31 July2013 Manager Companies Australian Securities Exchange Level 6, 20 Bridge Street Sydney NSW 2000 By ELodgement REPORT FOR THE QUARTER ENDED 30 JUNE 2013 Merlin Diamonds Limited Level 8 580 St Kilda Road Melbourne, VIC, 3004 PO Box 6315 St Kilda Road Central Melbourne, VIC, 8008 Telephone: +61 3 8532 2858 www.merlindiamonds.com.au Directors Mr Joseph Gutnick Executive Chairman and Chief Executive Officer Mr Craig Michael Executive Director Mr Henry Herzog NonExecutive Director Dr David S Tyrwhitt NonExecutive Director HIGHLIGHTS Merlin Mine Commencing Mining Operations Corporate The Mining Management Plan (MMP) for commencement of the trial borehole mining operation has been approved by the Northern Territory government s Department of Mines and Energy (DME). The approval of this MMP allows for trial mining operations to commence. All key contracts for commencing operations have been finalised and executed by Merlin and the mining and drilling contractors. A change in schedule due to late delivery of certain equipment means operations are now due to commence by the second half of August 2013. The takeover offer for all of Merlin Diamonds shares by Innopac Holdings Limited has now lapsed. The offer lapsed on 12 July 2013 as certain preconditions specified in the Bidders Statement, such as receiving at least 90% acceptance, had not been satisfied. All Merlin shareholders that accepted into Innopac s offer will now retain their Merlin shares. Senior Management Mr Peter Lee CFO & Company Secretary Mr Mike Kammermann Exploration Manager Merlin Diamonds Limited June 2013 Quarterly Report Page 1
MERLIN DIAMOND MINE PROJECT Background The Merlin Diamond Mine Project is located some 100km south of the settlement of Borroloola in the Northern Territory and comprises 14 kimberlite pipes. Since 1998, nine of the Merlin pipes have been subject to openpit mining over a 5 year period. These previous mining operations produced 507,000 carats of high quality diamonds. This included Australia s largest diamond at 104.73cts. In 2004, Merlin Diamonds acquired the project from the Rio Tinto parties and the current management took control in 2008. Mineral Resources and Ore Reserves 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. These estimates make the Merlin Diamond Mine Project the second largest combined diamond resource and reserve in Australia. An Ore 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. Probable Ore Reserve (Mt) Grade (cpht) Carats (Mcts) Southern Cluster PalSac 2 8.1 30 2.41 SubTotal 8.1 30 2.41 Central Cluster Gawain 2 0.5 39 0.21 Ywain 2 0.1 81 0.05 SubTotal 0.6 44 0.26 Northern Cluster Kaye 2 0.9 12 0.10 Ector 1 1.5 7 0.11 SubTotal 2.4 9 0.22 TOTAL 11.1 26 2.89 1 Resource grade based on previous mining operation recovery using a +0.95 mm slotted bottom screen and a +0.95mm cutoff. 2 Resource grade based on bulk sample test work using a +0.85 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 borehole mining methods has not yet been estimated. Merlin Diamonds Limited June 2013 Quarterly Report Page 2
Inferred and Indicated Resources The combined Indicated and Inferred Mineral Resource for all diamond pipes at the Merlin Diamond Mine is 19.02 million tonnes for an average grade of 24 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 2 6.59 6.59 30 1.96 Launfal 2 1.58 1.70 3.28 25 0.82 Excalibur 1 0.46 0.31 0.77 34 0.26 Tristram 2 0.74 0.74 6 0.04 SubTotal 11.38 27 3.09 Central Cluster Gawain 2 0.53 0.61 1.14 39 0.45 Ywain 2 0.02 0.10 0.12 81 0.09 SubTotal 1.26 43 0.54 Northern Cluster Gareth 1 0.13 0.14 0.27 22 0.06 Kaye 2 2.14 2.14 12 0.26 Ector 1 3.47 3.47 7 0.26 Bedevere 2 0.37 0.14 0.50 21 0.11 SubTotal 6.38 11 0.68 TOTAL 3.09 15.93 19.02 24 4.31 1 Resource grade based on previous mining operation recovery using a +0.95 mm slotted bottom screen and a +0.95mm cutoff. 2 Resource grade based on bulk sample test work using a +0.85 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. Merlin Diamond Mine Trial Production The Mining Management Plan (MMP) for commencement of the trial borehole mining operation has now been approved by the Northern Territory government s Department of Mines and Energy (DME) subject to the required security bond of $666,988 being paid by 12 August 2013. The DME requires mine operators to submit an annual MMP for approval under the Mining Management Act. The MMP consists of two parts; Part A covering the Environmental Mining Report and Water Management Plan and Part B covering the Mining Operations Plan. The MMP submitted is for the period 1st June 2013 to 31st May 2014. Jet Mining Pty Ltd (an affiliate of USA based Kinley Exploration) and Merlin Diamonds have executed the contract to begin mining operations at the Merlin Diamond Mine. The borehole drilling rig, which will provide access for the downhole mining tool, is to be operated by Gorey and Cole Drillers Pty Ltd who have also signed a contract to commence operations. Gorey and Cole will be working Merlin Diamonds Limited June 2013 Quarterly Report Page 3
jointly with Jet Mining for the combined operation of the borehole rig and the downhole mining tool. The commissioning phase of the trial is to take place at the Ywain kimberlite open pit. The rig will be setup on a floating platform on the surface of the water filled open pit. Delivery of the floating platform from an overseas supplier has been slightly delayed and the Company now expects the borehole mining equipment and drilling rig to be commissioned towards the end of August 2013 pending arrival of the floating platform to site which is expected in the second half of August 2013. The commissioning phase will be conducted on a single shift basis, initially mining kimberlite ore from the Ywain pipe. The diamond processing plant is expected to be recommissioned in the second half of August 2013 utilising available historical stockpiles until the borehole mining rig is supplying ore from the Ywain kimberlite. During the trial period, factors affecting ore extraction rates will be studied and the engineering processes optimised. Results from the trial are expected to establish the future production levels for the mine. If a steady rate of diamond production can be achieved, the Company intends for 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 has awarded and executed contracts for the majority of the key work packages of the mine operations 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 third quarter 2013. The work package specifies management of inpit operations and the engagement of a third party drilling contractor of which Gorey and Cole drillers have now been engaged. All mining activity and ore haulage will be managed by Jet Mining. Work Package 2: Ore Processing The processing tender called for suitable engineers to operate, maintain and possibly upgrade the Merlin processing plant. DRA Group has been awarded the contract for the upgrade and recommissioning of the processing plant. An operations and ongoing maintenance contract is still under review. 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 called for suitable remote catering suppliers to supply catering and camp management services for the Merlin mine camp. Cater Care Group has now been awarded the contract. Cater Care Group is an industrial catering and accommodation company with experience in mining, offshore and remote sites. MERLIN EXPLORATION OVERVIEW During the previous quarter, a total of 19 surface samples were collected on mining lease ML1154 and 15 samples on adjacent exploration licence EL26944 over historical geophysical targets. Results are now in hand with a total of 9 samples reporting positive for chromites (kimberlitic indicator mineral) and 1 sample reporting positive for diamonds. The positive results support the view that the targets may represent kimberlite pipes and require drill testing. An additional 57 surface samples were collected on adjoining exploration licence 26943 with 48 samples processed to date. Four of the samples processed reported positive results for chromites or diamonds, which is encouraging and may suggest that the Merlin kimberlite field extends beyond the mining lease. Merlin Diamonds Limited June 2013 Quarterly Report Page 4
The Company purchased an EM34 ground geophysical instrument and has commenced detailed surveys over historic targets, including those discussed above, and in areas of the mining lease where insufficient information exists, particularly in the areas where coverage is at 100 metre line spacing only. This spacing is considered too wide given that some of the already discovered Merlin kimberlites have a surface expression smaller than this and could potentially have been missed by this line spacing width. The EM34 was considered the most effective tool for discovery of the known Merlin kimberlites and the Company is encouraged that further use of this underutilised tool will lead to additional discoveries. Historic ground gravity data was also obtained and reprocessed during the quarter with a number of additional targets identified. These targets will be subjected to further exploration including surface sampling and EM34 surveying in the coming quarter. Merlin Orbit Projects Borroloola Alluvial Diamond Project On 29 August 2011, Exploration Licence 24512 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 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. All costeans have now been rehabilitated to the satisfaction of the DME. The Borroloola Alluvial Diamond Project represents a significant and unique opportunity to explore for a large volume, high value, alluvial diamond deposit. Further exploration work aimed at understanding the fluvial architecture of the gravels is planned for the next quarter. Lancelot Prospect A 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. A total of 32 samples reported positive results for kimberlitic indicator minerals including 2 microdiamonds and 2 macrodiamonds (greater than 0.4mm). Interpretation and analysis of the results is continuing prior to conducting further exploration in the next quarter. Arnhem Land Exploration 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 Merlin Diamonds Limited June 2013 Quarterly Report Page 5
diamonds and other minerals. The total Arnhem Land project area now encompasses some 20,000km 2. No field work was undertaken in Arnhem Land during the quarter. A number of tenements are currently under application and until these tenements are granted no further diamonds exploration will occur in Arnhem Land. 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. CORPORATE On the 26th March 2013 a Bidders Statement was received by Merlin Diamonds which outlined a takeover bid for all of Merlin Diamonds shares by Innopac Holdings Limited, an investment holding and management company listed on the Mainboard of the Singapore Exchange. The offer to all Merlin Diamonds shareholders opened on the 28th March 2013 and a Target Statement was issued to all Merlin Diamonds shareholders on the 11th April 2013. The offer lapsed at 7:00pm EST on 12 July 2013 as certain preconditions specified in the Bidders Statement had not been satisfied. All Merlin shareholders that accepted into Innopac s offer wil now retain their Merlin shares. During the quarter, the Company issued 8,000,000 convertible notes at an issue price of $1 each for a total value of $8 million to ISR Investments Limited. 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 31 July 2013 Merlin Diamonds Limited June 2013 Quarterly Report Page 6
Figure 1 Merlin Diamond Mine and Surrounding Areas Merlin Diamonds Limited June 2013 Quarterly Report Page 7
Figure 2 Merlin Diamond Mine Area Merlin Diamonds Limited June 2013 Quarterly Report Page 8
Figure 3 Arnhem Land Project Locations Merlin Diamonds Limited June 2013 Quarterly Report Page 9
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 86 009 153 119 30 JUNE 2013 Quarter ended ( current quarter ) 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 (12 months) $A 000 37 38 1.2 Payments for (a) exploration & evaluation (b) development (c) production (d) administration (1,615) (1,981) (3,958) (4,865) 1.3 Dividends received 1.4 Interest and other items of a similar nature received 11 70 1.5 Interest and other costs of finance paid (3) (10) 1.6 Income taxes paid 1.7 Other (GST & Fuel tax credits, R&D refund) 65 285 Net Operating Cash Flows (3,486) (8,440) 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 (28) (2,267) (48) (4,402) (c) other fixed assets 1.10 Loans to other entities (3,630) (4,934) 1.11 Loans repaid by other entities 1.12 Other (Security Deposits) 44 (34) Net investing cash flows (5,881) (9,418) 1.13 Total operating and investing cash flows (carried forward) (9,367) (17,858) + See chapter 19 for defined terms. 17/12/2010 Appendix 5B Page 1
Appendix 5B Mining exploration entity quarterly report 1.13 Total operating and investing cash flows (brought forward) (9,367) (17,858) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 8,000 17,030 1.15 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) (6) (61) Net financing cash flows 7,994 16,970 Net increase (decrease) in cash held 1,373 (888) 1.20 Cash at beginning of quarter/year to date 3,409 2,924 1.21 Exchange rate adjustments to item 1.20 1.22 Cash at end of quarter 2,036 2,036 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'000 1.23 Aggregate amount of payments to the parties included in item 1.2 195 1.24 Aggregate amount of loans to the parties included in item 1.10 1.25 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
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 000 3.1 Loan facilities 3.2 Credit standby arrangements The Company intends to issue up to 100,000,000 ordinary shares at an issue price of at least 80% of the average market price for ordinary shares over the last 5 days on which sales in the ordinary shares were recorded before the day on which the issue was made. Please refer to the notice of general meeting dated 24 July 2013. Estimated cash outflows for next quarter $A 000 4.1 Exploration and evaluation 235 4.2 Development 4,268 4.3 Production 4.4 Administration 1,200 Total 5,703 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 000 5.1 Cash on hand and at bank 2,306 3,405 5.2 Deposits at call 5.3 Bank overdraft 5.4 Other (provide details) Total: cash at end of quarter (item 1.22) 2,306 3,405 Changes in interests in mining tenements 6.1 Interests in mining tenements relinquished, reduced or lapsed Tenement reference EL331 EL3337 EL25976 EL26943 Nature of interest (note (2)) Granted title Granted title Granted title Granted title Interest at beginning of quarter 250 Bl 22 Bl 46 Bl 64 Bl Interest at end of quarter 0 Bl 0 Bl 22 Bl 32 BI + See chapter 19 for defined terms. 17/12/2010 Appendix 5B Page 3
Appendix 5B Mining exploration entity quarterly report 6.2 Interests in mining tenements acquired or increased 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) 7.2 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buybacks, redemptions 7.3 + Ordinary securities Total number Number quoted Issue price per security (see note 3) (cents) NIL 175,783,427 175,783,427 Amount paid up per security (see note 3) (cents) 7.4 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buybacks 7.5 + Convertible debt 8,000,000 $1.00 $1.00 securities (description) 7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted 8,000,000 $1.00 $1.00 7.7 Options (description and conversion factor) 7.8 Issued during quarter 7.9 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
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: 31 JULY 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 6.2. 3 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