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1 30 January 2013 Manager Companies Australian Securities Exchange Level 6, 20 Bridge Street Sydney NSW 2000 By ELodgement REPORT FOR THE QUARTER ENDED 31 DECEMBER 2012 Level St Kilda Road Melbourne, VIC, 3004 PO Box 6315 St Kilda Road Central Melbourne, VIC, 8008 Telephone: Directors Mr Joseph Gutnick Executive Chairman and Chief Executive Officer Mr Henry Herzog NonExecutive Director Dr David S Tyrwhitt NonExecutive Director Mr Craig Michael NonExecutive Director Senior Management Mr Peter Lee CFO & Company Secretary Mr Mike Kammermann Exploration Manager Mr Eric Magee Merlin Mine Operations Manager Merlin Mine Commencing Mining Operations Merlin Diamonds and Jet Mining have executed an agreement for Jet Mining to commence borehole mining operations at the Merlin Diamond Mine. The mining is expected to commence in the second quarter 2013 for trial operations aimed at optimising production. Full commercial mining operations will commence in the third quarter The Company has appointed Eric Magee as Operations Manager for the Merlin Diamond Mine. Work package tenders have been released for outsourcing processing plant operations and camp support services. Merlin Reserves and Resources Ore Classification Probable Ore Reserves Indicated & Inferred Mineral Resources Material (Mt) Average Grade (ct per tonne) Carats (Mcts) TOTAL The above Ore Reserves are additional to the Mineral Resources and are estimated on open pit and underground mining assumptions. A Reserve for alternative mining methods has not yet been estimated. Corporate Placement of 43 million ordinary shares at a price of 21 cents per share raising $9,030,000 of which 18 million shares have been issued with the balance to be issued by early March $8 million convertible note to international investor convertible at 21 cents per share., December 2012 Quarterly Report Page 1

2 Merlin Diamond Mine Trial Production Jet Mining Pty Ltd, an affiliate of USA based Kinley Exploration, has defined the technical and economic parameters for hydraulic ore cutting at Merlin. When implemented, this technology will enable the direct extraction of ore at Merlin without the need for capital intensive underground development or overburden removal. Jet Mining and Merlin Diamonds have executed the contract to begin mining operations at the Merlin Diamond Mine. The Company expects the borehole mining equipment and drilling rig to be commissioned during the second quarter The commissioning phase will be conducted on a single shift basis, mining kimberlite ore from the PalSac pipe. Subsequent to the successful commissioning of the borehole mining rig, double shift operations will commence at the higher grade Ywain kimberlite pipe. During the trial period, factors affecting ore extraction rates will be studied and the engineering processes optimised. Also, integration of mining and ore processing will be undertaken to establish the production levels for the Mine. Once a steady rate of diamond production is achieved, the Company expects mining and processing to continue uninterrupted. At that time, the Company will examine its options for increasing production which may include additional borehole mining rigs and/or plant upgrades. The Company s aim is to be producing at a minimum rate of 250,000 carats per year by the second half of 2014 with anticipated cash costs of less than US$150 per carat or less than US$60 per tonne of ore mined. The Company will initially outsource the operational and support activities at the Mine. Tenders for mining, haulage, processing and camp management have been released and the Company is evaluating the options. This strategy will allow the operation to commence production without the obligations and potential delays involved in Merlin employing and training staff inhouse. In the near term, Merlin management will focus on integrating and optimising site operations. Once production processes are in place, and the mine is operating in a steady state, the Company intends to move into a cost effective owner operated business model. Merlin Diamonds has appointed Eric Magee as Operations Manager for the Merlin Diamond Mine. Mr Magee is a qualified engineer with post graduate studies in Mining Engineering. He has over 25 years experience in the mining industry in South Africa and Australia. Between 2008 and 2012, he worked for Kimberley Diamond Company, with his final role being General Manager Operations. The Company has prepared tenders for key areas of the mines operation. Site visits by short listed companies have been concluded and the Company is awaiting proposals for two out of the three work packages., December 2012 Quarterly Report Page 2

3 Work Package 1: Mining Jet Mining has been awarded the tender for the provision of specialised borehole mining equipment, engineering and project management services to commence kimberlite ore extraction in the second quarter The work package specifies management of inpit operations and the engagement of a third party drilling contractor. All mining activity and ore haulage will be managed by Jet Mining. Work Package 2: Ore Processing The processing tender calls for suitable engineers to operate, maintain and possibly upgrade the Merlin processing plant. DRA Group has conducted a site visit and are preparing a proposal. DRA Group has an established history with the Merlin Mine. DRA designed the Merlin plant for Ashton Mining in the early days of the project. Work Package 3: Camp Facilities The camp facilities tender calls for suitable remote catering suppliers to supply catering and camp management services for the Merlin mine camp. Cater Care Group has conducted a site visit and is preparing a proposal. Cater Care Group are an industrial catering and accommodation company with experience in mining, offshore and remote sites. Merlin Exploration Program Since the early 1990 s a total of 11 kimberlite pipes have been discovered on the Merlin Mine Lease. The Mine s previous owners conducted extensive geochemical sampling and followed up with a drilling program resulting in the discovery of a lens shaped kimberlite body 100m south of Bedevere. The Company holds a significant historical database and data derived from sampling and drilling programs. The Company believes that the area covered by and near the Merlin Mine Lease has the potential to host undiscovered kimberlites. During 2012, a review of the exploration data has been commissioned and an exploration program designed with the goal of targeting unresolved geophysical, geochemical and structural anomalies. An exploration program drilling 42 targets was conducted at the Merlin Diamond Mine. The drilling program drilled 128 holes for a total of 3,568 metres. No kimberlites were intersected, however two drillholes intercepted anomalous geology in the sandstone cover. Samples from a fissure and a possible brecciated pipe discovered during the drilling program have been taken for indicator mineral analysis. No geochemical or heavy mineral results will be available until the next quarter. Numerous untested kimberlite targets remain to be drilled within the Merlin Mine Lease. Borroloola Alluvial Diamond Project An application was lodged in 2004 (Exploration Licence Application 24512) for an area of 289 blocks (approximately 230,000 acres), 10 kilometres south of the township of Borroloola. The Northern Land Council s Full Council ratified the Borroloola traditional owners decision to consent to the grant of the licence. On 29 August 2011, Exploration Licence was granted to the Company for a period of six years. The Borroloola alluvial gravels are exposed at surface in an area covering 5km 2. However, the total area which could potentially host alluvial gravel deposits on the Company s tenements is yet to be, December 2012 Quarterly Report Page 3

4 explored and is in the order of 300km 2. This significantly increases the opportunity to identify a large volume, high value alluvial diamond deposit. Following the grant of the exploration licence for the Borroloola Alluvial Diamond Project (EL24512) in August 2011, the Company immediately commenced the excavation of 5,000 tonnes of alluvial material from known diamond bearing gravel deposits. The purpose of the tests was to commence the assessment of the economic potential of the gravels by determining diamond quality, quantity and distribution in the alluvial material. The bulk sampling program focused on an area of outcropping gravel. Material from three costeans, 3,000 tonnes in total, has been processed at the Merlin Mine, yielding 22 stones with a total weight of 1.09 carats. Thirteen of the recovered diamonds are white in colour including the largest two at 0.19 and 0.25 carats. High water levels in rivers leading to the Merlin Diamond Mine prevented 2,000 tonnes of gravel from two costeans being transported during the wet season. This material will be processed in due course and further exploration work aimed at understanding the fluvial architecture of the gravels will be planned. The Borroloola Alluvial Diamond Project represents a significant and unique opportunity to explore for a large volume, high value, alluvial diamond deposit. Lancelot Prospect At the Lancelot Prospect (EL25676), in the Merlin Orbit tenements, an analysis of airborne gravity and magnetic data acquired in 2004, in conjunction with geochemical sampling has highlighted overlapping geophysical anomalies in proximity to geochemical anomalies. A Mine Management Plan has been submitted and accepted by the Department of Mines and Energy in the Northern Territory for an exploration costeaning program. The costeaning program was completed in November 2012 and targeted 30 sites. Fifty eight costeans were excavated and 91 samples comprising 20 to 80 kg each were collected for indicator mineral analysis. The results of this analysis are pending. In addition to testing the coincidental geophysical anomalies for the potential to be primary kimberlite, the program was designed to map and sample buried alluvial channels, known as palaeochannels, which may carry kimberlite indicator minerals. These palaeochannels were identified in drilling and costeaning during 2009 and The 2012 sampling will establish the distribution of chromites and micro diamonds in this alluvial material. This information will be used as vectors in future exploration programs to identify locations of primary kimberlite sources. Arnhem Land Exploration In October 2012 the Company collected 47 diamond exploration samples totalling 1,920kg over tenements EL331, EL3337, EL10233 and EL330. To date results from 28 samples have been received from the laboratory. Chromites were recovered in seven samples but are considered to be worn,, December 2012 Quarterly Report Page 4

5 weathered and of nonkimberlitic origin. A cube shaped microdiamond recovered in one sample is also considered to be of nonkimberlitic origin. Merlin Diamond Mine Project Background The Merlin Diamond Mine Project is located some 100km south of the settlement of Borroloola and comprises 14 kimberlite pipes. Since 1998, 9 of the Merlin pipes have been subject to openpit mining over a 5 year period. These previous mining operations produced 507,000 carats of diamonds. This included Australia s largest diamond at cts. In 2004, Merlin Diamonds acquired the project from the Rio Tinto parties. Mining Operations The Company s aim is to commence production in the third quarter of To meet this aim, capital items and personnel are currently being sourced. Resource Estimate Mining studies have enabled some of the Indicated Resources to be upgraded to Probable Ore Reserves. This resource estimate makes the Merlin Diamond Mine Project the second largest combined diamond resource and reserve in Australia. The combined Mineral Resource and Ore Reserve for all of the diamond pipes at Merlin is 30.1 million tonnes representing a total contained 7.2 million carats. A Reserve for alternative mining methods has not yet been estimated. Probable Ore Reserve The combined Probable Ore Reserve for all diamond pipes at Merlin is 11.1 million tonnes for an average grade of 26 carats per hundred tonnes ( cpht ) representing a total contained 2.89 million carats. Southern Cluster Probable Ore Reserve (Mt) Grade (cpht) Carats (Mcts) PalSac SubTotal Central Cluster Gawain Ywain SubTotal Northern Cluster Kaye Ector SubTotal TOTAL , December 2012 Quarterly Report Page 5

6 1 Resource grade based on previous mining operation recovery using a mm slotted bottom screen and a +0.95mm cutoff. 2 Resource grade based on bulk sample test work using a mm slotted bottom screen and a +1mm cutoff. The above Ore Reserves are additional to the Mineral Resources and are estimated on open pit and underground mining assumptions. A Reserve for alternative mining methods has not yet been estimated. Inferred and Indicated Resources The combined Indicated and Inferred Mineral Resource for all diamond pipes at Merlin is million tonnes for an average grade of 24 carats cpht representing a total contained 4.31 million carats. Southern Cluster Indicated Mineral Resource (Mt) Inferred Mineral Resource (Mt) Total (Mt) Grade (cpht) Carats (Mcts) PalSac Launfal Excalibur Tristram SubTotal Central Cluster Gawain Ywain SubTotal Northern Cluster Gareth Kaye Ector Bedevere SubTotal TOTAL Resource grade based on previous mining operation recovery using a mm slotted bottom screen and a +0.95mm cutoff. 2 Resource grade based on bulk sample test work using a mm slotted bottom screen and a +1mm cutoff. The above Mineral Resources are additional to the Ore Reserve and are estimated on open pit and underground mining assumptions. A Reserve for alternative mining methods has not yet been estimated., December 2012 Quarterly Report Page 6

7 DIAMOND EXPLORATION OVERVIEW Merlin Orbit Projects, Northern Territory The Merlin Orbit Project comprises an area of some 2,000km 2, and encompasses numerous known unresolved occurrences of indicator minerals and diamonds. Arnhem Land Projects, Northern Territory In 2009, the Company purchased all rights and title to tenements held by De Beers Exploration Australia Limited within Arnhem Land. These tenements are considered to have potential for diamonds and other minerals. The total Arnhem Land project area now encompasses some 20,000km 2. North Australian Diamonds Tenements Swancove and Red River Resources Joint Venture Agreement Merlin Diamonds Earning 80% Merlin Diamonds has a contractual right to obtain an 80% interest in two tenements covering some 2,000km² of land in the prospective western region of Arnhem Land. The Company s right to acquire an 80% interest in the two tenements is conditional on the grant of these tenements which are currently at the application stage. KIMBERLEY PROJECTS North Kimberley Within the Company s North Kimberley project area, the Company had previously identified a total inferred resource of 1.57M carats, contained within the Ashmore and Seppelt 1 and 2 pipes. The Company holds these resources under mining leases, as they continue to retain commercial potential. CORPORATE On 14 December 2012, the Company announced that it has entered into Application for Shares Agreements with four international investors to place 43 million fully paid ordinary shares at a price of 21 cents each raising $9,030,000. Since that announcement, the Company has issued 18 million shares ($3,780,000) and the balance of 25 million shares is due to settle by 4 March At the same time, the Company announced that that it has entered into an $8 million convertible note agreement with an international investor. The convertible note is for 1 year and bears interest at 6.5%. Interest is payable quarterly. The convertible notes can be converted into fully paid ordinary shares at any time during the 1 year period at a conversion price of 22 cents. The convertible notes are unsecured. The issue of the convertible note was subject to shareholder approval, which was obtained on 25 January The funds raised by the placements and convertible note are to provide financing towards the recommencement of mining operations at the Merlin diamond mine in Northern Territory, and for working capital., December 2012 Quarterly Report Page 7

8 The information in this report that relates to exploration results is based on information compiled by Dr DS Tyrwhitt who is a Fellow of the Australasian Institute of Mining and Metallurgy. Dr DS Tyrwhitt is a consulting geologist employed by DS Tyrwhitt & Associates Pty Ltd. Dr DS Tyrwhitt has 50 years experience in the industry and has more than 5 years experience which is relevant to the style of mineralisation being reported upon to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code of Reporting of Exploration Results, Mineral Resources and Ore Reserves. Dr Tyrwhitt consents to the inclusion in the report of the matters based on the information in the form and context to which it appears. Attached is a copy of the Company s Mining Exploration Entity Quarterly Report in accordance with Listing Rule 5.3. J I GUTNICK Chief Executive Officer 30 January 2013, December 2012 Quarterly Report Page 8

9 Figure 1 Merlin Diamond Mine and Surrounds Seppelt Ashmore Argyle Merlin Ellendale Western Australia Northern Territory Australian Diamond Pipes kilom etres 100 Scale 1:5,000,000, December 2012 Quarterly Report Page 9

10 Figure 2 Merlin Diamond Mine and Surrounding Areas, December 2012 Quarterly Report Page 10

11 Figure 3 Merlin Diamond Mine Area, December 2012 Quarterly Report Page 11

12 Figure 4 Arnhem Land Project Locations, December 2012 Quarterly Report Page 12

13 Appendix 5B Mining exploration entity quarterly report Appendix 5B Rule 5.3 Mining exploration entity quarterly report Introduced 01/07/96 Origin Appendix 8 Amended 01/07/97, 01/07/98, 30/09/01, 01/06/10, 17/12/10 Name of entity MERLIN DIAMONDS LIMITED ABN Quarter ended ( current quarter ) DECEMBER 2012 Consolidated statement of cash flows Cash flows related to operating activities 1.1 Receipts from product sales and related debtors Current quarter $A 000 Year to date (6 months) $A Payments for (a) exploration & evaluation (b) development (c) production (d) administration (840) (497) (1,414) (1,370) 1.3 Dividends received 1.4 Interest and other items of a similar nature received Interest and other costs of finance paid (2) (3) 1.6 Income taxes paid 1.7 Other (GST & Fuel tax credits, R&D refund) Net Operating Cash Flows (1,262) (2,611) Cash flows related to investing activities 1.8 Payment for purchases of: (a) prospects (b) equity investments (c) other fixed assets 1.9 Proceeds from sale of: (a) prospects (b) equity investments (c) other fixed assets 1.10 Loans to other entities (339) 1.11 Loans repaid by other entities 1.12 Other (Security Deposits) (8) 1 Net investing cash flows (11) (344) 1.13 Total operating and investing cash flows (carried forward) (1,273) (2,955) (3) (6) + See chapter 19 for defined terms. 17/12/2010 Appendix 5B Page 1

14 Appendix 5B Mining exploration entity quarterly report 1.13 Total operating and investing cash flows (brought forward) (1,273 (2,955) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 1,890 1, Proceeds from sale of forfeited shares 1.16 Proceeds from borrowings 1.17 Repayment of borrowings 1.18 Dividends paid 1.19 Other (Finance leases, fees for share consolidation) (18) (36) Net financing cash flows 1,872 1,854 Net increase (decrease) in cash held 599 (1,101) 1.20 Cash at beginning of quarter/year to date 1,225 2, Exchange rate adjustments to item Cash at end of quarter 1,824 1,824 Payments to directors of the entity and associates of the directors Payments to related entities of the entity and associates of the related entities Current quarter $A' Aggregate amount of payments to the parties included in item Aggregate amount of loans to the parties included in item Explanation necessary for an understanding of the transactions Noncash financing and investing activities 2.1 Details of financing and investing transactions which have had a material effect on consolidated assets and liabilities but did not involve cash flows 2.2 Details of outlays made by other entities to establish or increase their share in projects in which the reporting entity has an interest + See chapter 19 for defined terms. Appendix 5B Page 2 17/12/2010

15 Appendix 5B Mining exploration entity quarterly report Financing facilities available Add notes as necessary for an understanding of the position. Amount available Amount used $A 000 $A Loan facilities 8,000 8, Credit standby arrangements Estimated cash outflows for next quarter $A Exploration and evaluation 1, Development 6, Production 4.4 Administration 1,200 Total 9,200 Reconciliation of cash Reconciliation of cash at the end of the quarter (as shown in the consolidated statement of cash flows) to the related items in the accounts is as follows. Current quarter $A 000 Previous quarter $A Cash on hand and at bank 1,824 1, Deposits at call 5.3 Bank overdraft 5.4 Other (provide details) Total: cash at end of quarter (item 1.22) 1,824 1,224 Changes in interests in mining tenements 6.1 Interests in mining tenements relinquished, reduced or lapsed 6.2 Interests in mining tenements acquired or increased Tenement reference Nature of interest (note (2)) Interest at beginning of quarter EL27756 Partial Relinquishment 15 Bl 4 Bl Interest at end of quarter + See chapter 19 for defined terms. 17/12/2010 Appendix 5B Page 3

16 Appendix 5B Mining exploration entity quarterly report Issued and quoted securities at end of current quarter Description includes rate of interest and any redemption or conversion rights together with prices and dates. 7.1 Preference + securities (description) Total number Number quoted Issue price per security (see note 3) (cents) NIL 7.2 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buybacks, redemptions Ordinary securities 141,783, ,783,427 Amount paid up per security (see note 3) (cents) 7.4 Changes during quarter (a) Increases through issues 9,000,000 (b) Decreases through returns of capital, buybacks Convertible debt NIL securities (description) 7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted 7.7 Options (description and conversion factor) 7.8 Issued during quarter 9,000, Exercised during quarter 7.10 Expired during quarter 7.11 Debentures NIL (totals only) 7.12 Unsecured notes NIL (totals only) Exercise price Expiry date + See chapter 19 for defined terms. Appendix 5B Page 4 17/12/2010

17 Appendix 5B Mining exploration entity quarterly report Compliance statement 1 This statement has been prepared under accounting policies which comply with accounting standards as defined in the Corporations Act or other standards acceptable to ASX (see note 5). 2 This statement does give a true and fair view of the matters disclosed. Sign here:... Date: 30 JANUARY 2013 (Director/Company Secretary) Print name: PETER LEE Notes 1 The quarterly report provides a basis for informing the market how the entity s activities have been financed for the past quarter and the effect on its cash position. An entity wanting to disclose additional information is encouraged to do so, in a note or notes attached to this report. 2 The Nature of interest (items 6.1 and 6.2) includes options in respect of interests in mining tenements acquired, exercised or lapsed during the reporting period. If the entity is involved in a joint venture agreement and there are conditions precedent which will change its percentage interest in a mining tenement, it should disclose the change of percentage interest and conditions precedent in the list required for items 6.1 and Issued and quoted securities The issue price and amount paid up is not required in items 7.1 and 7.3 for fully paid securities. 4 The definitions in, and provisions of, AASB 6: Exploration for and Evaluation of Mineral Resources and AASB 107: Statement of Cash Flows apply to this report. 5 Accounting Standards ASX will accept, for example, the use of International Financial Reporting Standards for foreign entities. If the standards used do not address a topic, the Australian standard on that topic (if any) must be complied with. == == == == == + See chapter 19 for defined terms. 17/12/2010 Appendix 5B Page 5