Annual report EL 22961 Litchfiled Project for the year ended 10 July 2006

Abstract

This third annual report summarises work carried out on Exploration License 22961, Litchfield Project, Northern Territory for the year ended 10 July 2006. Through compilation efforts, Falconbridge (Australia) Pty Limited identified the Litchfield/Batchlor area of the Northern Territory as being favourable to host Proterozoic, intrusive related, magmatic Ni-Cu-PGE sulphide mineralization, such as Thompson or Voiseys Bay in Canada. The area has seen little historic work and has not been the focus of dedicated nickel sulphide exploration in recent years. In December 2003, Discovery Nickel Limited acquired 100% interest in EL 22961 and other Falconbridge tenements following the successful listing of Discovery Nickel on the Australian Stock Exchange. The tenement area lies in the western parts of the Pine Creek Inlier (Litchfield Province) and is considered to have excellent potential for magmatic Cu-Ni mineralisation related to the Proterozoic Wangi Basics. The Litchfield Province is the continuation of the prospective Halls Creek Province of the Kimberley's, a known significant magmatic Cu-Ni province (e.g. Sally Malay Deposit). Most significant nickel-copper massive sulphide deposits are extremely good conductors. Discovery Nickel's exploration approach relies heavily on airborne electromagnetic (AEM) surveying, followed up by ground EM to define targets. Where appropriate DNL considers regional soil geochemistry an excellent technique to identify areas of mafics for further exploration. Exploration completed to date on EL 22961 includes: review and compilation of open file reports, published literature and data; interpretation of the aeromagnetic, gravity and Landsat data; designing the boundaries of a Geotem Survey; designing a soil sampling program; Collection and analysis of the 2004 field season; Assessment of geochemistry and recommendations for ground EM; and Collection and assessment of Ground EM (SMARTEM). The exploration work on EL 22961 has not advanced as fast as intended due to delays in gaining the relevant statutory permits, and due to the short field season that applies to this part of northern Australia and challenges in contracting specialists to complete planned exploration surveys. During September-October 2004, soil sampling was initiated to test three prospect areas for Ni-Cu-PGE mineralisation, associated with the Wangi Basics (SW Daly, Chilling Creek and Sandy Creek Prospects). Both SW Daly and Chilling Creek fall on tenement 22961. The program highlighted four main Ni-related multi-element geochemical anomalies of interest. Anomaly LFGC1 at the northern end of the SW Daly Prospect is the most compelling as it shows elevated Ni-Cu-Pt-Pd-(Co) on three lines, over a strike length of about 2.5 km. The anomaly strikes roughly NNW and coincides with a linear magnetic feature. Another multi-element anomaly further SE at SW Daly (LFGC2), occurs in the vicinity of two strong magnetic features and some gabbroic outcrops. In late 2005 Quantec Geoscience was contracted to collect ground EM (SMARTEM) over these soil geochemistry anomalies, unfortunately the moving loop and fixed loop surveys failed to identify any targets worthy of drilling. In light of the geochemistry a thorough review of geochem, and magnetics will be initiated to re-focus on the Wangi basics.