native title has been established, to identify and manage cultural heritage issues. This could result in tenement holders requiring lengthy lead times to manage cultural heritage for their projects.

Transport risks

The Company's Cyclone Project is located in a remote location in Western Australia. The success of the Company's Cyclone Project is dependent on Diatreme being able to operate the project in an economically viable and efficient manner. Any use of the land surrounding the Cyclone Project in a way that affects Diatreme's ability to efficiently transport and supply to customers will adversely affect the profitability and performance of the Company.

Tenements

The Company‟s exploration activities are dependent upon the grant and maintenance of appropriate licences, permits, resource consents, access arrangements and regulatory authorities (authorisations), which may not be granted or may be withdrawn or made subject to limitations.

The Company‟s failure to meet its work or expenditure obligations under its authorisations may lead to dilution of its interest in, or the loss of, such authorisations.

Application risk

The Company has a number of applications for exploration permits. Although the Company is not aware of any reason why the applications will not be granted, the grant involves the exercise of administrative functions (including discretion), which are beyond the control of the Company.

Any failure of these applications to be granted may have a material adverse effect on the ability of the Company to explore for minerals on the areas in those applications.

Minerals resource rent tax

On 2 July 2010, the federal government announced that a minerals resource rent tax ( MRRT ) will be introduced on 1 July 2012. The MRRT is proposed to apply to the assessable profit based on the value of the resource extracted in all iron ore and coal projects.

The final form of the MRRT may change. Draft legislation introducing the tax has not been released. The extent to which the Company will be affected will depend upon the final legislative form of the MRRT, and its application to future projects that may be developed by the Company.

Any other changes to the current rate of company income tax or mineral royalties in the jurisdictions where the Company operates will impact on the potential profitability and performance of the Company.

Reliance on key management and employees

The responsibility of overseeing the day-to-day operations and the strategic management of the Company is dependent on the Company‟s ability to attract and retain highly qualified management, scientific, technical and other personnel. There can be no assurance that there will be no detrimental impact on the Company if one or more of its employees cease employment.

Dividends

The Directors cannot give any assurance concerning the extent and timing of future dividends (if any) as this will depend on the future profitability and financial position of the Company as well as other economic factors. It is not envisaged that dividends will be paid on the Company‟s increased capital in the foreseeable future.

Economic risks

General economic conditions, movements in interest and inflation rates and currency exchange rates may have an adverse effect on the Company‟s activities, as well as on its ability to fund those activities. The mining industry is competitive and there is no assurance that, even if significant quantities of a mineral resource are discovered, a profitable market will exist for the sale of the same.

Further, share market conditions may affect the value of the Company‟s quoted securities regardless of the Company‟s operating performance.

ADDITIONAL INFORMATION

Continuous disclosure obligations

This Prospectus is issued by the Company in accordance with the special content rules under section 713 of the Corporations Act. That provision allows the issue of a more concise prospectus in relation to the offer of securities in a class that have been continuously quoted on ASX for the three months before the date of the prospectus or that are options to acquire continuously quoted securities.

The Company is a disclosing entity for the purposes of the Corporations Act and is therefore subject to regular reporting and disclosure obligations under the Corporations Act and the ASX Listing Rules.

These obligations require the Company to notify ASX continuously of information about specific matters and events as they arise for the purpose of ASX making the information available to investors. In accordance with section 713 of the Corporations Act, provided that the Company has otherwise complied with its continuous disclosure obligations under the Corporations Act and the ASX Listing Rules, it is not necessary to include general information in this Prospectus.

For the purposes of satisfying section 713 of the Corporations Act a prospectus must also incorporate information concerning an offer if such information:

(a) has been excluded from a continuous disclosure notice in accordance with the ASX Listing Rules; and
(b) is information that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:
(i) the assets and liabilities, financial position and performance, profit and losses and prospects of the body; and
(ii) the rights and liabilities attaching to the securities being offered.

The prospectus must contain this information only to the extent to which it is reasonable for investors and their professional advisers to expect to find such information in the prospectus.

The Company, as a disclosing entity under the Corporations Act states that:

(a) it is subject to regular reporting and disclosure obligations;
(b) copies of documents lodged with ASIC in relation to the Company may be obtained from, or inspected at, the offices of ASIC; and
(c) any person may request, and the Company will provide free of charge, a copy of each of the following documents during the application period of this Prospectus:
(i) the financial statements of the Company for the year ended 31 December 2009, being the most recent annual financial report of the Company lodged with ASIC before the lodgement of this Prospectus with ASIC;
(ii) any continuous disclosure notices given by the Company since the lodgement of the annual financial report referred to in (i) above and before lodgement of this Prospectus. Continuous disclosure notices given by the Company since the lodgement of the annual financial report to the date of this Prospectus are listed below.

Given that the Company is a disclosing entity it may be required to release information to the market during the period between the date of this Prospectus and the Closing Date. Prospective investors are advised to refer to the Company‟s website at www.diatreme.com.au for updated releases about specified events or matters affecting the Company.

ASX announcements

The following announcements (continuous disclosure notices) have been made by the Company to ASX since 29 April 2010 being the date of lodgement of the 2009 Annual Report incorporating the Company‟s annual financial statements for the year ended 31 December 2009.

Document Date	Headline
04/05/2010	SAREIC Presentation Adelaide
09/06/2010	Cyclone Deposit Mineralogy Update
25/06/2010	Appendix 3B Placement Shares
25/06/2010	S 708A Notice - Placement Shares
25/06/2010	Change of Directors‟ interest notices – Tsang, Fawdon, Hall & White
28/06/2010	Change of Director`s Interest Notice - White (replacement document)
30/07/2010	Completion of Capital Raising
30/07/2010	Release of Escrowed Securities
30/07/2010	APP 5B Quarterly Cash Flow Report 30 June 2010
30/07/2010	QuarterlyActivities Report 30 June 2010
06/08/2010	Appendix 3B Part Placement Shares
06/08/2010	Section 708A Notice
10/08/2010	TradingHalt
10/08/2010	MOU signed for Cyclone Project
12/08/2010	Appendix 3B Balance of Placement
12/08/2010	Section 708A Notice
13/08/2010	Top20 Securityholders
18/08/2010	Half Year Accounts
26/08/2010	Change of Director`s Interest Notice - D Hall
27/08/2010	Change of Director`s Interest Notice - A Tsang
22/09/2010	MOU with Image Resources over Cyclone Project
05/10/2010	Cyclone Deposit Resource Update
11/10/2010	Zephyr Deposit – Inferred HM Resource
13/10/2010	Broker Presentation – Cyclone Deposit
25/10/2010	Appendix 5B Quarterly Cash Flow Report
27/10/2010	QuarterlyActivities Report 30 September 2010
28/10/2010	TradingHalt
01/11/2010	Completion of Capital Raising
01/11/2010	Appendix 3B
01/11/2010	Section 708A Notice
02/11/2010	Change of Director‟s Interest Notice – A Tsang
03/11/2010	Change in Substantial Holding - Doral
09/11/2010	Top 20 Security holders as at 8 November 2010
09/11/2010	Becominga substantial holder
12/11/2010	Notice of General Meeting of Shareholders
19/11/2010	Cyclone Project BaoTi Group Update
22/11/2010	Replacement Proxy Letter to All Shareholders
23/11/2010	Cyclone HM Deposit Bulk Sample Results

Document Date	Headline
23/11/2010	Amended Cyclone HM Deposit Bulk Sample Results
29/11/2010	Director retires
01/12/2010	Final Director‟s Interest Notice
08/12/2010	Melbourne Min Sands Conference Presentation
17/12/2010	Results of General Meeting
21/12/2010	Appendix 3B – Issue of Shares
21/12/2010	Section 708A Notice – Share Issue
21/12/2010	App 3Y Change in Director Interest Notice - Tsang
23/12/2010	Top 20 Security Holders
29/12/2010	Securities Trading Policy
18/01/2011	Independent Report on Cyclone Deposit
28/01/2011	Appendix 5B Quarterly Cash Flow Report
31/01/2011	Quarterly Activities Report 31 December 2010
03/02/2011	Cyclone Project Update
17/02/2011	Cyclone Project Update
18/02/2011	Trading Halt
22/02/2011	Suspension from Official Quotation

Any person may request, and the Company will provide free of charge, a copy of any of the above announcements during the application period of this Prospectus.

Underwriting agreement

Diatreme has entered into an underwriting agreement with Intersuisse Limited ( Underwriting Agreement ). The Underwriting Agreement results in the Entitlement Offer being fully underwritten.

Diatreme has agreed to pay the Underwriter an underwriting fee of 4.00% of the underwritten amount (being the underwritten securities multiplied by Issue Price) ( Underwriting Fee ) and a management fee of 2.00% of the total funds raised under the Offer ( Management Fee ) as consideration for the underwriting obligation undertaken by the Underwriter under the Underwriting Agreement.

The Underwriting Agreement provides that the Underwriter may, by notice, terminate its obligations under the Underwriting Agreement on the happening of any of the following events:

if the Underwriter becomes aware of any information in respect of the Offer, the Prospectus or any related document which, in the reasonable opinion of the Underwriter is untrue, incorrect or misleading or deceptive in a material way;
if the Underwriter becomes aware of any omission or non-disclosure or any item not previously made public which the Underwriter reasonably considers to be material;
any default by Diatreme in the performance of its material obligations;
other than a restructure agreed with the Underwriter or in the ordinary course of business there is any material adverse change in the condition, management or financial position, business, operations or prospects of Diatreme including:
(a) any one or more of the provisions of the constituent documents of the Company or a subsidiary being altered in a material way;
(b) the Company or a subsidiary resolving to reduce its share capital in any way;
(c) the Company or a subsidiary disposing, or agreeing to dispose of the whole, or a substantial part, of its business or any of its property, unless agreed to in advance by the Underwriter in writing;
(d) the Company or a Subsidiary charging, or agreeing to charge, any part of its business or property, unless agreed to in advance by the Underwriter in writing; or

(e) any change in the current board of directors or senior management of the Company without the prior written consent of the Underwriter;
there is a material contravention by the Company of any provision of its constitution or of any Australian legislation relating to the securities industry, taxation or ASX Listing Rules;
there is any new outbreak or escalation of hostilities or new acts of terrorism involving Australia, Japan, the United Kingdom, the United States of America, Afghanistan, Iraq, Iran, North Korea, Canada, Indonesia, any member of the Organisation of Petroleum Exporting Countries or any other country of the Middle East, People's Republic of China, Russia or other countries of the Commonwealth of Independent States which, in the reasonable opinion of the Underwriter, would have a material adverse effect on the success of the Offer;
if any of the following indices close below the following values:
(a) 4,649 in the case of the Australian All Ordinaries Index (Iress Code “XAO”);
(b) 5,581 in the case of the S&P ASX 200 Resources (Iress Code “XJR”)
(c) 6,418 in the case of the S&P ASX Small Resources (Iress Code “XSR”);
(d) 11,462 in the case of the Dow Jones Industrial Average,

on two or more days (consecutive or non-consecutive) on which the relevant exchange or exchanges is or are open after the date of the Underwriting Agreement;

If the Company‟s share price, as stated on the ASX, falls below $0.072 (7.2 cents) on any two days (consecutive or non consecutive);
any person acquires a relevant interest (as defined in the Corporations Act) in more than 20% of the issued share capital of the Company (excepting the existing owners of the Company at the date of this Agreement already holding more than 20% of share capital of the Company) or as otherwise contemplated by the Prospectus;
any law or being introduced into the Australian commonwealth, state or territory parliament or any prospective law or other measures being passed or becoming effective, having the effect of restricting capital issues or company profits or imposing any excess profits, tax or any other measure which, in the reasonable opinion of the Underwriter, is likely to have an material adverse effect on the success of the Offer, the underwriting of the Offer, or the financial position or prospects of the Company;
any law or budget being introduced into the Australian commonwealth, state or territory parliament or any prospective law or other measure being passed or becoming effective, or there being adopted any measures or policy by any government authority effecting any major change in monetary or fiscal policy that is likely to have a material effect on the success of the Offer;
at any time, excepting any event required to restructure or structure the Company with the prior written approval of the Underwriter to achieve agreed objectives to facilitate the Offer:
(a) the Company or any of its subsidiaries are wound up, or suffer any act whereby any of them might be wound up;
(b) a meeting is called to consider a resolution for the winding up of a Company or a subsidiary;
(c) proceedings are commenced against the Company or a subsidiary which would materially impact upon or inhibit the relevant company carrying on its business; or
(d) the Company or a subsidiary otherwise becomes an externally administered body corporate (within the meaning of the Corporations Act);
a Company or a subsidiary fails to comply with a statutory demand in accordance with the Corporations Act or any proceedings are commenced or threatened against a Company or a subsidiary for its winding up;

an increase in the interest rate for the issue of Australian Government or semi-Government securities by one half of one percent or more above that prevailing on the date of the Underwriting Agreement;
any material breach of any warranty given by the Company to the Underwriter;
ASIC makes any stop order or gives notice of an intention to hold a hearing in relation to the Prospectus under the Corporations Act or any other relevant and applicable laws in Australia;
unconditional approval or conditional approval (provided such conditions would not, in the reasonable opinion of the Underwriter, have a material adverse effect on the success of the Offer or the Underwriting of the Offer) by the ASX for quotation is refused, or is not granted prior to 5pm on a date which is within 7 days after the closing date for the Offer or such approval is granted but then withdrawn;
a court or ASIC concludes that the Prospectus fails to comply with the Corporations Act or any other applicable laws;
a supplementary or replacement document in relation to the Offer is required to be lodged under section 719 of the Corporations Act;
in the opinion of the Underwriter, the Company has not taken all necessary steps to satisfactorily complete the Due Diligence Programme and a review of any associated documentation;
in the reasonable opinion of the Underwriter, the Company has not taken all necessary steps to satisfactorily complete ongoing due diligence;
in the sole opinion of the Underwriter, there has been any breach of the Corporations Act or any other relevant and applicable law which may effect the Company‟s share price, which includes but is not limited to market misconduct and/or other prohibited conduct as described in Chapter 7 of the Corporations Act;
the ASX does not indicate in writing that it will grant quotation (subject only to customary listing conditions);
Andrew Tsang, and/or associated parties fail to sub-underwrite 44,324,664 New Shares or fail to subscribe for and pay its portion of the shortfall shares in accordance with a a sub-underwriting agreement with the Underwriter;
in the sole opinion of the Underwriter the issue and allotment of New Shares and New Options (or either of them) to Andrew Tsang and/or associated parties would breach the provisions of Chapter 6 of the Corporations Act or any other relevant provisions of the Corporations Act without further waivers, consents, shareholder approval or other relevant action given to or taken by the Company or a subsidiary of the Company.

The Underwriter may only terminate in respect of matters listed in items 1, 2, 3 or 5 after notice is provided by the Underwriter to the Company and such notice will have no effect if, in the sole discretion of the Underwriter, such event is capable of remedy by the Company within five business days after notice is given.

Diatreme agrees to indemnity the Underwriter, Phillip Capital and their related bodies corporate, their directors, employees and agents ( Indemnified Parties ) against each claim, judgment, damage, loss, expense (including all reasonable legal costs and disbursements) or liability incurred or suffered by or brought or made or recovered against the Indemnified Parties in connection with or resulting from:

a) the Company failing to perform or observe any of its obligations under the Underwriting Agreement or any other obligations binding on it in relation to the Offer;
b) any representations or warranty made or given by the Company under the Underwriting Agreement proving to have been untrue or incorrect in any material respect;
c) any misleading or deceptive statement in or any omission in connection with the Offer or the issue of the New Shares and the New Options;

d) any misleading or deceptive statement in or any omission from any announcement, advertisement or publicity in connection with the Offer or the issue of the New Shares and the New Option:
(i) made or distributed by Company; or
(ii) made or distributed by the Underwriter with the prior consent of the Company; and
e) any non-compliance by the Company with the Corporations Act or any other relevant and applicable law, the ASX Listing Rules or any other legal obligation in connection with the Offer or the issue of the New Shares and New Options.

The Company releases the Indemnified Parties from and indemnifies the Indemnified Parties against all liability to the Company for any reason whatsoever in excess of the amount of the Management Fee.

The Underwriting Agreement contains covenants, warranties and representations and other terms in favour of the Underwriter typical for agreements of this nature.

Sub-underwriting agreement

Intersuisse has entered into a sub-underwriting agreement with Ms Lie You, an associate of Mr Andrew Tsang, a Director of the Company. The Company is not a party to the sub-underwriting agreement.

Set out below is a summary of the material terms of the sub-underwriting agreement:

a) in the event of a shortfall, the sub-underwriter agrees to lodge an application and pay for 50% of the shortfall, up to a maximum of 44,324,564 New Shares;
b) the Underwriter will pay a sub-underwriting fee to the sub-underwriter of 4% of the amount sub-underwritten. This fee will be paid by the Underwriter and not the Company;
c) the sub-underwriting is conditional upon Diatreme satisfying all of its regulatory obligations relating to the Issue and the Shortfall under the Corporations Act and the ASX Listing Rules, and also upon Diatreme proceeding with the allotment of the New Shares;
d) the sub-underwriter agrees to be bound by the terms contained in the underwriting agreement between Diatreme and the Underwriter; and
e) the liability of the sub-underwriter will only cease when the liability of the Underwriter under the underwriting agreement ceases and when the sub-underwriter has lodged an application and paid for the shares it is obliged to subscribe for.

Directors’ interests

The directors of the Company at the date of this Prospectus are:

Mr Anthony John Fawdon (CEO, Executive Chairman);
Mr David Hugh Hall (Executive Director - Operations);
Mr George Henry White (Non Exec. Director); and
Mr Andrew Tsang (Non Exec. Director).

Except as disclosed in the Prospectus, no Director or proposed Director has, or has had within two years before lodgement of this Prospectus, any interest in:

the formation or promotion of the Company; or
any property acquired or proposed to be acquired by the Company in connection with its formation or promotion or the Entitlement Offer; or
the Entitlement Offer.

Except as disclosed in the Prospectus, no person has paid or agreed to pay any amount to any Director or has given or agreed to give any benefit to any Director, to induce the Director to become, or to qualify as, a Director of the Company or otherwise for services rendered by the Director in connection with the formation or promotion of the Company or the Entitlement Offer.

As at the date of this Prospectus, the Directors' or their associates have an interest in the following securities:

Director	Existing Shares	Existing Shares	Existing Options	Existing Options
	Direct	*Indirect **	Direct	*Indirect **
Anthony John Fawdon	1,767,997	1,513,824	2,500,000	2,500,000
David Hugh Hall	2,120,000	430,000	2,500,000	1,600,000
George Henry White	50,000	0	500,000	2,000,000
Andrew Tsang	28,721,700	12,622,918	0	0

*Indirect holdings held by associates of the Directors

Participation by Directors in Entitlement Offer

The Directors are entitled to participate in the Entitlement Offer without the need for Shareholder approval though they are not obliged to.

Anthony Fawdon and David Hall currently intend to take up part of their Entitlement. Andrew Tsang and George White currently intend to take up their Entitlement in full.

If the Directors each participate to the maximum extent permissible then their respective interests will increase and upon issue of the New Shares they will have the following holdings (assuming that they do not exercise any of their Options):

Director	New	Shares	New Options	New Options
	Direct	Indirect1	Direct	Indirect1
Anthony John Fawdon	589,332	504,608	589,332	504,608
David Hugh Hall	706,667	143,333	706,667	143,333
George White	16,667	0	16,667	0
Andrew Tsang	9,573,900	4,207,6392	9,573,900	4,207,6392

1Indirect holdings held by associates of the Directors

2This figure does not include any New Shares or New Options issued to an associate of Mr Tsang pursuant to the sub-underwriting agreement outlined on page 22 of this Prospectus.

Payments to Directors

The constitution of the Company provides that the Directors may be paid, as remuneration for their services, a sum determined from time to time by the Company‟s Shareholders in general meeting, with that sum to be divided amongst the Directors in such manner and proportion as they agree. The maximum aggregate amount that has been approved by Shareholders for payment to all Directors as director fees is currently $150,000 per annum.

Under the Company‟s constitution the total amount of remuneration paid to all Directors as director fees must not be increased unless authorised by the Company in general meeting. This does not apply to remuneration payable to any Director under any executive service contract with the Company.

Directors are entitled to be reimbursed for traveling and other expenses incurred in attending meetings or in relation to the business of the Company.

The total amounts received by current Directors as fees and executive service remuneration (including superannuation) in the past two years (1 February 2009 to 31 January 2011) are:

Director	Total Paid(Past twoyears)
AnthonyJohn Fawdon	$518,221
DavidHugh Hall	$471,027
GeorgeHenryWhite	$76,300
Andrew Tsang	$73,127

Insurance and indemnities

The constitution of the Company allows the Company to indemnify Directors in relation to claims arising out of the discharge of their duties as Directors, and to pay the premium for insurance cover in respect of such claims, subject to the limitations imposed by the Corporations Act. The Company has taken out such insurance on behalf of its Directors.

Interests of advisers

Except as set out in this Prospectus, no person named in this Prospectus as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Prospectus, or an underwriter to the Entitlement Offer:

holds or has at any time during the last two years held, any interest in the formation or promotion of the Company, or in property acquired or proposed to be acquired by the Company in connection with the Company‟s formation or promotion or the Entitlement Offer, or in the Entitlement Offer itself; or
has been paid or agreed to be paid any amount, or received or agreed to receive any benefit, for services provided in connection with the formation or promotion of the Company or the Entitlement Offer.

Intersuisse has acted as Manager to the Entitlement Offer, and it and its associated company, Phillip Capital Pty Ltd ACN 066 066 911 (Australian Financial Services Licence No: 246796), is entitled to receive fees of 2% of the total funds raised by the Issue, being approximately $7.1 million. Intersuisse is also the Underwriter of the Entitlement Offer, and is entitled to receive fees of 4% of the underwritten amount, being approximately $7.1 million. Intersuisse is entitled to be reimbursed all reasonable costs, professional fees and expenses of and incidental to the Entitlement Offer.

Intersuisse and Phillip Capital Pty Ltd have been engaged by Diatreme to carry out corporate advisory and capital raising services, and together have received approximately $503,401 in fees over the past two years. Intersuisse and associated parties, which includes some employees, currently hold approximately 3,325,680 Shares.

Carter Newell have acted as solicitors for the Company in connection with the Entitlement Offer. Carter Newell are entitled to receive professional fees of approximately $50,000 in respect of this work. Further amounts may be paid to Carter Newell in accordance with their normal time-based charges.

All amounts referred to above are exclusive of GST.

Consents

Intersuisse has given, and not withdrawn before the lodgement of this Prospectus, its written consent to being named in the Prospectus as the Underwriter.

Link Market Services Limited has given, and not withdrawn before the lodgement of this Prospectus, its written consent to being named in this Prospectus as the Company‟s share registry.

Carter Newell have given, and not withdrawn before the lodgment of this Prospectus, their written consent to being named in this Prospectus as the Company‟s solicitors.

BDO Audit (QLD) Pty Ltd has given, and not withdrawn before the lodgement of this Prospectus, its written consent to being named in this Prospectus as the Company‟s Auditor.

Terrence Willsteed and Associates Pty Ltd has given and not withdrawn before the lodgement of this Prospectus, its written consent to the references to its technical review and valuation report in this Prospectus in the form and context in which they appear.

Directors’ responsibility statement

The Directors of the Company have authorised the lodgement of this Prospectus with ASIC.

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Anthony J Fawdon Executive Chairman/CEO

GLOSSARY

GLOSSARY
Additional Shares	means those Shares that Eligible Shareholders may apply for under this Prospectus in excess of their Entitlement, in the event that there is a Shortfall.

Applicant	means an Eligible Shareholder who submits an Application.
Application	means the submission of an Entitlement and Acceptance Form accompanied by the relevant application money or arranging for payment through Bpay® in accordance with the instructions on the Entitlement and Acceptance Form.

ASIC	means the Australian Securities and Investments Commission.
ASX	means ASX Limited ACN 008 624 691 or the securities exchange operated by it, as the context requires.

ASX Listing Rules	means the official listing rules of ASX.

Company or Diatreme	means Diatreme Resources Limited ACN 061 267 061.
Closing Date	means 5:00 pm (Brisbane time) on 31 March 2011 or such other date as may be determined bythe Directors in consultation with the Underwriter.

Constitution	means the constitution of the Company.
Corporations Act	means the_Corporations Act 2001_ (Cth), as amended.
Director	means a director of the Company.
Eligible Shareholder	means a Shareholder at the Record Date, whose registered address is in Australia or New Zealand.

Entitlement	means the number of New Shares and New Options that an Eligible Shareholder is entitled to under the Entitlement Offer.

Entitlement and Acceptance Form	means the entitlement and acceptance form accompanying this Prospectus.
Entitlement Offer	means the one for three non-renounceable entitlement offer of Shares with one free attachingoption for each New Share issued.

Ineligible Shareholder	means a Shareholder who is not an Eligible Shareholder.
Issue Price	means $0.08per New Share.
Manager to the Entitlement Offer	means Intersuisse Limited ACN 002 918 247 (Australian Financial Services Licence No: 246827)
New Shares	means the Shares being offered to Eligible Shareholders under the Entitlement Offer.

New Option	means a free attaching Option, exercisable at $0.15 on or before 30 September 2013, to be issued at the ratio of one New Option for every New Share subscribed for under the Entitlement Offer.

Option	means an option to subscribe for Shares.
Prospectus	means this Prospectus, including any supplementary or replacement prospectus.

Record Date	means 4 March 2011, 7:00pm(Sydneytime).
Share	means a fully paid ordinaryshare in the capital of the Company.
Shareholder	means aperson registered as the holder of a Share.
Shortfall	means the number of New Shares for which the Company does not hold valid Applications on the ClosingDate.

Underwriter or Intersuisse	means Intersuisse Limited ACN 002 918 247 (Australian Financial Services Licence No: 246827)

THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY

All Registry communications to: Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia Telephone: 1300 554 474 From outside Australia: +61 2 8280 7454 ASX Code: DRX Website: www.linkmarketservices.com.au

ABN 33 061 267 061

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SRN/HIN:

Entitlement Number:

Number of Eligible Shares held as at the Record Date, 7:00pm (Sydney Time) on 4 March 2011:

Entitlement to New Shares

(on a 1 New Share for 3 basis):

Entitlement to New Options (on a 1 New Option for 1 New Share basis):

Amount payable on full acceptance at A$0.08 per Share:

Offer Closes 5:00pm (Brisbane Time): 31 March 2011

ENTITLEMENT AND ACCEPTANCE FORM

As an Eligible Shareholder you are entitled to acquire 1 New Share for every 3 Existing Shares that you hold on the Record Date, at an Issue Price of A$0.08 per New Share. In addition, for every 1 New Share subscribed for, Diatreme Resources Limited will issue 1 free attaching New Option with an exercise price of A$0.15 and an expiry date of 30 September 2013. You may also apply for New Shares in excess of your Entitlement, at the Issue Price. This is an important document and requires your immediate attention. If you do not understand it or you are in doubt as how to deal with it, you should contact your accountant, stockbroker, solicitor or other professional adviser.

[[[®]]] you do NOT need to Bpaypay[[®]] . pay[[®]] before 5:00pm (Brisbane Time) on pay[[®]] pay[[® ]] you will Telephone & Internet Banking – Bpay[®] Biller Code: 136549 Ref: ® Registered to Bpay Pty Ltd ABN 69 079 137 518

IMPORTANT: The Offer is being made under the Prospectus dated 23 February 2011. The Prospectus contains information about investing in the New Shares. Before applying for New Shares, you should carefully read the Prospectus. This Entitlement and Acceptance Form should be read in conjunction with the Prospectus.

If you do not have a paper copy of the Prospectus, you can obtain a paper copy at no charge, by calling the Diatreme Resources Limited Offer Information Line on 1300 857 499 (within Australia) or +61 2 8280 7753 (from outside Australia).

PAYMENT OPTIONS

If you wish to take up all or part of your Entitlement (as shown above), or take up all of your Entitlement and apply for additional New Shares, you have two payment options detailed below.

OPTION 1: PAyINg by BpayBpaypay[[[®]]]

OPTION 1: PAyINg by BpayBpaypay[[[®]]] OPTION 2: PAyINg by ChEquE, bANk dRAfT OR MONEy ORdER If paying by Bpay[®] , refer to the instructions overleaf. you do NOT need to If paying by cheque, bank draft or money order, complete and return the return the acceptance slip below if you elect to make payment by Bpaypay[[®]] . acceptance slip below with your Application Monies. No signature is required on Payment must be received via Bpay[[®]] before 5:00pm (Brisbane Time) on the acceptance slip. The acceptance slip with your Application Monies must be 31 March 2011. You should check the processing cut off-time for Bpay[[®]] received by the Registry before 5:00pm (Brisbane Time) on 31 March 2011. transactions with your bank, credit union or building society to ensure your payment will be received by the Registry in time. By paying by Bpay[[® ]] you will have deemed to have completed an Application Form for the number of Shares subject of your application payment.

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Contact your bank or financial institution to make this payment from your cheque, savings, debit or transaction account. More info: www.bpay.com.au

See overleaf for details and further instructions on how to complete and lodge this Entitlement and Acceptance Form.

THIS IS A PERSONALISED FORM FOR THE SOLE USE OF THE SHAREHOLDER AND HOLDING RECORDED ABOVE.

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----- Start of picture text -----

Please detach and enclose with payment
SRN/hIN:
ABN 33 061 267 061 9999999 Entitlement Number:
A Number of New Shares accepted (being not B Number of additional New Shares C Total number of New Shares accepted (add
more than your Entitlement shown above) Boxes A and B)
+ =
D PLEASE INSERT ChEquE, bANk dRAfT OR MONEy ORdER dETAILS – Cheques, bank drafts or money orders must be drawn on an Australian branch
of a financial institution in Australian currency, made payable to “diatreme Resources Limited – Share Offer Account” and crossed “Not Negotiable”.
Drawer Cheque Number BSB Number Account Number Amount of Cheque
A$
E CONTACT dETAILS – Telephone Number Telephone Number – After Hours Contact Name
( ) ( )
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DIATREME RESOURCES LIMITED

The Entitlement Offer to which this Entitlement and Acceptance Form relates is not being made to investors located or resident outside of Australia and New Zealand. In particular the Entitlement Offer is not being made to any person in the U.S. or to a U.S. person. The Prospectus and Entitlement and Acceptance Form do not constitute an offer or invitation to acquire Shares in any place in which, or to any person to whom, it would be unlawful to make such an offer or invitation.

2. If PAyINg by ChEquE, bANk dRAfT OR MONEy ORdER

Complete all relevant sections of the Entitlement and Acceptance Form USING BLOCK LETTERS. These instructions are cross referenced to each section of the Entitlement and Acceptance Form.

A. Acceptance of New Shares

Enter into section A the number of New Shares you wish to apply for. The number of New Shares must be equal to or less than your Entitlement, which is set out overleaf.

ACCEPTANCE Of ENTITLEMENT OffER

By either returning the Entitlement and Acceptance Form with payment to the Registry, or making payment received by Bpay[®] :

b. Application for Additional New Shares
- You can apply for more New Shares than your Entitlement if you have applied for your full Entitlement. Please enter the number of additional New Shares above your Entitlement for which you wish to apply into Box B. Your Application for additional New Shares may not be successful (wholly or partially). The decision of Diatreme Resources Limited on the number of New Shares to be allocated to you will be final. No interest will be paid on any Application Monies received or returned.
you represent and warrant that you have read and understood the Prospectus and that you acknowledge the matters, and make the warranties and representations;
you provide authorisation to be registered as the holder of New Shares acquired by you and agree to be bound by the Constitution of Diatreme Resources Limited.
C. Total Number of New Shares Subscribed for

hOw TO APPLy fOR NEw ShARES

To calculate total number of New Shares subscribed for, add Box A and Box B and enter this in Box C.

1. If PAyINg by Bpay[®] (AvAILAbLE TO ShAREhOLdERS wITh AN AuSTRALIAN bANk ACCOuNT ONLy)

Box B and enter this in Box C. d. Cheque, bank draft or money order details pay[[®]] you must contact your bank will pay for. E. Contact details your acceptance of New Shares, if necessary.

d. Cheque, bank draft or money order details Enter your cheque, bank draft or money order details in section D. Cheques, bank drafts or money orders must be drawn on an Australian branch of a financial institution in Australian currency, made payable to “Diatreme Resources Limited – Share Offer Account” and crossed “Not Negotiable”. Please ensure sufficient cleared funds are held in your account, as your cheque will be banked as soon as it is received. If you provide a cheque or money order for the incorrect amount, Diatreme Resources Limited may treat you as applying for as many New Shares and Additional New Shares as your cheque, bank draft or money order will pay for.
If you elect to make payment using Bpay[[®]] you must contact your bank or financial institution to make this payment from your cheque, savings, debit or transaction account. For more information on paying by Bpay[®] : www.bpay.com.au

Work out the total amount payable by you. To calculate the total amount, multiply the number of New Shares you wish to apply for by A$0.08.

Refer overleaf for the Biller Code and Reference Number. The Reference Number is used to identify your holding. If you have multiple holdings you will have multiple Reference Numbers. You must use the Reference Number shown on each personalised Entitlement and Acceptance Form when paying for any New Shares that you wish to apply for in respect of that holding.

E. Contact details Enter your contact telephone number where we may contact you regarding your acceptance of New Shares, if necessary.

3. hOw TO LOdgE yOuR ENTITLEMENT ANd ACCEPTANCE fORM A reply paid envelope is enclosed for your use. No postage stamp is required if it is posted in Australia. Alternatively, if you have lost the reply paid envelope, or you have obtained the Prospectus electronically, your completed Entitlement and Acceptance Form with the payment for New Shares may be mailed to the postal address, or delivered by hand to the delivery address, set out below. If paying by Bpay[® ] you do not need to complete or return the Entitlement and Acceptance form. You should check the processing cut off-time for Bpay[®] transactions with your bank, credit union or building society to ensure your payment will be received by the Registry by the close of the offer.

Mailing Address hand delivery Diatreme Resources Limited Diatreme Resources Limited C/- Link Market Services Limited C/- Link Market Services Limited Locked Bag 3415 Level 15, 324 Queen Street Brisbane QLD 4001 Brisbane QLD 4000 (Please do not use this address for mailing purposes)

Make sure you send your Acceptance Slip and application payment allowing enough time for mail delivery, so Link Market Services Limited receives them no later than 5:00pm (Brisbane Time) on 31 March 2011. Please ensure sufficient cleared funds are held in your account, as your cheque will be banked as soon as it is received. Diatreme Resources Limited reserves the right not to process any Acceptance Slips and cheques received after the Closing Date.

If you require further information on how to complete this Entitlement and Acceptance form, please contact the diatreme Resources Limited Offer Information Line on 1300 857 499 (within Australia) or +61 2 8280 7753 (from outside Australia) between 8:30am and 5:30pm (Sydney Time) Monday to friday.