31 January 2011 Manager of Company Announcements Australian Securities Exchange Level 6, 20 Bridge Street Sydney NSW 2000 By E-Lodgement QUARTERLY REPORT Period Ended 31 December 2010 MERLIN EVALUATION DECEMBER 2010 QUARTER HIGHLIGHTS NADL has successfully completed pre-feasibility production trials with the recovery of 10,600cts of diamonds; Largest diamond recovered was a 24.12ct gem; 2,590cts in excess of 1ct, representing 24% of production; The total Merlin JORC compliant combined Indicated and Inferred resource is 30 million tonne for a contained 7.2 million carats. Studies to validate the scale and commercial viability of a mining project are being undertaken by Australian Mining Consultants (AMC). EXPLORATION A total of 23 reconnaissance stream samples were taken on the Arnhem Land Project tenements. Indicator minerals report in samples taken to the south of Lancelot anomaly. CORPORATE A general meeting of shareholders is to be held on 10 February 2011 to consider a 20 for 1 consolidation of ordinary shares. Meeting documentation has been mailed to all shareholders.
MERLIN MINING LEASE MERLIN DIAMOND PROJECT The Merlin Diamond Project is located some 100 kms south of the settlement of Borroloola and comprises 14 kimberlite pipes of which 9 have been subject to open-pit mining over a 5 year period commencing 1998 (Figure 1 and 2). Previous mining operations produced 507,000 carats of diamonds including Australia s largest diamond at 104.73cts which was valued at in excess of US$500,000 in 2002. NADL acquired the project from the Rio Tinto parties in 2004. INFERRED AND INDICATED RESOURCES As a consequence of the 2010 resource definition drilling program, the Merlin project total resources are now 30MT @ 24 cpht for 7.2 million carats. Merlin Total Resource Table 1: Merlin Total Resource Southern Cluster Indicated Mineral Resource Inferred Mineral Resource Total Carats PalSac 1 8,090,000 6,590,000 14,680,000 4,370,000 Launfal 3 1,580,000 1,700,000 3,280,000 820,000 Excalibur 3 464,000 309,000 773,000 263,000 Tristram 2 740,000 740,000 44,000 19,473,000 5,497,000 Central Cluster Gawain 2 1,100,000 580,000 1,680,000 663,000 Ywain 2 80,000 95,000 175,000 142,000 1,855,000 805,000 Northern Cluster Gareth 3 125,000 143,000 268,000 59,000 Kaye 2 873,000 2,135,000 3,008,000 360,000 Ector 3 1,510,000 3,470,000 4,980,000 369,000 Bedevere 4 366,000 138,000 504,000 106,000 8,760,000 894,000 TOTAL 30,088,000 7,196,000 1 Resource grade estimated using a +1DTC bottom screen cutoff (approx 0.85mm). 2 Resource grade estimated using a +1mm slotted bottom screen size. 3 Resource grade based on previous mining operation recovery. 4 Resource grade based on bulk sample test work.
Figure 1: Merlin Orbit Tenements Figure 2: Merlin Mining Lease Borroloola Cape Scott Granted Tenements Tenement Applications MLN1154 The combined resource for the pipes included in the pre-feasibility production trials and subsequent prefeasibility study is in excess of 21Mt (Figure 3). This resource is compliant with JORC reporting standards, and is sufficient to potentially underpin a long term mining operation (Table 2). Table 2: Targeted Project Resources JORC Resource Category PalSac Launfal Gawain Ywain Kaye Bedevere Total (Mt) (Mt) (Mt) (Mt) (Mt) (Mt) (Mt) Indicated 8.09 1.58 1.1 0.08 0.87 0.366 12.09 Inferred 6.59 1.7 0.58 0.09 2.13 0.138 11.22 Total 14.68 3.28 1.68 0.170 3.00 0.504 23.31 Pit Test Grade* ** ** 41cpht 81cpht 13.4cpht ** Prev Mine Grade 20cpht 21cpht 35cpht 60cpht 10cpht 21cpht * Grades based on HPGR crushed wet tonnes processed using a +1mm slotted bottom screen. ** Confirmation of recovered grade by means of bulk testing is required for PalSac, Launfal and Bedevere. Crushing Oversize Grizzly Reject Kimberlite
0 80m Figure 3: Palsac Pipe Open pits Indicated 8.0Mt 2.44 Million Carats 438m Inferred 6.59 Mt 1.93 Million Carats 750m Pre-feasibility Production Trial North Australian Diamonds Limited ( North Australian or the Company ), successful completed pre-feasibility production trials at its 100% owned Merlin diamond project in the Northern Territory in 2010. The trials which commenced in July, 2009 resulted in the recovery of 10,600cts of diamonds. The primary objectives of the trials, to build a parcel of diamonds for valuation and marketing purposes, to test new liberation and recovery technologies in the process circuit and to confirm grades were achieved. 1) Diamond Parcel The trials resulted in the recovery of 10,600 carats with the largest diamond being a 24.12 carat gem quality stone. The +1ct diamonds represent 2,590 carats or 24% of the total production. The diamond parcel is being used to test current market diamond pricing and value adding strategies. The company believes that the good quality and large diamonds produced by Merlin will enable branding and boutique marketing opportunities that will be important in
redeveloping Merlin and successfully establishing NADL as an integrated long term diamond producer. Preliminary indications are that the parcel will achieve well in excess of US$200 per carat. 2) ProjectStudy Project studies based on the results obtained from the production trials has identified a potential commercial mining project. Further studies aimed at confirming the scale and commercial viability of the mining project are being undertaken by Australian Mining Consultants (AMC). This study is expected to be completed in the forthcoming quarter. The successful outcome of this study will enable the company to embark on a detailed Feasibility Study. Selection +1ct gems recovered 2010 Diamonds recovered 2010 DIAMOND EXPLORATION MERLIN ORBIT TENEMENTS, NORTHERN TERRITORY The Merlin Orbit tenements comprise an area of some 4,035.95km 2, and encompass numerous known unresolved occurrences of indicator minerals and diamonds. Lancelot Prospect The Lancelot Prospect is situated some 40km south of Merlin and comprises an area where there are significant numbers of indicator minerals and diamonds reporting to surface samples. Trench mapping and heavy mineral sampling has led to the identification of indicator mineral bearing eluvial material believed to be derived from the eroding rocks in the southern part of the licence area. The samples have not been processed for diamonds. Further sampling of this eluvial material towards its interpreted source area has been initiated aimed at identifying the source rock. Preliminary results of samples taken to the south of Lancelot have reported indicator minerals and may support the premise that the primary kimberlite source is to the south. Processing of the reconnaissance samples taken in this southern area is continuing.
Borroloola Prospect The Borroloola alluvial prospect comprises one granted exploration licence and one exploration licence application (ELA), which is located on aboriginal land and is subject to the ALRA process. The ELA contains surficial deposits of ancient McArthur River gravels, which the Company intends to bulk sample to determine diamond content and economic potential. The company is engaged in final consultations with a view to having the tenement recommended for grant by Traditional Owners. ARNHEM LAND PROJECTS, NORTHERN TERRITORY The total Arnhem Land project area now encompasses 26,000km 2 (Figure 4). NADL Tenements 100% Reconnaissance Sampling A total of 23 reconnaissance stream samples were collected during the quarter. These are being processed through the company s heavy mineral laboratory. Results are awaited. Swancove and Red River Resources Joint Venture Agreement NADL Earning 80% NADL has a contractual right to obtain an 80% interest in 2 tenements covering approximately 2,097km² of land in the prospective western region of Arnhem Land. The Company s right to acquire an 80% interest in the 2 tenements is conditional on the grant of these tenements which are currently at the application stage. Figure 4: Arnhem Land Project ARAFURA SEA Maningrida Millingimbi Gulf Of Carpentaria Granted Tenements Tenement Applications YAMBARRA PROJECT, NORTHERN TERRITORY Rio Tinto Yambarra Farm-in NADL Earning 100% The Company has a farm-in agreement with Rio Tinto to earn 100% interest for diamonds in tenements in the Daly River region of the Northern Territory. These tenements have a total project area of 9,132km2 (Figure 5). Work program meetings initially scheduled by the Northern Land Council for September 2010 have been rescheduled to 2011. Figure 5: Yambarra Project
TIMOR SEA Daly River Port Keats Granted Tenements Tenement Applications 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. Figure 6: North Kimberley M80/532 Perth URANIUM INTERESTS URANIUM EXPLORATION Top End Uranium Ltd (ASX: TEU) is a uranium focused exploration company which controls through farm-in arrangements with NADL, one of the largest portfolios of highly prospective exploration tenements in the Northern Territory, Australia. Its tenement holding covers an area aggregating approximately 34,300km² across three project areas, Arnhem Land Project Area, Yambarra Project Area and the McArthur South Project Area (Figure 7).
NADL holds a31% of the issued capital in Top End in accordance with the terms of the Mineral Rights Agreement, whereby NADL assigned to Top End the non-diamond mineral rights to its tenements. Figure 7: NT Project Areas ARAFURA SEA Darwin Arnhem Land Yambarra McArthur South Granted Tenements Tenement Applications YAMBARRA PROJECT The Yambarra Project area comprises a large mostly contiguous land holding located within a major tectonic zone that links the Pine Creek Orogen, one of Australia s richest mineral fields, to the Halls Creek Mobile Belt, which is also host to major mineral occurrences. Access The Yambarra Project consists of 10 exploration tenements, 5 of which are granted and with approvals in place for work programs allowing general reconnaissance and ground survey work. Rio Tinto Yambarra Farm-in TEU Earning 100% The Company has a farm-in agreement with Rio Tinto to earn 100% interest for uranium in tenements in the Daly River region of the Northern Territory. These tenements have a total project area of 9,100km 2 (figure 2). Door Creek Anomaly The Door Creek anomaly extends for a distance of almost 5km and appears in part to be associated with a drainage emanating from the nearby Tom Turner fault, which, in this area, coincides with the unconformity between the Fitzmaurice Group sediments and the underlying older basement rocks. A water sample from a spring at the headwaters of Door Creek reported 29ug/l of Uranium in a background of 0.04ug/l. A soil sampling program comprising 93 samples has been completed over the source point of the airborne anomaly, which is some 600m from the Tom Turner fault and removed from the drainage. Although recording some elevated metal responses no specific target was identified. ARNHEM LAND PROJECT The Arnhem Land Project Area lies within a region that is host to significant and in some instances world class unconformity related uranium related mineralisation. The company has rights to all minerals other than diamond for 41 tenements comprising an area of approximately 23,300km 2. Access The Arnhem Land tenements are on land subject to the Aboriginal Land Rights Act. The company now has access to 8 granted tenements, with a further 3 tenements recommended for grant.
Work program meetings have been scheduled by the Northern Land Council for August, which will allow the Company to conduct additional ground activities this year on a further 4 tenements. Stream Sediment Sampling Anomalous Pb-Zn Reconnaissance stream sediment samples collected during the previous quarter have highlighted two areas with anomalous Pb- Zn and anomalous Zn respectively. Follow-up of these anomalous results was completed with the collection of 26 stream sediment samples during the previous quarter. The initial anomalous responses have been confirmed by the results of these follow-up samples. Further follow-up sampling aimed at identifying a source for the anomalous Pb-Zn will be undertaken at cessation of the wet season. Reconnaissance Sampling Reconnaissance stream sediment sampling has been completed on a further 3 granted tenements with 14 samples collected and submitted for analysis. Results are awaited. MCARTHUR SOUTH PROJECT The McArthur South Project consists of 8 exploration tenements, totalling approximately 2,000km 2 all of which are granted. The company has been targeting interpreted structures intersecting the unconformity between the Seigal Volcanics and the underlying Westmorland Conglomerate in the Puzzle Creek area. This is a well established geological setting for uranium mineralization in the Westmoreland area, located 120km to the east. The company is using the RadonX survey technique, which is a refinement of the Radon-on-activated-charcoal technique developed by the South African Atomic Energy Corporation in the 1970 s. A number of anomalous Radon gas responses were highlighted in the initial RadonX survey with the most promising responses being followed up by soil geochemical sampling. Detailed follow-up soil geochemical sampling revealed one of the radon gas anomalies to be coincident with anomalous soil geochemical responses in the elements U, Th, Cu and constrained to an area approximately 200m by 200m. Access to this area has been restricted due to wet conditions but it is planned drill test the target as soon as ground access permits. CORPORATE A general meeting of shareholders is to be held on 10 February 2011 to consider a 20 for 1 consolidation of ordinary shares. Meeting documentation has been mailed to all shareholders. Tom Reddicliffe Chief Executive Officer Tom Reddicliffe, a full time employee of the company, and who is a Fellow of the AUSIMM, has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the Australian Code of Reporting of Exploration Results, Mineral Resources and Ore Reserves. Tom Reddicliffe consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.
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 NORTH AUSTRALIAN DIAMONDS LIMITED ABN Quarter ended ( current quarter ) 86 009 153 119 31 DECEMBER 2010 Consolidated statement of cash flows Cash flows related to operating activities 1.1 Receipts from product sales and related debtors 1.2 Payments for (a) exploration & evaluation (b) development (c) production (d) administration Current quarter $A 000 Year to date ( 6 months) $A 000 81 81 (999) (186) (2,640) (376) 1.3 Dividends received 1.4 Interest and other items of a similar nature received 110 224 1.5 Interest and other costs of finance paid (1) 1.6 Income taxes paid 1.7 Other (GST & Fuel tax credits, legal settlement) 281 923 Net Operating Cash Flows (713) (1,789) 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 (258) (342) (258) (720) (c) other fixed assets 1.10 Loans to other entities 1.11 Loans repaid by other entities 1.12 Other (Security Deposits) (126) (129) Net investing cash flows (726) (1,107) 1.13 Total operating and investing cash flows (carried forward) (1,439) (2,896) + 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) (1,439) (2,896) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 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) (19) (38) Net financing cash flows (19) (38) Net increase (decrease) in cash held (1,458) (2,934) 1.20 Cash at beginning of quarter/year to date 8,020 9,496 1.21 Exchange rate adjustments to item 1.20 1.22 Cash at end of quarter 6,562 6,562 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 71 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 Financing facilities available Add notes as necessary for an understanding of the position. + See chapter 19 for defined terms. Appendix 5B Page 2 17/12/2010
Appendix 5B Mining exploration entity quarterly report Amount available Amount used $A 000 $A 000 3.1 Loan facilities 3.2 Credit standby arrangements Estimated cash outflows for next quarter $A 000 4.1 Exploration and evaluation 610 4.2 Development 4.3 Production 4.4 Administration 210 Total 820 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 695 919 5.2 Deposits at call 5,867 7,101 5.3 Bank overdraft 5.4 Other (provide details) Total: cash at end of quarter (item 1.22) 6,562 8,020 Changes in interests in mining tenements 6.1 Interests in mining tenements relinquished, reduced or lapsed Tenement reference Nature of interest (note (2)) Interest at beginning of quarter Interest at end of quarter + 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 EL10229 EL24082 EPM16606 Granted Granted Granted 23 blocks 80 blocks 96 blocks + See chapter 19 for defined terms. Appendix 5B Page 4 17/12/2010
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) 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 2,334,241,368 2,334,241,368 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 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 7.9 Exercised during quarter 7.10 Expired during quarter 7.11 Debentures (totals only) NIL 80,000,000 NIL Exercise price 0.8 cents Expiry date 09/02/2012 + See chapter 19 for defined terms. 17/12/2010 Appendix 5B Page 5
Appendix 5B Mining exploration entity quarterly report 7.12 Unsecured notes (totals only) NIL 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 JANUARY 2011 (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. Appendix 5B Page 6 17/12/2010