Diatreme Resources (DRX) November Cyclone now moving ahead · Diatreme Resources (DRX) 25 November 2014 Cyclone : now moving ahead Management changed; First Zircon in 2017 Key is

Diatreme Resources (DRX) 25 November 2014

Cyclone : now moving aheadManagement changed; First Zircon in 2017

Key is securing off‐take.

Page 1 See Page 31 for Disclaimer and Disclosures 25 November 2014

Recommendation ■ DRX announced the results of its PFS in March 2012. There were 4 key issues to be resolved, and 3 of these have now been resolved, 2 in the last month, with the final issue in train.

■ Processing 10Mt/yr of ore, Cyclone is expected to produce 65kt/yr of saleable zircon, plus 85kt/yr of saleable titaniferous feedstock.

■ DRX is re-engaging with off-take partners to secure funding and a project go-ahead during 2015.

BUY, High Risk

Price

1.6c

Valuation

4.4c

Snapshot Market Cap $11.2m

Cash on hand (30 Sept 2014) $1.4m

Shares on Issue 719.2m

52 Week High 2.5c

52 Week Low 0.7c

1 month / 6 month VWAP 1.30c / 1.06c

DRX : daily share price v. value traded

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0.0 c

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15‐Nov‐12 15‐Feb‐13 15‐May‐13 15‐Aug‐13 15‐Nov‐13 15‐Feb‐14 15‐May‐14 15‐Aug‐14 15‐Nov‐14

value traded

DRX sahre price

In March 2012, DRX announced the results of its Pre‐Feasibility Study on the Cyclone mineral sands deposit, with a pay‐back period of 2.1years.

While DRX had announced, in August 2010, an MOU with the largest end user of zircon in China, there were 4 key assurances required, and 3 have now been delivered, with the final, environmental clearance for an access road, now in train.

DRX is now re‐engaging with potential off‐take partners and financiers.

A formal commitment to project construction can be expected late in 2015, with first product in early 2017.

Author : Pieter Bruinstroop [email protected]

Three of the four required assurances now delivered

In 2013, DRX advised that to execute the Memorandum of Understanding into a binding Heads of Agreement, four key issues needed to be resolved

Water supply was located in November 2013, with the successful drilling of a water bore within the area of the Exploration Lease;

The signing of a Native Title Agreement was announced on 17 November 2014;

A Mining Licence, which was announced on 24 November 2014; and

Approval for a road transport corridor from Cyclone to the rail line at Forrest, for which the Public Environmental review documents have been lodged.

In short, DRX is now making real progress on the Cyclone project.

Cyclone Valuation

On 9 January 2014, DRX announced a Heads of Agreement with Perpetual Mining Holdings Limited, a Hong Kong based company with sound business connections within China including in iron ore mining and steel products processing, for PMHL to acquire a 6% stake in the Cyclone project for $2m.

Beer & Co expects zircon prices to firm to $1,500/t, and rutile to $1,250/t by 2017, when Cyclone begins production. Our resulting, after‐tax valuation of Cyclone is $A 125m.

Financing

Estimated capital to get into production is $146m. Beer & Co expects that DRX’s current discussions with potential investors and off‐take partners results in a party buying a project stake at a value related to NPV, and the new party facilitates the required capital.

Beer & Co conclusions

Our risk weighted valuation of DRX is 4.4c/share. There is significant upside potential at Tick Hill and Cape Bedford.

The recent progress encourages us that the final requirements for financing will be met. Beer & Co initiates research on DRX with a BUY, High Risk recommendation.

This report was produced by Beer & Co Research, an independent research and advisory firm. It is intended for wholesale investors ONLY.

If you do not wish to receive our research, please email to [email protected] with “unsubscribe” If you wish to receive, free of charge, Beer & Co research, please register at http://beerandco.com.au/all‐research/

Diatreme Resources (DRX)


DRX : Zircon in 30 months

,

DRX ‐ Background

DRX has a number of exploration projects, but it is now focussed on the developed of the Cyclone zircon project, in the Eucla Basin, which is shown in Figure 1.

DRX has zircon in the Eucla Basin

915klt of contained zircon in Cyclone

plus

345klt of contained zircon in Cyclone Extended

Figure 1 : Cylcone, in WA, Eucla Basin

Source : DRX presentation, March 2014

Cyclone Zircon Project …

In February 2012, DRX announced a Mineral Resource estimate for Cyclone of 136Mt at 2.3% Heavy Minerals, for 954kt contained zircon. This was recently revised, to be JORC 2012 compliant, to 137Mt at 2.2% HM for 915kt of contained zircon, as shown in Figure 2.

Figure 2 : Cyclone Resource estimate

1% cut‐off H M slimes over‐size Zircon Rutile 85% ‐ 95% 70%‐ 85% <70% SiTiOx

Measured 118 Mt 2.3 % 4.1 % 5.4 % 0.71 % 0.07 % 0.15 % 0.49 % 0.24 % 0.51 %

Indicated 19 Mt 1.5 % 3.3 % 5.0 % 0.38 % 0.05 % 0.04 % 0.49 % 0.07 % 0.28 %

TOTAL 137 Mt 2.2 % 4.0 % 5.4 % 0.67 % 0.07 % 0.14 % 0.49 % 0.21 % 0.47 %

Source : DRX ASX announcement, 9 January 2014, Beer & Co

In March 2012, DRX published the results of its Pre‐Feasibility Study. Figure 3 shows the Ore Reserve estimate, of 97Mt of ore grading 2.5% HM for 770kt of contained zircon, developed for the PFS.

Figure 3 : Cyclone project, Maiden ore reserve

Reserves HM Slimes over‐size Zircon Rutile Leucoxene HiTi Alt. Ilm Si‐TiOx Zircon Rutile HiTi + Ilm.

Probable 97 Mt 2.5 % 4.0 % 5.1 % 0.79 % 0.08 % 0.17 % 0.52 % 0.26 % 0.56 % 770 kt 78 kt 922 kt

Source : DRX ASX announcement, 7 February 2012, Beer & Co

The PFS showed an economic project, with an NPV of $194m, after cap.ex of $233m and annual op.ex, before royalties, of $82m.



DRX completed its PFS in May 2012

To complete the DFS, DRX needed to achieve certain milestones.

The first milestone, a secure water supply, was achieved in November 2013,m though it needed further testing.

Agreement with the Traditional Owners was announced on 17 November 2014

Grant of the Mining Licence was announced on 24 November 2014

The draft Public Review document has been lodged and is expected to be open for comment early in 2015.

It is hoped that the Environmental Approval will be given by mid 2015

The PFS was based on mining and processing 10Mt/yr of ore to produce 65kt of zircon, 10kt of HiTi87 and 46kt of HiTi67.

The assumed product prices were US$2,100/t for zircon, $1,200/t for HiTi87 and $400/t for HiTi67.

DRX had signed an MoU with a major Chinese consumer of zircon in August 2010.

To complete a DFS and secure investment in the project, DRX needed to

Secure an adequate water supply,

On 11 November 2013, DRX announced that it had successfully drilled a bore that produced water at a rate likely to be adequate for Cyclone operations

Execution of an agreement with the Traditional Owners

On 17 November, 2014, DRX announced that it had signed an agreement with the traditional owners

Secure the grant of a Mining Lease

This was announced on 24 November 2014; and

Secure environmental approval

The Public Environmental Review will be made available for public review in early 2015 and is expected to be concluded by mid 2015

Present Status

Since publication of the PFS, development momentum slowed as key milestones drifted out in time as the commodity prices softened.

In January 2014, DRX agreed to sell a 6% stake in the project to a Hong Kong base company, Perpetual Mining Holdings Limited (PMHL), for $2m, following the success of the water bore.

In August 2014, the Board was re‐structured with the Executive Chairman and the Executive Director of Operations standing down. Neil McIntyre, a non‐executive director, resigned from the Board and took over as Chief Executive, and has since moved the project significantly, including securing Cyclone Extended.

The project is being revised :

Capital required has been trimmed by $77m to $146m, of which $5m is required for completion of the DFS, and

The cost of the wet plant has been reduced by $15m, following its re‐design

$41m has been saved by using spare dry plant capacity currently available in China

Site operational costs has been trimmed, with lower oil prices and use of a relocatable wet concentrator plant.

DRX has cut both cap.ex and op.ex from the PFS levels.

Commodity prices are also lower

Importantly, DRX has re‐engaged with a number of parties that are interested in the product and may be prepared to invest in the project, as PMHL has done.

Figure 4 shows the timetable expected by Beer & Co.

Figure 4 : Expected timetable

Compelte DFS 6 months April 2015

Permits 2 months June 2015

Finance / JV 2 months August 2015

Construction 15 months November 2016

Commission 3 months February 2017

First HMC sale 2 months April 2017

Source : Beer & Co estimates



DRX has secured Cyclone Extended

On 10 November, 2014, DRX announced that it had secured the extension of the Cyclone deposit. Figure 5 shows the current, though dated, resource estimate for Cyclone Extended.

Figure 5 : Cyclone Extended – Mineral Resources estimate

1% cut‐off H M slimes over‐size Zircon 85% ‐ 95% <70%

Indicated 77 Mt 2.0 % 6.1 % 5.4 % 0.42 % 0.20 % 0.74 %

Inferred 9 Mt 1.2 % 2.3 % 5.0 % 0.26 % 0.06 % 0.50 %

TOTAL 86 Mt 1.9 % 5.7 % 5.4 % 0.40 % 0.18 % 0.71 % Source : Image Resources (IMA) ASX announcement, 23 July 2010, Beer & Co

Beer & Co has analysed the Cyclone project, using the PFS as a base.

Beer & Co’s analysis

Figure 6 shows the mining inventory assumed by Beer & Co for this analysis. The first 2 tranches are very close to the Reserve developed for the PFS, while the final tranche is basically a project extension that adds a little value.

Figure 6 : Beer & Co’s assumed mining inventory for expanded Cyclone project

1% cut‐off H M Zircon Rutile HitTi 87 HiTi 77 HiTi 67 H MWaste : Ore Zircon Rutile HitTi 87 HiTi 77 HiTi 67

Tranche 1 40 Mt 2.6 % 0.85 % 0.09 % 0.17 % 0.55 % 0.25 % 1,040 kt 1.2 : 1 340 kt 36 kt 68 kt 220 kt 100 kt


Tranche 3 30 Mt 2.1 % 0.65 % 0.05 % 0.10 % 0.45 % 0.15 % 630 kt 1.1 : 1 195 kt 15 kt 30 kt 135 kt 45 kt

TOTAL 120 Mt 2.4 % 0.76 % 0.07 % 0.14 % 0.50 % 0.20 % 2,820 kt 1.10 : 1 910 kt 86 kt 168 kt 605 kt 245 kt


We have changed cost estimates, due to a different project concept

DRX will ship a Heavy Mineral Concentrate. We treat this as though it were a base metal concentrate, with a charge related to metal recoveries plus operating costs plus a further charge for the facilities.

Figure 7 shows the recoveries that have been used in this analysis for each product.

Figure 7 : Assumed mineral recoveries

Zircon Rutile HitTi 87 HiTi 77 HiTi 67

Wet Plant / WCP 95 % 85 % 85 % 85 % 85 %

Dry Plant / MSP 87 % 70 % 45 % 75 % 70 %

Overall / TOTAL 83 % 60 % 38 % 64 % 60 % Source : Beer & Co estimates

Figure 8 shows the product expected to be recovered from mining 10Mt/yr of ore, grading as indicated in Figure 6.

Figure 8 : Saleable mineral in HMC ' 000 tonnes 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

zircon in HMC produced 53 81 81 81 74 71 71 71 71 65 62 62 19

rutile in HMC produced 4 8 8 8 6 6 6 6 6 5 4 4 1

HiTi 87 in HMC produced 8 14 14 14 13 12 12 12 12 10 9 9 3



HMC Sold 109 176 177 177 161 154 154 154 154 137 130 130 41


While the resource shows a range of products, the relatively small volumes and difficulties in getting definitive separation means that only 2 titaniferous products, in addition to the non‐magnetic zircon, are expected to be sold.



Figure 9 shows Beer & Co’s resulting final product sales and projected revenue. Note that the revenue relates to the volume of product not the final sales product. This makes it consistent with the costs shown in Figure 10.

Figure 9 also details our commodity price projections, which are considerably lower than those used in the PFS, but still a premium to current prices, reflecting Iluka’s advice in their August half year results presentation

Figure 9 : Saleable final product

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

AUD/USD 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850

Zircon USD /t 1,475 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

HiTi 87 USD/t 950 950 950 950 950 950 950 950 950 950 950 950 950

HiTi 67 USD/t 438 438 438 438 438 438 438 438 438 438 438 438 438

Final Product Volume

Zircon 46 kt 70 kt 70 kt 70 kt 65 kt 62 kt 62 kt 62 kt 62 kt 56 kt 54 kt 54 kt 17 kt

HitTi 87 7 kt 12 kt 12 kt 12 kt 10 kt 10 kt 10 kt 10 kt 10 kt 8 kt 7 kt 7 kt 2 kt

HiTi 67 29 kt 49 kt 50 kt 50 kt 46 kt 44 kt 44 kt 44 kt 44 kt 40 kt 38 kt 38 kt 12 kt

Revenue, AUD m 127 201 202 202 184 176 176 176 176 158 149 149 47


Our estimated changes in operating costs are due to

The use of a relocatable WCP; and

Lower oil prices

Otherwise, costs are about the same as in the PFS

Annual site costs are project to be about $50m :

Overburden removal, by truck and shovel, is projected to be $1.9/t, and the quantity varies as shown by changes in waste : ore ratio in Figure 6;

Annual mining cost, using dozer traps, is projected to be $11.4m, for 10Mt;

Wet plant cost are projected to be $14.2m;

Site admin and sales is projected to be $5.1m.

Transport of up to 177klt/yr of HMC is expected to cost

$33.6/t for 240km road haulage at 14c/t‐km;

$35/t for 1,000km by rail at 3.5c/t‐km;

$7.5/t to load onto a ship; and

US$ 45/t to ship to China.

These operational costs, plus the costs of the out‐sourced mineral separation, are shown in Figure 10.

Figure 10 : Projected EBITDA, Cyclone project

AUD m 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Revenue 127 201 202 202 184 176 176 176 176 158 149 149 47

Site Costs (38) (53) (53) (53) (51) (50) (50) (50) (50) (51) (51) (51) (18)

Transport (14) (23) (23) (23) (21) (20) (20) (20) (20) (18) (17) (17) (5)

MSP Fee (5) (8) (8) (8) (8) (7) (7) (7) (8) (7) (7) (7) (2)

Plant Charge (3) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (1)

Metal Losses (24) (39) (39) (39) (35) (34) (34) (34) (34) (30) (28) (28) (9)

Royalties (6) (9) (9) (9) (8) (8) (8) (8) (8) (7) (7) (7) (2)

E B I T D A 37 66 66 66 58 54 54 54 53 42 36 36 10


We calculate a project NPV of $125m

Figure 11 shows the net cashflows generated by the Cyclone project.

The NPV of these cashflows, after the DFS has been completed, using a 10% discount rate on the after‐tax cashflows to equity holders, is $125m.



Figure 11 : Projected cashflows for Cyclone project

AUD m 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

E B I T D A 37 66 66 66 58 54 54 54 53 42 36 36 10

Dep'cn & Amort'sn (10) (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) (4)

Interest Expense (6) (5) (4) (3) (1) (0) 0 0 0 0 0 0 0

Tax Expense (6) (14) (14) (15) (13) (12) (12) (12) (12) (8) (7) (7) (2)

N P A T 15 32 33 34 30 28 28 28 28 19 16 16 4

Project Cap. Ex (5) (141) 0 0 0 0 0 0 0 0 0 0 0 0 0

Sus. Cap. Ex 0 0 (1) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) 0 0

Net Cashflow to Equity (5) (70) 20 31 31 30 24 29 39 39 39 31 27 30 8


Valuation of DRX

Recent momentum has enabled DRX to re‐engage with potential Chinese off‐take partners

As a result, we expect that DRX will be able to sell a stake in the Cyclone project

Beer & Co believes that there is interest in investing in the Cyclone project, as shown by PMHL’s recent acquisition of a 6% stake.

Beer & Co expects that DRX will sell a further stake, which we have assumed to be 40%, in the project which will help finance the project as shown in Figure 12.

Figure 13 shows that Beer & Co’s risk weighted valuation of DRX is 4.4c/share

Figure 12 : Financing Cyclone

Project Value Jun. 15 $ 114m

Project Share sold 40 % $ 46m

Value Received 85 % $ 39m

Project Capital $ 146m

Debt Finance 50 % ($73m)

Project Equity Required $ 73m

DRX share 54% $ 39m

value received ($39m)

further DRX equity required $ 1m

DRX Working Capital $ 4m

DRX Equity to raise $ 5m


The sale of a project stake at a value related to its NPV will

Assist in securing debt finance; and

Provide much of the equity needed

Beer & Co’s risked, base case valuation is 4.4c/share

Figure 13 : Beer & Co’s value for DRX is 4.4/share

25‐Nov‐14

risk : 100% Product per share

Cyclone 70 % $ 51m $ 35m 2.4 c 2.7 c

franking credits 42 % $ 18m $ 7m 0.5 c 0.6 c

Cape Bedford nom $ 2m $ 2m 0.1 c 0.1 c

Tick Hill nom $ 2m $ 2m 0.1 c 0.1 c

Other / Exploration nom $ 0m $ 0m 0.0 c 0.0 c

Corporate 100 % ($23m) ($23m) (1.6c) (1.6c)

Asset Sales 80 % $ 31m $ 25m 1.7 c 1.9 c

Cash 100 % $ 1m $ 1m 0.1 c 0.1 c

Cash to be raised 80 % $ 9m $ 7m 0.5 c 0.5 c

TOTAL $ 90m $ 57m 3.9 c 4.4 c

Shares on issue 609.6m FPO shares 19.9m options

110m issued 2014 19.9m ex'd

442m issued 2015

276m Issued 2016

discount rate = 12.0 % 31‐Dec‐13




Conclusions

The key risks to Beer & Co’s valuation are

Commodity prices; and

Project finance

Beer & Co feels comfortable that mineral sands price will lift 40% from current levels, from under a third to under half of the prices 2 year back

Beer & Co is certain that there is good interest from potential off‐take parties in investing in Cyclone.

Beer & Co has a BUY, High Risk, recommendation.

This analysis has built on the PFS announced in March 2012.

DRX changed its Chief Executive in August, 2014, and since then many announcements have been made to advance the project, including Native Title and the Mining Lease. This momentum is critical to re‐engage the Chinese parties that wish to source zircon.

Key Risks

Beer & Co’s base case, risked valuation is 4.4c/share, a multiple of the share price, even after the strong rise, which has seen the share price more than double since the start of November.

The key risks in our valuation are :

Financing : being able to sell a project stake of 40% ‐ 50% at a value related to NPV is critical; and

Commodity prices : at current prices, the project is uneconomic, and a price rise of more than 10% is required, though this is modest given recent price swings.

In our analysis, an investment decision is not highly sensitive to capital and operating cost estimates.

Conclusion

Beer & Co is confident that the key risks are managed. We are confident that DRX will produce zircon in 30 months, so we have a BUY, High Risk, recommendation.



Diatreme : Cyclone and so much more

Background

DRX has a range of projects, as shown in Figure 14.

Figure 14 : DRX’s range of projects


On 1 July, 2014, DRX announced a Board re‐structure, with the Executive Chairman, Tony Fawdon, retiring and Neil McIntyre resigning as a Director and assuming the role of Chief Executive Officer.

Neil has focussed on advancing projects and so has trimmed DRX’s portfolio :

The development of Cyclone is the clear focus of DRX;

Pursuant to an option agreement from 2004, in November 2014, DRX exercised its option and executed a farm‐down with Superior Resources (SPQ.ASX) to undertake exploration;

DRX is reviewing Cape Bedford which is prospective both as high grade silica sand and also for heavy minerals.

Some other projects have been exited, while others are in suspension pending interest from potential third parties.

While Beer & Co is very encouraged by the prospects at both Tick Hill and Cape Bedford, at this stage we have not attributed significant value to these prospects.

Cyclone Zircon project

As shown in Figure 14, the Cyclone zircon project is just on the WA side of the border with SA. As shown in Figure 15, it is on the margin of the Eucla Basin. In the same province as Iluka (ILU)’s Jacinth‐Ambrosia.



Figure 15 : Cyclone, in WA, Eucla Basin


Geology

The Cyclone Deposit comprises mineralised strand systems which are interpreted to represent Tertiary (c. 35m years) beach placer deposits with overlying dunal and underlying near shore deposits.

There is a shallow weathering profile, with some rock in the overburden.

The mineralised sands are free flowing with very little rock and low slimes content.

Mineralisation occurs within discrete bimodal near‐shore fine sands, higher grade beach strandlines, homogenous beach sands, and overlying aeolian dune sands.

Figure 16 is a diagram representing the stratigraphic column at Cyclone.

Figure 16 : Cyclone deposit – stratigraphic profile

Source : www.diatreme.com.au/Projects/Cyclone



Resource

The Cyclone deposit was discovered in 2007 from drilling an elongated topographic feature. As the mineralisation occurs within a beach shoreline environment overlain by a thin dunal unit, all exploration has been completed using NQ Air Core drilling.

A total of 1,379 holes for 55,834m of drilling has been completed over the Cyclone Deposit. Most has been drilled at 50m hole spacing and drill lines are generally 150m apart with some lines spaced at 300‐500m, as shown in Figure 17.

Figure 17 : Drilling, Cyclone and Cyclone Extended

Source : DRX ASX announcement, 11 November 2014

On 5 October 2010, DRX announced an updated Resource estimate for Cyclone. Figure 18 shows the update of that estimate, announced in January 2014, to be compliant with JORC 2012.


1% cut‐off H M slimes over‐size Zircon Rutile 85% ‐ 95% 70%‐ 85% <70% SiTiOx

Measured 118 Mt 2.3 % 4.1 % 5.4 % 0.71 % 0.07 % 0.15 % 0.49 % 0.24 % 0.51 %

Indicated 19 Mt 1.5 % 3.3 % 5.0 % 0.38 % 0.05 % 0.04 % 0.49 % 0.07 % 0.28 %

TOTAL 137 Mt 2.2 % 4.0 % 5.4 % 0.67 % 0.07 % 0.14 % 0.49 % 0.21 % 0.47 %


The area included in the Resource is the area shown in Figure 17 in the pink‐orange colour. Note that all of the Resource is Measured and Indicated.


H M slimes over‐size Zircon Rutile 85% ‐ 95% 70%‐ 85% <70% SiTiOx

Measured 2,690 kt 4,838 kt 6,407 kt 842 kt 83 kt 179 kt 578 kt 280 kt 597 kt

Indicated 281 kt 627 kt 956 kt 73 kt 10 kt 8 kt 93 kt 13 kt 52 kt

TOTAL 2,972 kt 5,465 kt 7,363 kt 915 kt 92 kt 188 kt 671 kt 293 kt 650 kt




Figure 19 shows the contained valuable heavy minerals. It shows that the Cyclone project has nearly 1.0Mt of zircon in Resources, which comprises about 55% ‐ 60% of the total value of contained minerals in the Cyclone deposit.

Project Development

There is significant interest in Cyclone as a zircon rich deposit. On 10 August 2010, DRX signed a Memorandum of Understanding (MOU) with BaoTi, China’s largest consumer of titaniferous feedstocks and a major consumer of zircon.

To progress the project, a number of conditions needed to be fulfilled

A acceptable feasibility study needed to be completed

DRX announced the results of the Pre‐Feasibility Study on 20 March 2012;

Satisfactory results were required from metallurgical studies of bulk samples

BaoTi has successfully treated bulk samples;

An adequate supply of water needed to be assured

On 11 November 2013, DRX announced that it had successfully drilled a bore that produced water at a rate likely to be adequate for Cyclone operations;

The aquifer intersected is interpreted, from regional petroleum exploration, to be extensive;

Execution of an agreement with the Native Title claimants

On 17 November, 2014, DRX announced that it had signed an agreement with the Pila Nguru (Aboriginal Corporation) (RNTBC) representing the Spinifex People, the traditional owners of the land containing the project;

A Mining Lease needed to be issued

Following the Native Title agreement, DRX announced the issue of a Mining Lease on 24 November; and

Environmental approval granted

DRX has completed the studies and has submitted them to the WA Environmental Protection Authority (EPA);

On 25 October 2014, DRX received written advice from the Commonwealth Department of the Environment that no further assessment is required by the Commonwealth;

The Public Environmental Review will be made available for public review in early 2015;

The PER process is expected to be concluded by mid‐2015, providing environmental approvals for the entire project, including the haul road.

In conclusion, the only remaining condition before DRX is able to conclude an agreement with a potential partner is the environmental approval, which is well in train and boosted by the Native Title agreement.

Project Parameters

The key parameters from the PFS were :

Mining an Ore Reserve of 97Mt, as shown in Figure 7, at a rate of 10Mt a year;

A capital cost of $233m, including $14m for the Definitive Feasibility Study and $41m for a dry plant in China; and

Annual operating costs of $82m (revenue $191m less $78m profit less $24m taxes and $7m royalties).



Figure 20 : Cyclone project, Maiden ore reserve

Reserves HM Slimes over‐size Zircon Rutile Leucoxene HiTi Alt. Ilm Si‐TiOx Zircon Rutile HiTi + Ilm.

Probable 97 Mt 2.5 % 4.0 % 5.1 % 0.79 % 0.08 % 0.17 % 0.52 % 0.26 % 0.56 % 770 kt 78 kt 922 kt

Source : DRX ASX announcement, 7 February 2012, Beer & Co

Of the 132Mt in Resources, as per the 5 October 2010 announcement, containing 915kt of zircon, the Cyclone project is planned to mine 97Mt containing 770kt of zircon.

Bigger Resource, Cyclone Extended

Figure 17 showed that the Cyclone deposit extended to the south‐east, as shown by the area in the pale yellow colour.

On 10 November, 2014, DRX announced that it had agreed to purchase this extension of the Cyclone deposit, for $435,000 in cash, of which $20,000 has been paid and the balance is due by 10 March 2015, plus a 1% production royalty, on which DRX has the option to purchase the royalty for a further $435,000 in cash, by 31 January 2017.

As shown in Figure 21, Cyclone Extended has a Resource, overwhelmingly Indicated, at lower grades than Cyclone.

Figure 21 : Cyclone Extended – Mineral Resources estimate

1% cut‐off H M slimes over‐size Zircon 85% ‐ 95% <70%

Indicated 77 Mt 2.0 % 6.1 % 5.4 % 0.42 % 0.20 % 0.74 %

Inferred 9 Mt 1.2 % 2.3 % 5.0 % 0.26 % 0.06 % 0.50 %

TOTAL 86 Mt 1.9 % 5.7 % 5.4 % 0.40 % 0.18 % 0.71 % Source : Image Resources (IMA) ASX announcement, 23 July 2010, Beer & Co

Cyclone Extended can now be incorporated into a revised mine plan, though this has yet to be formally done.

Reduced Capital Cost

In their announcement of 21 November, 2014, DRX advised that estimated project capital cost had been reduced by $77m to $146m.

Beer & Co understands that the reduction in capital cost comprises :

$14m funds for the DFS, as this has been virtually completed, plus

$41m saving by not building a dry plant, but rather using existing spare capacity in China; plus

About $15m saving through re‐design of the wet plant; and

About $7m in various, other savings.

The changes in the estimated capital cost are shown in Figure 22.

The main saving, $41m from using existing spare dry plant capacity in China, will assist in the financability of the project and also result in an overall saving as existing plants do not require commissioning and spare capacity means that the economic return is low.

Mineral Technologies is continuing to refine the wet plant technology which will assist both recoveries and capital costs.



Figure 22 : Revised capital costs estimates

Pre‐Feasibiilty $ 1.7m $ 0.0m completed

Definisitve F/S $ 14.0m $ 5.0m some left

Project Management $ 4.0m $ 4.0m

Pre‐Strip $ 3.1m

Airstrip $ 3.0m $ 2.0m

Workshop, offices $ 3.0m $ 2.0m

Accommodation Camp $ 10.0m $ 10.0m

Mine site access roads $ 3.6m $ 0.2m with pre‐strip

Mine water management $ 2.0m $ 1.0m

Power supply $ 4.0m $ 4.0m

Water supply $ 12.0m $ 12.0m

Ligh vehicles, mobile plant $ 3.0m $ 3.0m

Wet Concentrator Plant $ 60.0m $ 45.0m re‐designed

Haul road $ 40.0m $ 35.0m re‐designed

Rail siding, train load $ 5.0m $ 5.0m

Hot Acid Leach $ 19.0m $ 0.0m out‐sourced

Dry plan (M S P) $ 22.0m $ 0.0m out‐sourced

E P C M $ 6.3m $ 5.4m

Contingency $ 10.4m $ 9.2m

TOTAL $ 223 m $ 146 m Source : DRX ASX announcements, 20 March 2012 and 21 November 2014, Beer & Co estimates

Lower Operating Costs

In their announcement of 21 November, 2014, DRX advised that estimated project capital annual operating costs had been reduced by $11m. Of this :

$7.5m is the operating cost of the dry plant

instead of being a cost, it becomes a deduction in revenue, in the manner of treatment charges and refining charges for base metals; and

there is an expected saving in power costs of $1.5m due to a design change in using a re‐locateable wet plant rather than a fixed plant so less pumping cost

at the time of the PFS, the price of oil was about $105/bbl and it is now about $75/bbl, so there is a further saving in our modelling

the balance of savings in a range of sundry areas.

Operations

Figure 10 shows the geological interpretation of the Cyclone deposit. As a general rule, the Strand resource, in the red outline, will tend to be the highest grade, while the nearshore resource in the blue outline, is lower grade and finer grained.

Figure 11 shows 2 sections across the Cyclone deposit showing variability both across the deposit and with depth, with 2 high grade cores.

Mining Inventory

Figure 18 showed that the Cyclone deposit had a Mineral Resource of 132Mt, grading 0.67% zircon. Figure 20 showed that from this Mineral Resource, an Ore Reserve of 97Mt grading 0.79% zircon was developed.

Figure 8 showed that the purchase of Cyclone Extended added a further 86Mt grading 0.40% zircon to the Mineral Resource.



Figure 23 : Cyclone deposit Figure 25 shows the Mining Inventory assumed by Beer & Co for this analysis.

It shows that Beer & Co has assumed that mining starts in a higher grade core and that the grades drop in later years, as the project adds resources which add value only at the margin.

It shows that Beer & Co has assumed that the first five years of the Cyclone project are slightly better than the original Cyclone Reserve, but the next 4 years bring the overall project into line with the Ore Reserve published by DRX on 7 February 2012.

The updated Resource, announced on 9 January 2014, had 0.79% zircon, 0.08% rutile.


Figure 24a : Cross Section of Cyclone deposit


Figure 24b : Cross Section of Cyclone deposit




Figure 25 : Beer & Co’s assumed mining inventory for expanded Cyclone project

1% cut‐off H M Zircon Rutile HitTi 87 HiTi 77 HiTi 67 H MWaste : Ore Zircon Rutile HitTi 87 HiTi 77 HiTi 67



Tranche 3 30 Mt 2.1 % 0.65 % 0.05 % 0.10 % 0.45 % 0.15 % 630 kt 1.1 : 1 195 kt 15 kt 30 kt 135 kt 45 kt

TOTAL 120 Mt 2.4 % 0.76 % 0.07 % 0.14 % 0.50 % 0.20 % 2,820 kt 1.10 : 1 910 kt 86 kt 168 kt 605 kt 245 kt


Mining Method

Figure 26 shows a diagram of envisaged operations.

It involves removing over‐burden from an initial area by truck and shovel to enable mining of ore by a dozer trap using 2 dozers.

In contrast to that shown in Figure 26, part of the review is to use a mobile west concentrator plant so that ore needs to be transported, by a slurry pipeline, only a modest distance.

After an initial establishment, the waste material, along with the tailings, will be placed in the mined out area.

Figure 26 : Proposed mining method for Cyclone deposit

Source : DRX Presentation, December 2013

As per the PFS, Beer & Co assume that DRX mine about 10Mt of ore each year, at a waste to ore ratio of about 1.1 : 1, as shown in Figure 25, to produce about 150kt a year of Heavy Mineral Concentrate (HMC).

The HMC will, as shown in Figure 27, be trucked about 240km to a rail head at Forrest where it will be loaded onto trains to be railed about 1,000km where it will be exported through Port Pirie.

A significant change from the PFS is that the HMC will be processed through a third party dry plant in China, where there is currently significant spare capacity.

Production

Ore will be mined at the rate of 10Mt/yr. Figure 28 shows the recoveries assumed by Beer & Co :

from ore to concentrate; and

from concentrate to final product.



Figure 27 : Transport of Cyclone Heavy Mineral Concentrate (HMC)

Source : DRX Presentation, December 2013

Figure 28 : Assumed mineral recoveries

Zircon Rutile HitTi 87 HiTi 77 HiTi 67

Wet Plant / WCP 95 % 85 % 85 % 85 % 85 %

Dry Plant / MSP 87 % 70 % 45 % 75 % 70 %

Overall / TOTAL 83 % 60 % 38 % 64 % 60 %


Figure 29 : Beer & Co’s estimated production for Cyclone

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Overburden 8,250 kt 12,000 kt 12,000 kt 12,000 kt 10,650 kt 10,200 kt 10,200 kt 10,200 kt 10,200 kt 10,800 kt 11,000 kt 11,000 kt 3,438 kt

Ore Mined 6,875 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 3,125 kt

Zircon 0.85 % 0.85 % 0.85 % 0.85 % 0.78 % 0.75 % 0.75 % 0.75 % 0.75 % 0.68 % 0.65 % 0.65 % 0.65 %

WCP Recovery 90 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 %

zircon in HMC p 53 kt 81 kt 81 kt 81 kt 74 kt 71 kt 71 kt 71 kt 71 kt 65 kt 62 kt 62 kt 19 kt

MSP Recovery 87 % 87 % 87 % 87 % 87 % 87 % 87 % 87 % 87 % 87 % 87 % 87 % 87 %

final product 46 kt 70 kt 70 kt 70 kt 65 kt 62 kt 62 kt 62 kt 62 kt 56 kt 54 kt 54 kt 17 kt

Rutile 0.09 % 0.09 % 0.09 % 0.09 % 0.08 % 0.07 % 0.07 % 0.07 % 0.07 % 0.06 % 0.05 % 0.05 % 0.05 %

WCP Recovery 72 % 84 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 %

rutile in HMC pr 4 kt 8 kt 8 kt 8 kt 6 kt 6 kt 6 kt 6 kt 6 kt 5 kt 4 kt 4 kt 1 kt

MSP Recovery 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 %


HitTi 87 0.17 % 0.17 % 0.17 % 0.17 % 0.15 % 0.14 % 0.14 % 0.14 % 0.14 % 0.11 % 0.10 % 0.10 % 0.10 %

WCP Recovery 72 % 84 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 %

HiTi 87 in HMC 8 kt 14 kt 14 kt 14 kt 13 kt 12 kt 12 kt 12 kt 12 kt 10 kt 9 kt 9 kt 3 kt

MSP Recovery 45 % 45 % 45 % 45 % 45 % 45 % 45 % 45 % 45 % 45 % 45 % 45 % 45 %


HiTi 77 0.55 % 0.55 % 0.55 % 0.55 % 0.52 % 0.50 % 0.50 % 0.50 % 0.50 % 0.47 % 0.45 % 0.45 % 0.45 %

WCP Recovery 72 % 84 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 %


MSP Recovery 75 % 75 % 75 % 75 % 75 % 75 % 75 % 75 % 75 % 75 % 75 % 75 % 75 %


HiTi 67 0.25 % 0.25 % 0.25 % 0.25 % 0.22 % 0.20 % 0.20 % 0.20 % 0.20 % 0.17 % 0.15 % 0.15 % 0.15 %

WCP Recovery 72 % 84 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 % 85 %


MSP Recovery 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 % 70 %


HMC Sold 109 kt 176 kt 177 kt 177 kt 161 kt 154 kt 154 kt 154 kt 154 kt 137 kt 130 kt 130 kt 41 kt




Figure 29 shows Beer & Co’s estimated production, based on the mining inventory shown in Figure 25, mined at the rate of 9.8Mt/yr, and the recoveries shown in Figure 28.

Costs

Figure 29 shows Beer & Co’s estimated site costs for the Cyclone project. It shows that the costs of dozer assist mining are low, though the costs of over‐burden removal and rehabilitation are consistent with that which would be expected from free dig (sand) material.

Figure 29 shows total annual on‐site costs are about $50m to produce about 150kt/yr of HMC, as shown in Figure 16.

Figure 30 : Beer & Co’s estimated site costs for Cyclone

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Overburden 8,250 kt 12,000 kt 12,000 kt 12,000 kt 10,650 kt 10,200 kt 10,200 kt 10,200 kt 10,200 kt 10,800 kt 11,000 kt 11,000 kt 3,438 kt

$ 14.9 m $ 22.2 m $ 22.2 m $ 22.2 m $ 19.9 m $ 19.1 m $ 19.1 m $ 19.1 m $ 19.1 m $ 20.1 m $ 20.5 m $ 20.5 m $ 6.5 m

AUD/t Material $ 1.8/t $ 1.8/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t $ 1.9/t

AUD/t HMC $ 137/t $ 126/t $ 126/t $ 126/t $ 123/t $ 124/t $ 124/t $ 124/t $ 124/t $ 147/t $ 158/t $ 158/t $ 159/t

Ore Mining 6,875 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 10,000 kt 3,125 kt

$ 6.2 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 8.9 m $ 2.8 m



Mine Planning $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 2.5 m $ 1.3 m



Wet Concentrat $ 9.7 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 14.2 m $ 4.6 m



Site Admin & Sa $ 4.7 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 5.1 m $ 2.3 m



TOTAL SITE COS $ 38 m $ 53 m $ 53 m $ 53 m $ 51 m $ 50 m $ 50 m $ 50 m $ 50 m $ 51 m $ 51 m $ 51 m $ 18 m



Figure 31 shows the balance of costs for Cyclone :

transport of HMC to port requires trucking 240km along an unsealed road, at an estimated cost of 14c/t‐km and then railing 1,000km to Port Pirie at a cost of 3.5c/t‐km, including loading;

ship loading is assumed to cost $7.5/t and shipping to southern China US$ 45/t.

Figure 31 : Beer & Co’s estimated total costs for Cyclone

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

On to Ship $ 8.3 m $ 13.4 m $ 13.5 m $ 13.5 m $ 12.3 m $ 11.7 m $ 11.7 m $ 11.7 m $ 11.7 m $ 10.5 m $ 9.9 m $ 9.9 m $ 3.1 m

Shipping $ 5.8 m $ 9.3 m $ 9.4 m $ 9.4 m $ 8.5 m $ 8.1 m $ 8.1 m $ 8.1 m $ 8.1 m $ 7.3 m $ 6.9 m $ 6.9 m $ 2.1 m


MSP Fee $ 5.1 m $ 8.0 m $ 8.1 m $ 8.2 m $ 7.6 m $ 7.3 m $ 7.4 m $ 7.4 m $ 7.5 m $ 6.8 m $ 6.5 m $ 6.6 m $ 2.2 m


TOTAL $ 57 m $ 84 m $ 84 m $ 84 m $ 79 m $ 77 m $ 77 m $ 77 m $ 77 m $ 75 m $ 74 m $ 75 m $ 25 m



Beer & Co has estimated the cost for toll treatment of the HMC, of about $7.5m, as the equivalent of the cost if the operations were company owned.



This means that the total annual costs estimated by Beer & Co is about $80m, which compares with $82m in the March 2012 PFS.

As explained, Beer & Co expects significant savings from lower oil prices.

In our modelling, Beer & Co has 2 extra costs for the Mineral Separation Plant :

a fee for the use of the plant, representing some return on capital invested, which we have assumed to be $4m a year; and

the cost of the metal losses, as shown by the recoveries from the dry plant in Figure 15.

Revenue

Product Volume

Figure 29 showed the detail of Beer & Co’s estimated production volume. Figure 19 shows the amount of valuable heavy mineral produced in concentrate.

Figure 32 : Saleable mineral in HMC ' 000 tonnes 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

zircon in HMC produced 53 81 81 81 74 71 71 71 71 65 62 62 19

rutile in HMC produced 4 8 8 8 6 6 6 6 6 5 4 4 1




HMC Sold 109 176 177 177 161 154 154 154 154 137 130 130 41


Figure 33 shows Beer & Co’s estimated production of final product. It shows that Beer & Co does not expect saleable product from each of the products shown in the Resource estimate, in Figure 20.

Figure 33 : Saleable final product

' 000 tonnes 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Zircon 46 70 70 70 65 62 62 62 62 56 54 54 17

HitTi 87 7 12 12 12 10 10 10 10 10 8 7 7 2

HiTi 67 29 49 50 50 46 44 44 44 44 40 38 38 12


Zircon is easily separated from the titaniferous products as the latter have high electrical conductivity while the former have low electrical conductivity. Separation of the various titaniferous products is more difficult as they cover a range of magnetic susceptibility, from low for rutile to high for low Ti products. Hence it is difficult to get a clear separation, so Beer & Co have assumed a high mag (HiTi67) and a low mag (HiTi87) product.

Beer & Co believes that there is scope to get better value from the titaniferous products, but we have not made this our base case.

In addition, by using third party MSP, it will be difficult for DRX to get value from better recoveries.



The PFS was based on annual saleable product volumes of :

65kt of zircon;

10kt HiTi87; and

46kt of HiTi67.

Beer & Co’s analysis has estimated average production over the first 9 years that is very consistent with the estimates in the PFS.

Prices

The PFS assumed long term prices of

$2,100/t for zircon;

$1,200/t for HiTi87; and

$400/t for HiTi67.

Since 2012, prices for mineral sands products have fallen. In their recent financial year presentation, Iluka (ILU.ASX) advised that prices for 2014 Q4 are :

$1,080/t for zircon; and

$910 for Rutile (c. 95% TiO2).

ILU also advised

Current zircon prices are below inducement level; and

Globally, zircon and high TiO2 grade assemblages are reducing.

Consistent with some other analysts, Beer & Co has assumed long‐run prices of :

$1,500/t for zircon; and

$1,250 for Rutile.

Beer & Co assumes that it takes until 2017 for prices to reach these levels.

The lower TiO2 products are priced off rutile, with :

$950/t for HiTi87; and

$438/t for HiTi67.

Project Revenue

Figure 34 shows that Beer & Co projects peak revenue of $202m in the high grade early years, and $177m average over the project life.

Note that the volumes are final product, while the revenue relates to product in HMC, to align with the costs in Figure 35.

Figure 34 : Projected revenue for Cyclone project

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

AUD/USD 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850 0.850

Zircon USD /t 1,475 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

HiTi 87 USD/t 950 950 950 950 950 950 950 950 950 950 950 950 950

HiTi 67 USD/t 438 438 438 438 438 438 438 438 438 438 438 438 438

Final Product Volume

Zircon 46 kt 70 kt 70 kt 70 kt 65 kt 62 kt 62 kt 62 kt 62 kt 56 kt 54 kt 54 kt 17 kt

HitTi 87 7 kt 12 kt 12 kt 12 kt 10 kt 10 kt 10 kt 10 kt 10 kt 8 kt 7 kt 7 kt 2 kt

HiTi 67 29 kt 49 kt 50 kt 50 kt 46 kt 44 kt 44 kt 44 kt 44 kt 40 kt 38 kt 38 kt 12 kt

Revenue, AUD m 127 201 202 202 184 176 176 176 176 158 149 149 47




Value of Cyclone Project

Above, we have shown the capital costs, operating costs and revenues for the Cyclone project.

Figure 35 shows the resulting EBITDA from the Cyclone project.

Figure 35 : Projected EBITDA, Cyclone project

AUD m 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Revenue 127 201 202 202 184 176 176 176 176 158 149 149 47

Site Costs (38) (53) (53) (53) (51) (50) (50) (50) (50) (51) (51) (51) (18)

Transport (14) (23) (23) (23) (21) (20) (20) (20) (20) (18) (17) (17) (5)

MSP Fee (5) (8) (8) (8) (8) (7) (7) (7) (8) (7) (7) (7) (2)

Plant Charge (3) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (1)

Metal Losses (24) (39) (39) (39) (35) (34) (34) (34) (34) (30) (28) (28) (9)

Royalties (6) (9) (9) (9) (8) (8) (8) (8) (8) (7) (7) (7) (2)

E B I T D A 37 66 66 66 58 54 54 54 53 42 36 36 10


Figure 36 shows the timetable expected by Beer & Co. To simplify this analysis, we have assumed that there is no project expenditure is expected during 2015.

Figure 37 shows the net cashflows from the Cyclone project.

Figure 36 : Expected timetable

Compelte DFS 6 months April 2015

Permits 2 months June 2015

Finance / JV 2 months August 2015

Construction 15 months November 2016

Commission 3 months February 2017

First HMC sale 2 months April 2017


Figure 37 : Projected cashflows for Cyclone project

AUD m 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

E B I T D A 37 66 66 66 58 54 54 54 53 42 36 36 10

Dep'cn & Amort'sn (10) (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) (4)

Interest Expense (6) (5) (4) (3) (1) (0) 0 0 0 0 0 0 0

Tax Expense (6) (14) (14) (15) (13) (12) (12) (12) (12) (8) (7) (7) (2)

N P A T 15 32 33 34 30 28 28 28 28 19 16 16 4

Project Cap. Ex (5) (141) 0 0 0 0 0 0 0 0 0 0 0 0 0

Sus. Cap. Ex 0 0 (1) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) 0 0

Net Cashflow to Equity (5) (70) 20 31 31 30 24 29 39 39 39 31 27 30 8


The NPV of the after‐tax cashflows, shown in Figure 24, after the DFS has been completed, but before construction has begun, is $125m.

In this analysis, we have assumed project finance providing 50% of the cost of the project, so the $5m to complete the DFS is shown as being a cost to equity providers, but only half of the project construction cost, of $141m, is paid by equity.

The pay‐back period, after tax and sustaining capital, is projected to be 3 years.



Other DRX Assets

Figure 14 showed that DRX had a number of exploration projects, each of which has potential. Figure 25 provides more detail.

Figure 38 : DRX’s exploration projects

Source : http://www.diatreme.com.au/projects/

Figure 38 shows that DRX has potential extensions to the Cyclone project.

While Beer & Co believes that there is good potential in ,any of these projects, we attribute nominal value to only 2 of these projects :

Cape Bedford; and

Tick Hill.

Cape Bedford

DRX’s Cape Bedford project is in far north Queensland. It surround the Cape Flattery silica project, the world’s largest silica mine, which has been in operation since 1967 and is now operated by Mitsubishi.

For DRX to be granted an EPM, it needs to reach agreement with the Native Title claimants and negotiations are in progress.



Prospecting has shown that the silica sand sequences mined by Mitsubishi extend into DRX tenements.

DRX is, however, focussed on the mineral sands potential and DRX has commenced discussions with Mitsubishi about both the silica sands and the valuable heavy minerals potential.

Tick Hill

Tick Hill, in north‐west Queensland, was operated by MIM from 1991 to 1995, producing 513,333oz of gold from 703kt of ore mined, making it the highest grading Australian gold mine of the modern era.

In 2004, DRX secured an option from Xstrata, which had taken over MIM.

Figure 39 : Cape Bedford

Source : http://www.diatreme.com.au/projects/CapeBedford

That option was exercised by DRX on 7 November 2014.

On 11 August, 2011, DRX announced that it had concluded a farm‐in agreement with Superior Resources (SPQ.ASX), and this agreement can now be implemented.

SPQ has the right to earn a 50% interest in the Tick Hill gold project by

Spending $750k on exploration;

Paying DRX $100k; and

Lodging half of the security bond on the tenements.

SPQ is of the view that there is the potential for a continuation of the rich lode that had been mined to have been off‐set by a fault.

SPQ will also look for short term revenue generation by

testing the tailings from the previous mining to determine if there is enough to warrant reprocessing,

assessing potential alluvial resources; and

investigating the grade of the old mine dumps.

Conclusions

Tick Hill will not require from DRX either further capital or management. It has prospects for short term cash generation as well as discovery.

Cape Bedford will require agreements to be executed with the Native Title claimants and also Mitsubishi; Cape Flattery was developed before Native Title existed so DRX holds to key.



Valuation of DRX

Figure 37 showed Beer & Co’s valuation of the Cyclone project.

DRX currently holds a 94% stake in the project. On 9 January 2014, DRX announced that Perpetual Mining Holding Limited (PMHL) had agreed to invest $2m for a 6% stake in the Cyclone project. This investment has been used to finalise the Native Title agreement, produce a JORC 2012 compliant updated Resource estimate, secure Cyclone Extended, as well updating project economics.

On 18 September, 2014, DRX announced that PMHL had secured its full project interest.

Financing Cyclone Development

With the recent rally in the DRX price, it still has a market cap of $11m, and both equity and debt capital markets will be very reluctant to fund a $141m project for a $11m company.

Beer & Co is confident that there is sufficient interest in the Cyclone project, as shown by the investment by PMHL, and also by the strong Chinese connections through the DRX board.

Figure 40 shows a potential financing for the Cyclone project, comprising 3 elements :

Sale of a stake in the project to a third party, such as an off‐take partner that has an interest in the project output;

Beer & Co has assumed that DRX is able to sell a 40% stake in the Cyclone for about 85% of the NPV of that stake

About 50% project debt

financing

the new project partner will assist in securing debt finance ; and

A small equity raising for the balance

In this case, the required equity is zero

Any raising will be done at a value that is related to the share price and not the value of the project.

Figure 40 : Financing Cyclone

Project Value Jun. 15 $ 114m

Project Share sold 40 % $ 46m

Value Received 85 % $ 39m

Project Capital $ 146m

Debt Finance 50 % ($73m)

Project Equity Required $ 73m

DRX share 54% $ 39m

value received ($39m)

further DRX equity required $ 1m

DRX Working Capital $ 4m

DRX Equity to raise $ 5m


DRX Valuation

Beer & Co projects that, in order to finance the development of the Cyclone project, DRX will end up with a stake in that project of 54%.

Beer & Co projects that DRX will need to raise equity, as opposed to selling a further slice of the project, as in the deal it did with PMHL earlier this year.



This near term equity raising will be required to complete the project Definitive Feasibility Study, including environmental clearances, and secure development finance.

In this analysis, we project that a further equity raising will not be required, but DRX may well determine that it would be prudent to do so given that the base case projection allows for very little slack.

Figure 41 shows that Beer & Co’s risk weighted base case valuation of DRX is 4.4c/share.

Figure 41 : Beer & Co’s value for DRX is 4.4c/share

25‐Nov‐14

risk : 100% Product per share

Cyclone 70 % $ 51m $ 35m 2.4 c 2.7 c

franking credits 42 % $ 18m $ 7m 0.5 c 0.6 c

Cape Bedford nom $ 2m $ 2m 0.1 c 0.1 c

Tick Hill nom $ 2m $ 2m 0.1 c 0.1 c

Other / Exploration nom $ 0m $ 0m 0.0 c 0.0 c

Corporate 100 % ($23m) ($23m) (1.6c) (1.6c)

Asset Sales 80 % $ 31m $ 25m 1.7 c 1.9 c

Cash 100 % $ 1m $ 1m 0.1 c 0.1 c

Cash to be raised 80 % $ 9m $ 7m 0.5 c 0.5 c

TOTAL $ 90m $ 57m 3.9 c 4.4 c

Shares on issue 609.6m FPO shares 19.9m options

110m issued 2014 19.9m ex'd

442m issued 2015

276m Issued 2016



Sensitivity Analyses

Beer & Co’s base case valuation is the result of a large number of estimates, each of which is subject to error. In our view, there are 4 major areas to be tested :

Risk weighting

Mineral recoveries

Commodity prices; and

Operating costs.

Risk Weighting v. Recoveries

Our base case, expected mineral recoveries were shown in Figure 28. In the discussion, we stated that we thought there was upside potential, especially for the titaniferous products.

Figure 42 : Potential recoveries Zircon Rutile HitTi 87 HiTi 77 HiTi 67

Better 85.5 % 60 % 55 % 64 % 64 %

Base Case 82.7 % 60 % 38 % 64 % 60 %

Poorer 80.8 % 55 % 43 % 51 % 51 % Source : Beer & Co estimates



Figure 42 shows a range of final recoveries of product. It shows that we expect scope for slight improvement in zircon, and similarly only modest downside, while our improved case has better recoveries in high TiO2 product, and the downside has lower recoveries for the low TiO2 product.

Our base case is risked, and Figure 43 shows a case for higher risk weightings and a case for un‐risked outcomes (ie. execution happens as we expect in our base case).

Figure 43 : Risk weightings

High Base Un‐Risked

Cyclone 55 % 70 % 100 %

franking credits 33 % 42 % 60 %

Corporate 100 % 100 % 100 %

Asset Sales 70 % 80 % 100 %

Cash to be raised 70 % 80 % 100 % Source : Beer & Co estimates

Figure 44 shows the outcomes of our sensitivity analysis of risk by recoveries.

Figure 44 : Risk by recoveries

Better Base Poorer

Un‐risked 9.7 c 6.5 c 4.1 c

Base Case 6.8 c 4.4 c 2.8 c

Highly riske 5.3 c 3.4 c 2.1 c Source : Beer & Co estimates

Figure 44 shows Beer & Co’s valuation is particularly sensitive to the downside as lower project values means more equity needs to be raise at values near the current share price.

Operating Costs

In Figure 45, we show the sensitivity of the results of our analysis to changes in operating costs. The base case for operating costs is not the same as that in Figure 31; we have included the plant fee for the MSP, but have excluded the transport costs, so the cost base is all costs that would be operating costs if the project had its own MSP, plus the fee to use the MSP of a third party.

Figure 45 : Sensitivity to Costs

+ 10 % Base (10 %)

Costs $ 69 m $ 63 m $ 57 m

value 2.8 c 4.4 c 6.7 c


Figure 45 shows that our results are sensitive to higher costs.

Product prices

Beer & Co’s base case product prices are $1,500/t for zircon and $1,250/t for rutile, with our assumed titaniferous product prices related to the rutile price, even though we do not have any rutile in our projected product suite.



Figure 46 shows the impact of lower sands prices. Our downside case is still prices above the current prices, and show only a weak price reaction to the expected tightening of supply and demand.

Figure 46 shows that the project is much more sensitive to zircon than titaniferous prices.

Figure 46 : Product prices

Rutile $ 1,500/t $ 1,250/t

$ 1,250/t 4.4 c 0.5 c

$ 1,000/t 2.7 c n/a

Zircon


Figure 46 indicates that the project needs prices to rise by more than 10% to be a valuable project.

Stake Sold

The size of the stake sold is an important assumption in this analysis

DRX has already sold a 6% stake in the Cyclone project, showing that there is an appetite for this, and this was done early in 2014 with the funds used to advance the project, with the announcements made in October and November;

If DRX is not able to sell a further stake, then, in Beer & Co’s view, DRX will not be able to raise sufficient debt and equity finance to fund development.

We have used a 40% stake. Figure 47shows that the optimum value is about 45%; If this is sold to PMHL, or related parties, then DRX will be the smaller party in the JV.

Figure 47 : Stake sold

40 % 45 % 50 %

value 4.4 c 5.2 c 5.1 cSource : Beer & Co estimates

Conclusions

This analysis has built on the PFS announced in March 2012.

DRX changed its Chief Executive in August, 2014, and since then many announcements have been made to advance the project, including Native Title and the Mining Lease. This momentum is critical to re‐engage the Chinese parties that wish to source zircon.

Key Risks

Beer & Co’s base case, risked valuation is 4.4c/share, a multiple of the share price, even after the strong rise, which has seen the share price more than double since the start of November.

The key risks in our valuation are :

Financing : being able to sell a project stake of 40% ‐ 50% at a value related to NPV is critical; and

Commodity prices : at current prices, the project is uneconomic, and a price rise of more than 10% is required, though this is modest given recent price swings.

Conclusion

Beer & Co is confident that the key risks are managed. We are confident that DRX will produce zircon in 30 months, so we have a BUY, High Risk, recommendation.



Board and Management

Cheng (William) Wang Non‐Executive Chairman

Mr Wang was appointed to the Board 26 May 2011.

He has a finance major from The Chinese University of Hong Kong. For 15 years he held senior management positions in several major Chinese state owned companies, with most recent role being in charge of an international commodities trading arm with group assets exceeding $1.5 billion.

Having worked across most provinces in China and understanding Chinese politics and government systems, he has developed wide business connections within China. Now domiciled in Australia, he has over recent years been active with Australian companies including directorships with China Century Capital Limited and Jupiter Mines Limited. William is also a director of Gulf Alumina Limited.

Andrew Tsang Non‐Executive Director

Mr Tsang was appointed to Board 23 January 2009.

He is a naturalised Australian citizen who was born and educated in China and who has successfully established and run construction, engineering and property development businesses, both in China and Australia, as well as establishing successful import agencies for Australian manufactured goods into China. Andrew is a non‐executive director of Mindax Limited and has sound commercial connections with many leading Chinese heavy industry producers.

Yufeng (Daniel) Zhuang Non‐Executive Director

Mr Zhuang was appointed to Board 1 August 2013.

He was nominated to the Board by the association of Chinese shareholders Messrs Z Zhuang, C Zhuang and Q Lin, to represent their significant investment and ongoing corporate commitments toward the Company.

Daniel holds a Bachelor of Arts in Economics (Investment Management) from the Central University of Finance and Economics (CUFE) and is currently completing a Master of Science (Project Management) through Stevens Institute of Technology in New Jersey, USA. He has worked for Ping An Securities in Beijing and Fujian Minxing Group in Zhangzhou, China.



Neil McIntyre ‐ MBE Chief Executive

Mr McIntyre was appointed to Board 28 July 2011, resigned as Director 26 August 2014 and appointed as Chief Executive.

He is a career banker with over 25 years of senior management experience at National and State levels in Australia, Asia and the Pacific, including eight years as Managing Director of Pacific Capital Limited in Papua New Guinea, a boutique Merchant Bank owned at that time by NM Rothschild and Sons Australia Ltd and several major PNG pension and superannuation funds which provided corporate and commercial advisory services with specialist expertise in the mining, petroleum and natural resource sectors.

Neil has been involved in the origination, financing and packaging of a number of resource companies in Papua New Guinea and Indonesia including Belvedere Limited, a major copper/gold exploration project (Yandera Mine) in Papua New Guinea subsequently sold to ASX and TSX listed Marengo Mining Limited and Indon Energi Limited, a PSC license holder in Indonesia and major holder of coal bed methane prospects jointly with PERTAMINA in Indonesia subsequently sold to ASX listed NuEnergy Capital Limited, and has held positions as Chairman , Executive Director , Director Finance and Non Executive Director in various listed and unlisted minerals and petroleum exploration companies regionally.

Mr McIntyre is a Member of the Australian Institute of Company Directors and in 2003 was made an ordinary member of the Civil Division of The Order of The British Empire ("MBE") for services to Commerce, Finance and Forestry in Papua New Guinea.

Ian Reudavey Chief Geologist BSc(Hons) ‐ Geology, MAIG

Ian joined CRA Exploration as a graduate in 1990, spending the next 4 years working on a number of precious and base metals exploration projects in PNG and the Pilbara region of WA. He then joined Placer Exploration and worked on a number of gold projects in WA, before commencing his mineral sands geological career with a position as Mine Geologist at Westralian Sands Capel mine site in 1995.

Ian completed a year long stint in Indonesia during the "Busang" gold rush of 1997, before re‐entering the mineral sands sector as a geologist at Consolidated Rutile's North Stradbroke Island mining operations. During his 8½ year service with CRL he progressed to the role of Technical Services Manager on North Stradbroke Island, before joining a privately owned company as their lead technical adviser for a mineral sands project in Bangladesh. After 2 ½ years in this role, he returned to Brisbane and joined the team at Diatreme Resources as Chief Geologist in August 2010.



Phil McMurtrie Contract Project Manager, Cyclone Zircon Project BEng (Mining), DipPM, MAusIMM, MAIPM

In 1982, Phil began as a Graduate Mining Engineer with Hamersley Iron in the Pilbara region of Western Australia and subsequently accepted positions as Mining Engineer with Queensland Nickel at the Greenvale nickel mine in North Queensland, Senior Mining Engineer with Consolidated Rutile at the mineral sand dredging and concentrating operations on North Stradbroke Island, Mine Manager with Republic Resources at the Yarrowick alluvial gold mine in New South Wales, and Mine Manager and Operations Manager with Consolidated Rutile at the mineral sand operations on North Stradbroke Island.

In 1996 Phil moved from mine operational roles to mine development roles when he was appointed Project Manager for the feasibility study into the development of a new mineral sand dredging operation at Yarraman on North Stradbroke Island and was subsequently appointed Project Manager for the implementation and commissioning phases of the project. On successful completion of the Yarraman Project he managed operational support projects for CRL in the role of Projects and Capital Manager until 2003 when he commenced work as a Consultant Project Manager for mine development projects.

Since 2003 Phil has worked extensively on mineral sand, industrial minerals, and iron sand mine development projects from exploration, through the various stages of feasibility studies, government approvals, project implementation, and commissioning.

Phil McMurtrie now specialises in providing mine development Project Management Services to mining and exploration companies to assist the development of mineral resources through completion of feasibility studies and the management of project implementation and commissioning.

Tuan Do CA Financial Controller / CFO and joint company secretary

Tuan has a degree in Commerce & Business Administration and is a member of the Institute of Chartered Accountants of Australia.

He started his career with Ernst & Young an international Chartered Accountancy firm. He has knowledge of and experience with finance, financial reporting, treasury and cash management, taxation and internal risk management.

He brings 25 years of business and finance experience to Diatreme. Tuan's experience includes, 12 years in senior financial positions for a major distribution & manufacturing business, and 4 years with large Australian coal & gold mining companies.

Tuan is also currently the Joint Company Secretary for Diatreme. He attends all the company's Board meetings and reports to the Board on all financial matters.



Beer & Co ResearchDiatreme Minerals (DRX.ASX)

Year ended December 2013 2014 2015 2016 2017 2018 2019 Year ended December 2015 2016 2017 2018 2019 2020

Section 1 - P&L Commodity price assumptions

Sales revenue $A m 0 0 0 0 51 81 81 AUD/USD 0.850 0.850 0.850 0.850 0.850 0.850

Interest revenue $A m 0 0 0 0 0 0 1 Zircon USD /t 1,275 1,375 1,475 1,500 1,500 1,500

Other revenue $A m 0 0 0 0 0 0 0 Rutile USD /t 1,075 1,175 1,250 1,250 1,250 1,250

Total Revenue $A m 0 0 0 0 51 82 82 HiTi 87 USD/t 817 893 950 950 950 950

HiTi 75 USD/t 637 696 740 740 740 740

Cost of Goods Sold $A m 0 0 0 0 (28) (41) (41) HiTi 67 USD/t 376 411 438 438 438 438

Royalties $A m 0 0 0 0 (3) (5) (5)

Exploration Expense $A m (3) 0 0 0 0 0 0 Mine Production, 100% basis

Corporate Costs $A m (2) (2) (2) (2) (4) (4) (4) Mine production '000t 0 0 6,875 10,000 10,000 10,000

Total Operating Expenses $A m (5) (2) (2) (2) (35) (50) (50) Zircon in HMC, '000t 0 0 53 81 81 81

Rutile in HMC, '000t 0 0 4 8 8 8

EBITDA $A m (5) (2) (2) (2) 16 32 32 HiTi 87 in HMC, '000t 0 0 8 14 14 14

Dep'cn & Amort'sn $A m (0) 0 0 0 (5) (8) (8) HiTi 77 in HMC, '000t 0 0 27 46 47 47

EBIT $A m (5) (2) (2) (2) 11 24 25 HiTi 67 in HMC, '000t 0 0 12 21 21 21

Interest Expense $A m (0) 0 0 (0) (3) (3) (2) TOTAL HMC '000t 0 0 109 176 177 177

Other $A m

Pre‐Tax Profit $A m (5) (2) (2) (2) 8 21 22 Attributable production (DRX share)

Tax Expense $A m 0 1 1 1 (2) (6) (7) Heavy Mineral Conc. '000t 0 0 59 95 95 95

NPAT $A m (5) (1) (1) (1) 5 15 16

Resources

Section 2 - Key Data Cyclone H M Zircon Rutile 85% ‐ 95% 70%‐ 85% <70%

Ordinary shares ‐ year end m 610 719 1,161 1,437 1,437 1,437 1,437 Measured 118 Mt 2.3 % 0.71 % 0.07 % 0.15 % 0.49 % 0.24 %

Fully diluted shares on issue m 610 719 1,161 1,437 1,437 1,437 1,437 Indicated 19 Mt 1.5 % 0.38 % 0.05 % 0.04 % 0.49 % 0.07 %

Weighted # shares m 559 667 1,161 1,437 1,437 1,437 1,437 TOTAL 137 Mt 2.2 % 0.67 % 0.07 % 0.14 % 0.49 % 0.21 %

Earnings per Share (0.1c) (0.2c) (0.1c) (0.1c) 0.4 c 1.0 c 1.1 c Cyclone Extended

Dividends Per Share 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c Indicated 77 Mt 2.0 % 0.42 % 0.0 % 0.20 % 0.0 % 0.74 %

Inferred 9 Mt 1.2 % 0.26 % 0.0 % 0.06 % 0.0 % 0.50 %

Section 3 - Balance Sheet TOTAL 86 Mt 1.9 % 0.40 % 0.0 % 0.18 % 0.0 % 0.71 %

Cash $A m 1 1 38 3 11 24 33

Receivables $A m 0 0 0 0 11 12 12 Assumed mining inventory

Other $A m 0 0 0 0 0 0 0 Tranche 1 40 Mt 2.6 % 0.85 % 0.1 % 0.17 % 0.6 % 0.25 %

CURRENT ASSETS $A m 1 1 38 3 21 36 45 Tranche 2 50 Mt 2.3 % 0.75 % 0.1 % 0.14 % 0.5 % 0.20 %

Tranche 3 30 Mt 2.1 % 0.65 % 0.1 % 0.10 % 0.5 % 0.15 %

Receivables $A m 0 0 0 0 0 0 0 TOTAL 120 Mt 2.4 % 0.76 % 0.1 % 0.14 % 0.5 % 0.20 %

P , P & E $A m 0 0 0 77 73 67 60

Mining Properties / Exploration $A m 20 20 17 17 16 15 14 Asset based Valuation

Other $A m 1 0 0 0 0 0 0

NON‐CURRENT ASSETS $A m 21 21 18 94 89 82 75 41968.673

TOTAL ASSETS $A m 22 22 55 97 110 118 120 risking 100% Product per share

Cyclone 70 % $ 51m $ 35m 2.4 c 2.7 c

Payables $A m 1 0 0 0 3 4 4 franking credits 42 % $ 18m $ 7m 0.5 c 0.6 c

Debt $A m 0 0 0 2 8 8 9 Cape Bedford nom $ 2m $ 2m 0.1 c 0.1 c

Other $A m 0 0 0 0 0 0 0 Tick Hill nom $ 2m $ 2m 0.1 c 0.1 c

CURRENT LIABILITIES $A m 2 0 0 2 8 8 9 Other / Exploration nom $ 0m $ 0m 0.0 c 0.0 c

Corporate 100 % ($23m) ($23m) (1.6c) (1.6c)

Long Term Debt $A m 0 0 0 36 28 20 12 Asset Sales 80 % $ 31m $ 25m 1.7 c 1.9 c

Deferred Tax Liability $A m 0 0 0 0 0 0 0 Cash 100 % $ 1m $ 1m 0.1 c 0.1 c

Other $A m 0 0 0 0 0 0 0 Cash to be raised 80 % $ 9m $ 7m 0.5 c 0.5 c

Provisions $A m 0 0 0 0 0 0 0 TOTAL $ 90m $ 57m 3.9 c 4.4 c

NON‐CURRENT LIABILITIES $A m 0 0 0 36 28 20 12 Shares on issue 609.6m FPO shares 19.9m options

TOTAL LIABILTIES $A m 2 0 0 38 36 28 20 109.6m issued 2014 19.9m ex'd

NET ASSETS $A m 21 22 55 59 75 90 100 441.7m issued 2015

276.4m Issued 2016

Accumulated Profit (Loss) $A m (25) (27) (28) (29) (24) (9) 7 Estimated Cash Costs, US $ /t of HMC

Reserves $A m 0 1 31 30 38 38 32 LoM 2017 2018 2019 2020 2021

Contributed Equity $A m 46 47 52 58 58 58 58 Overburden 113 116 107 107 107 105

Total Equity $A m 21 22 55 59 71 86 96 Ore Mining 49 49 43 43 43 47

Mine Planning 14 20 12 12 12 13

Section 4 - Cashflow Wet Concentrator 78 75 69 68 68 75

Net Cashflow from operations $A m (2) (2) (2) (2) 16 32 32 Site Admin & Sales 29 37 25 25 25 27

Net Interest Paid $A m 0 0 0 (0) (3) (3) (2) Transport of HMC 110 110 110 110 110 110

Taxes Paid $A m 0 0 0 0 0 0 (4) MSP Fee 250 252 247 248 248 249

Change in Working Capital $A m 0 0 0 0 (7) (1) 0 Royalties 44 44 44 43 43 43

OPERATING CASHFLOW $A m (2) (2) (2) (2) 5 27 25 TOTAL 686 702 657 655 656 669

Exploration Expenditures $A m 0 0 (5) 0 0 0 0 Financial Ratios

Maintenace Capex $A m 0 0 0 0 (1) (1) (1) Year ended December 2013 2014 2015 2016 2017 2018

Expansion Capex $A m 0 0 0 (76) 0 0 0 Revenue $A m 0 0 0 0 51 82

PPE Acquisitions (Total Capex $A m 0 0 (5) (76) (1) (1) (1) EBITDA $A m (5) (2) (2) (2) 16 32

PPE Divestments $A m 0 0 39 0 0 0 0 EBIT $A m (5) (2) (2) (2) 11 24

INVESTING CASHFLOW $A m 0 0 34 (76) (1) (1) (1) Adjusted EPS (cps) (0.1c) (0.2c) (0.1c) (0.1c) 0.4 c 1.0 c

EPS Growth (%) (245%) 43 % 17 % 477 % 185 %

Change in Equity $A m 0 1 5 5 0 0 0 DPS (c) 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c

Dividends Paid $A m 0 0 0 0 0 0 0 Dividend Yield (%) 0 % 0 % 0 % 0 % 0 % 0 %

Change in Debt $A m 0 0 0 38 (2) (8) (8) PE adj. (x) x (33) (8) (14) (16) 4 2

FINANCING CASHFLOW $A m 0 1 5 43 (2) (8) (8) EV / EBITDA (x) x (2) (5) 10 (37) 3 1

EV / EBIT (x) x (2) (5) 10 (37) 4 1

Free Cashflow $A m (2) (2) 32 (79) 4 26 24 Gearing (%) 0 % 0 % 0 % 39 % 32 % 24 %

Net Cashflow $A m (2) (1) 37 (35) 2 19 16 Return on Assets (24%) (9%) (4%) (2%) 10 % 21 %

Return on Equity (23%) (6%) (2%) (2%) 7 % 17 %

Major Shareholders EBITDA Margin (%) n/a n/a n/a n/a 31 % 39 %

Andrew Tsang 111.5m 15.5 % Non‐Executive Director Interest Cover (x) x n/a n/a n/a (3.7) 3.2 8.3

Zhenbin Jiang 82.0m 11.4 %

Yufeng Zhang 59.6m 8.3 % Non‐Executive Director

Chenxia Zhou 50.0m 7.0 %

November 2014




Important Information Confidential This document is for the confidential use of the recipients only and is not to be reproduced without the authority of Beer & Co Pty Ltd. It has been prepared at the request of Diatreme Resources Limited and Beer & Co Pty Ltd will receive a fee for its preparation. Disclaimer The persons involved in or responsible for the preparation and publication of this report believe that the information herein has been obtained from reliable sources and that any estimates, opinions, conclusions or recommendations are reasonably held at the time of compilation. No warranty is made as to the accuracy of the information in this document and, to the maximum extent permitted by law, Beer & Co Pty Ltd and its related entities, their respective directors and officers disclaim all liability for any loss or damage which may be suffered by any recipient through relying on anything contained or omitted from this document. General Advice The content is of a general nature and is based on a consideration of the securities alone, and as such is conditional and must not be relied upon without advice from a securities adviser as to the appropriateness to you given your individual investment objectives, financial situation and particular needs. Whilst this document is based on information and assessments that are current at the date of publication, Beer & Co Pty Ltd has not undertaken detailed due diligence on the information provided and has no obligation to provide revised assessments in the event of changed circumstances. Disclosure Beer & Co Pty Ltd has been engaged by Diatreme Resources Limited to prepare this research report and is being paid a fee for its preparation. In the future, Beer & Co Pty Ltd may provide capital raising services to Diatreme Resources Limited on commercial terms. Directors of Beer & Co or other associate companies may own securities in Diatreme Resources Limited. Beer & Co Pty Ltd seeks to do work with those companies it researches. As a result, investors should be aware that Beer & Co Pty Ltd may have a conflict of interest that could affect the objectivity of this report. Analyst Certification The analyst responsible for this research report certifies that all of the views expressed reflect his personal views about the securities and the issuer. Report prepared by : Pieter Bruinstroop [email protected]

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