Diatreme Resources Limited : Quarterly Activities Report Dec 2011

ASX:DRX Exploration Activities Report Quarter ended 31 December 2011

Highlights

CYCLONE ZIRCON PROJECT

ƒ The Prefeasibility Study ("PFS") nears completion with the results of the financial evaluation imminent.

ƒ Results from Cyclone bulk sample have provided data for development of mining systems and processing plant designs.

ƒ A maiden Ore Reserve estimate is underway.

ƒ Three valuable mineral products have been recovered during metallurgical processing of the bulk sample - Zircon, HiTi87 and HiTi67 (ASX announcement 30 January 2012).

ƒ Mine water studies for deep and shallow aquifers are being completed prior to test drilling.

ƒ Alternative road transport routes are being evaluated.

ƒ Capital and operating cost estimates to PFS standard are being finalised for project evaluation.

ƒ TZMI has been engaged for a market study and independent review of PFS components.

ƒ Planning for a Definitive Feasibility Study has commenced.

METALLIFEROUS PROJECTS

ƒ Negotiations with potential joint venture partners for the Clermont Project (copper gold molybdenum) and the Anabama Project (copper gold cobalt) are in progress.

CORPORATE

ƒ The Company is continuing its discussions with Baoti Group and another International end user regarding future funding and cooperation for the Cyclone Project.

Diatreme Resources is an Australian based diversified mineral explorer with significant projects in heavy mineral sands, copper, base metals and gold.

The Company owns the world class Cyclone Zircon Deposit in Western Australia, situated within the recognised Eucla Basin province, along with extensive areas of underexplored ground prospective for heavy mineral sands.

The Board and senior personnel exhibit wide experience, ranging through the exploration and development phases of resource management.

Australian Securities Exchange

Codes: DRX and DRXO

Securities

Ordinary shares (DRX):

354,597,423

Listed 15c options (30/09/13)(DRXO):

88,650,039

Board of Directors

Executive:

Tony Fawdon - Chairman/CEO David Hall - Operations Non-executive:

George White

Andrew Tsang William Wang Neil McIntyre

Joint Company Secretaries:

Leni Stanley

Tuan Do

Key Projects:

• Eucla Basin Cyclone Zircon Project

• Clermont Copper Project

• Anabama Copper Project

• Gilbert River Base Metals Project

Diatreme Resources Contact:

Tony Fawdon

Executive Chairman/CEO Phone: [phone]

Fax: [phone]

Share Registry:

Link Market Services

Level 15, ANZ Building

324 Queen Street, Brisbane, Q4000

DIATREME RESOURCES LIMITED ABN 33 061 267 061

Level 2, 87 Wickham Terrace, Spring Hill, Qld, 4000

PO Box 10288 Brisbane Adelaide Street Qld 4000

Telephone : [phone] Facsimile : [phone]

[e-mail] www.diatreme.com.au

Page 1 of 8

DIATREME RESOURCES LIMITED

MINERAL SAND PROJECTS

Cyclone Zircon Deposit WA - Prefeasibility Study (DRX 100%)

The Prefeasibility Study ("PFS") for the Cyclone Zircon Project is scheduled for completion in late
February 2012. A summary of the status of key areas of activity follows:

Geology and Mineral Resource

Geological work for the PFS is complete and the Mineral Resource estimate has been updated using additional mineralogy data obtained following review of the metallurgical testwork results (ASX release dated 23 January 2012).

Ore Reserve and Mining

An Ore Reserve estimate is well advanced and is expected to be completed early February 2012, in parallel with completion of the project's financial modelling. The mining system planned for Cyclone includes excavator and trucks for overburden removal and bulldozer and dozer trap for the ore (see Figure 1). Overburden removal rates will vary from 450 to 1,100 cubic metres per hour over the life of the mine due to the varying depth of overburden. Two dozer traps are planned, allowing the blending of higher and lower grade ore zones and facilitation of grade control for the wet concentrator. The planned mining rate is 1,300 tonnes per hour, or 10 million tonnes per year for
9.5 years.

Figure 1: Cyclone Zircon Project - Schematic Proposed Mining Methods (Years 1 to 5)

Processing

Metallurgical testwork and process design for Wet Concentration Plant ("WCP") and Mineral Separation Plant ("MSP") flowsheet design have been completed. Reports have been received from CPG Resources - Mineral Technologies ("CPG") and the results are being analysed for use in the financial evaluation. Mineral recovery and annual production rates for mineral products are being evaluated. Product quality specifications have been completed and products and annual production rates have been estimated using bulk sample testwork and process modelling. Annual mineral production estimates are in the order of 65,000 tonnes of Zircon, 10,000 tonnes of HiTi87 (87% TiO2), and 46,000 tonnes of HiTi67 (67% TiO2) (ASX release dated 30 January 2012).

Exploration Activities Report for the Quarter ended 31 December 2011 Page 2 of 8

DIATREME RESOURCES LIMITED

Plant Design

Preliminary plant design to PFS standard has been completed by CPG. Capital and operating costs have been estimated to an accuracy of +/-25%. The MSP has been designed to Australian Standards and details have been sent to BaoTi Group Limited ("BaoTi") for estimation of costs to construct and operate the MSP in China. The WCP capital cost is estimated to be $60 million and the Chinese estimate for the MSP is expected to be completed late February.

Transport

Tabling of Cyclone HM concentrates during bulk sample processing

Diatreme has engaged Sustainability Pty Ltd (Environmental Consultants) to evaluate three options for the road transport route between Cyclone and the Trans Australian Railway Line. Specialist flora and fauna consultants will conduct surveys of the three routes and a report will be prepared for the Department of Environment and Conservation recommending the route of least environmental impact. The Pila Nguru People, the Traditional Landowners, will play an integral role in the environmental studies and in determining that the preferred route has minimal impact on significant cultural heritage within their lands. A Miscellaneous Licence application for the road corridor will be submitted once there is general agreement on the preferred low impact route.

Water Supply

Diatreme has engaged Australian Groundwater Technologies ("AGT") to review all available data on shallow water supplies within 50 kilometres of Cyclone and recommend potential water supply targets. AGT will also investigate the potential for existence of a deep aquifer below Cyclone which may be capable of supplying all the water required for the project. Rodinia Oil has drilled two deep oil exploration wells approximately 80 kilometres to the east of Cyclone (within SA) and both wells intersected a high yielding aquifer of good quality water at a depth of 730 metres. Wells in this deep aquifer have produced water flows up to 3.5 megalitres per day and the broad extent of this aquifer, if it exists below Cyclone, would make it suitable for supplying the 20 megalitres per day required for the operation from 6 production bores.

Capital and Operating Costs

PFS capital cost estimates for the processing plants are in line with earlier estimates with some additions to allow for the remote location and construction cost increases. Operating costs are generally in line with expectations and some general increases have been included to allow for pricing pressures within the resources industry. Cost estimates are being finalised and the project capital cost estimate is in the order of $210 million. The average annual cash operating cost estimate is $80 million. These estimates will be revised when updated capital and operating costs for the China based MSP are received from BaoTi.

Independent Review and Market Study

Independent mineral sands industry consulting group, TZMI, has been engaged to review specialist reports for the PFS and complete a market study using product annual tonnages and product quality information derived from the metallurgical and engineering studies carried out by CPG.

Exploration Activities Report for the Quarter ended 31 December 2011 Page 3 of 8

DIATREME RESOURCES LIMITED

TZMI will also complete an independent financial evaluation of the project. All technical reports are being reviewed by TZMI and their project evaluation and market study reports are expected to be finalised by late February 2012.

DRX Chairman, Tony Fawdon, discussing the Cyclone Project with members of the Pila Nguru People, the Traditional Landowners.

Eucla Basin Mineral Sands Project - WA and SA (DRX 100%) E69/1920 Wanna Lakes Cyclone Deposit - MLA 69/141 / Resource Estimation / Mineralogy

A substantial infill drilling program over Cyclone has been conducted in several stages since late
2010, and a comprehensive re-assessment of the Quantitative Evaluation of Minerals by Scanning Electron Microscopy ("QEMSCAN®") mineral assemblage classification categories was undertaken in late 2011 following HM characterisation studies of bulk samples. During the quarter nine aircore holes were drilled for 388m, 39 new composite samples were analysed and a further 137 earlier samples were reprocessed using revised QEMSCAN® classification criteria.
The total resource estimate for Cyclone, estimated in accordance with the guidelines outlined in the JORC Code (2004) for the reporting of Exploration Results, Mineral Resources and Ore Reserves, now stands at 136 Mt at 2.3% HM at 1% HM cut-off grade (full details provided in ASX release dated 23 January 2012). The resource is reported using a wider range of titanium bearing minerals as metallurgical test-work highlighted a broad spread of Ti-bearing minerals with variable recovery to mineral concentrate streams. A significant reduction in rutile within the mineral assemblage is noted from the October 2010 estimate (12.6% to 3%), albeit with coincident increases in leucoxene and HiTi.
Figure 1 shows the outlines for the Cyclone and Cyclone Extended (owned by Image Resources
NL) HM resources.

Exploration Activities Report for the Quarter ended 31 December 2011 Page 4 of 8

DIATREME RESOURCES LIMITED

Figure 1: Location Map Cyclone Resource

Exploration Activities Report for the Quarter ended 31 December 2011 Page 5 of 8

DIATREME RESOURCES LIMITED

Figure 2 presents a typical cross section through the Cyclone Resource, displaying multiple HM
strands in the Beach domain and homogenous HM in the underlying Nearshore domain.

Figure 2: Section line WL21N, Cyclone Resource

A maiden ore reserve estimate for Cyclone is expected to be released in February 2012 and as is common with mining reserves there is an expectation of lower overall tonnages and higher grade than reported in the latest mineral resource. This will be as a result of lower grade material and stranded HM resources being excluded from the ore reserve estimate. In future years, the reserve status could alter with the advent of even higher zircon and titanium prices, which would mean that lower grade material could be mined and processed.

Regional Exploration (WA)

Regional exploration drilling during the quarter confirmed the presence of the Barton shoreline north of the Cyclone Deposit and investigated other interpreted shorelines features in the northeast. A total of 52 aircore drill holes were completed for 1328m. However, no economic concentrations of heavy minerals were located.
Shallow drilling testing for water to the west of the Cyclone Deposit located the targeted palaeochannel. However, flow rates encountered were relatively low. Additional hydrogeological investigations are currently in progress assessing both the shallow palaeochannels to the northwest of Cyclone and the deeper sedimentary strata within the underlying Officer Basin. Petroleum exploration within the Officer Basin, approximately 75km east of Cyclone in South Australia, has located significant quantities of potable water. It is believed that the intersected aquifers extend westward beneath the Cyclone Project area. Work is progressing.
As a result of the unsuccessful regional HM exploration and water testing exploration licences E69/2425 (Wanna South), E69/2427 (Marble Gum) and E69/2428 (Jungooner) were partially surrendered and E69/2426 (Serpentine Lake) fully surrendered during the period.

Exploration Activities Report for the Quarter ended 31 December 2011 Page 6 of 8

DIATREME RESOURCES LIMITED

Eucla Basin Exploration (SA)

Recent exploration has reduced the HM prospectivity of the Ooldea Range line of tenements toward the south eastern areas, within EL 3616 (Eucla 4). Further testing of the identified mineral strands will be undertaken during 2012.

Arckaringa Mineral Sands Project - SA (DRX 100%)

Following clearances to explore within the Woomera Prohibited Area and the Tallaringa Conservation Park, a follow-up regional drilling program was undertaken in November. A total of 64 aircore drill holes were completed for 2,963m along five regional drill lines.
Although drilling proved to be a technical success, again intersecting marine sands and minor HM, the economic prospectivity of the tenements, coupled with the significant Tallaringa Conservation Park environmental restrictions, have downgraded the local targets. No further work is planned.

Shark Bay Mineral Sands Project - WA (DRX 100%)

A cultural heritage survey was initiated over exploration licence E09/1518 during the quarter, but not completed due to logistical access constraints. Following evaluation of the geology and historical drill data for the area, a decision has been made to surrender the tenement.

METALLIFEROUS PROJECTS

Clermont Copper Gold Project - QLD (DRX 100%)

Following on from adverse decisions of the Queensland Government reported last quarter, DRX is confident that its direct representations (along with representations by other parties throughout the State) will see the prospectivity of our Palm Trees Gold and Peak Downs Copper prospects little affected by the "mining activities within 2km of designated town areas" restrictions advocated by the State. Opportunity will exist during 2012 to conduct important exploration over these prospects in conjunction with the highly prospective Rosevale Porphyry Copper Prospect, located 15 km west of Clermont town centre.
DRX is continuing in its efforts to farm-out its exploration interests within this highly prospective project area. Field trips and core reviews were undertaken during the quarter with potential joint venture partners for the purpose of assessing and conducting due diligence prior to any farm-in agreement being concluded.

Anabama Copper Project - SA (DRX 100%)

DRX is continuing its efforts to farm-out its two tenements (EL 3923 and EL 4783) which are highly prospective for hosting copper and gold within an open ended mineralised corridor at least 200m wide and containing several sub-parallel mineralised vein breccias and copper veined schists.

Gilbert River Base Metal Project - QLD (DRX 100%)

With the onset of the North Queensland wet season no further field work has been conducted nor contemplated until later in 2012.

Exploration Activities Report for the Quarter ended 31 December 2011 Page 7 of 8

DIATREME RESOURCES LIMITED

Tick Hill Gold Project - QLD (DRX reducing to 50%)

A field inspection was undertaken during the quarter with Superior Resources Limited (ASX:SPQ) to assess the status of the Tick Hill mining leases. Diatreme's previously announced farm-out of the project is subject to pre-conditions and the purpose of the visit was part of SPQ undertaking due diligence related to these pre-conditions.

CORPORATE

With HM prices, particularly zircon, continuing to strengthen in the short term and expected to remain steady into the future, the Board continues to focus its main attention on seeking to develop the Cyclone Zircon Project. To that end:

ƒ Negotiations continue with BaoTi, having advanced to the point where they have sought time to await the release of the PFS before proceeding to negotiate the final stages of a Heads of Agreement to cooperate in funding the project.

ƒ Preliminary joint venture discussions regarding project development have been held with another major international end user.

ƒ The concept of sole funding the Definitive Feasibility Study and project development is being reviewed wherein Diatreme would retain 100% control of the project along with the total net project revenue. The Company has received interest from several domestic and international institutions regarding funding.

Dated 31 January 2011 Anthony J Fawdon

Executive Chairman/CEO

Company contact details: Tel : [phone]

Fax : [phone]
Email : [e-mail]
For media queries: Anthony Fensom Bayly Willey Holt
Tel: [phone]

Competent Person Statement

The information in this report, insofar as it relates to Exploration Results and Mineral Resources is based on information compiled by company personnel under the supervision of Mr David Jelley, who is a full time employee of Diatreme Resources Limited and a Member of the Australasian Institute of Mining and Metallurgy. Mr Jelley has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr Jelley consents to the inclusion in the report of the matters based on the information in the form and context in which it appears.

Exploration Activities Report for the Quarter ended 31 December 2011 Page 8 of 8