Annual report on exploration activities on EL 7970 'Arnold River', year six of tenure, 24 July 2005 to 23 July 2006

Abstract

EL 7970 forms part of Rio Tinto's 'Hodgson Diamond Project' and is centred approximately 150km northeast of Daly Waters in the Northern Territory, within the Hodgson Downs 1:250,000 map sheet. The EL was granted to Ashton Mining on 24th July 2000. Ashton Mining Ltd was taken over by Rio Tinto Limited in the 4th quarter of 2000. The tenement forms part of a farmin agreement between Rio Tinto Exploration Pty Ltd ('Rio Tinto') and Diamond Mines Australia Pty Ltd ('DMA') covering numerous Rio Tinto tenements and applications in the Northern Territory. Under this agreement, DMA is conducting predominantly diamond exploration utilising the newly-developed Falcon- airborne gravity gradiometer system. The Falcon- system has been shown to be effective in detecting kimberlite pipes. Gravity Diamonds Ltd is managing the farmin arrangement for Diamond Mines Australia and owns 100% of DMA. The tenement is considered prospective for commercial sources of diamonds. Historic gravel sampling shows that there are unresolved chromite and diamond occurrences in an area of Bukalara Sandstone on EL 7970. During the initial year of the Rio Tinto-DMA farmin arrangement, a review of historic exploration data was conducted by Gravity. On this basis, a Falcon- survey was planned to cover prospective areas within EL 7970 and adjacent farmin tenements to the east. The survey was conducted in August - September 2003 and results were received by Gravity in November 2003. Interpretation and exploration targeting from the Falcon- data was completed during 2004, with target areas defined for follow-up work. Statutory requirements for clear access to target areas were completed in February 2005 and field testing of these targets commenced during the 2005 field season. During the past year of tenure, 11 anomalies generated from the Falcon- survey were field inspected within EL 7970 and sampled where appropriate. A total of 4 gravel and 3 loam samples were collected within EL 7970 during a broader exploration program, which also covered neighbouring tenements in the Hodgson Project area. Results from sampling programs implemented during 2005 have been received with samples 159816 and 159817 reporting chromite, while sample 159886 reported a single macrodiamond. The field inspection and sampling program conducted has downgraded the kimberlite potential for a number of these targets, however some anomalies require further work. Preliminary interpretation of the recovered chromite grains suggests a probable kimberlite affinity, and follow-up work, including drilling, of anomalies proximal to these positive samples is anticipated.