31st January, 2012 Silver Mines Ltd. Quarterly activities report and Appendix 5B ACTIVITIES REPORT - FOR THE QUARTER ENDED 31st DECEMBER 2011. HIGHLIGHTS DURING THE QUARTER - Results from diamond drill holes continue to demonstrate near surface silver rich mineralisation in good agreement with nearby RC drilling. - Results from deeper diamond drilling confirm depth extensions and the deposit remains open at depth in many areas. - Diamond drilling results being incorporated into the resource database for new resource estimate. - Geological and structural Interpretations for the resource model being used to plan further drilling. - Desktop review of metallurgy by expert consultants indicates several process options available, including possible production of silver doré bars. - Samples from Webbs South being collected for metallurgical testwork. ACTIVITIES DURING THE QUARTER Webbs Silver Project - EL5674 1. Diamond Drilling Silver Mines continued to report excellent diamond drilling intersections during the quarter and subsequent to the quarter. The drilling includes infill and extensional drilling. These results were published in several ASX announcements released during the quarter. Better intersections from the drilling include: - DDH016 intersects: * 14m @ 1704g/t Ag, 1.6% Cu, 0.9% Pb and 6.8% Zn from 83m; Incl. 3.5m @ 5830g/t Ag, 5.3% Cu, 0.6% Pb and 8.8% Zn from 83m Incl. 1.0m @ 11212g/t Ag, 9.7% Cu, 0.5% Pb and 9.5% Zn from 85m - DDH017 intersects: * 25.9m @ 337g/t Ag, 0.29% Cu, 0.17%Pb and 2.93% Zn from 169.8m Incl. 9.0m @ 686g/t Ag, 0.52% Cu, 0.16% Pb and 5.56% Zn from 169.8m Incl. 1.0m @ 2560g/t Ag, 0.80% Cu, 0.30% Pb and 10.8% Zn from 176.4m and 1.05m @ 1210g/t Ag, 1.47% Cu, 0.30% Pb and 3.60% Zn from 187.0m - DDH018 intersects: * 3.65m @ 624g/t Ag, 0.50% Cu, 0.27% Pb and 2.97% Zn from 80.75m; Incl. 1.0m @ 1110g/t Ag, 0.92% Cu, 0.06% Pb and 5.08% Zn from 80.75m - DDH019 intersects: * 7.3m @ 538g/t Ag, 0.4% Cu, 1.9% Pb and 3.0% Zn from 40.7m; Incl. 0.6m @ 2270g/t Ag, 2.1% Cu, 16.1% Pb and 4.9% Zn from 46.9m - DDH020 intersects: * 14m @ 147g/t Ag, 0.2% Cu, 0.8% Pb and 3.4% Zn from 83m; - DDH021 intersects: * 6.9m @ 213g/t Ag, 0.12% Cu, 0.79%Pb and 0.83% Zn from 21.1m Incl. 1.0m @ 1130g/t Ag, 0.46% Cu, 1.50% Pb and 1.51% Zn from 26.0m - DDH022 intersects: * 17.4m @ 194g/t Ag, 0.18% Cu, 0.46% Pb and 1.43% Zn from 30m; Incl. 9.0m @ 308g/t Ag, 0.28% Cu, 0.44% Pb and 1.77% Zn from 35m Diamond drillhole data is presented in Table 1. All diamond results for Webbs South have now been received. Silver Mines awaits results for drillholes DDH026-031 from Webbs Main. 2. Metallurgical Testwork Silver Mines has engaged Mineralurgy Pty Ltd to oversee a metallurgical testwork program for the Webbs Silver Project. Mineralurgy is represented by world recognised metallurgical consultant, Mr Peter Munro who is regarded as an expert on silver-lead-zinc metallurgy having worked extensively on complex polymetallic projects in Australia and overseas. Mineralurgy conducted a review of metallurgical data related the Webbs project, including testwork conducted by Silver Mines and previous explorers. Comparisons were also made to projects with similar mineralisation to Webbs. The review proposed conceptual flow sheets with regard to likely production and marketability of various concentrates. Conceptual flow-sheets to produce silver bullion were also evaluated. The advantages and disadvantages of all scenarios were considered with reference to assumed capital costs, operating costs and revenue flows. The design of metallurgical testwork programs and sample selection is now being finalised. During the quarter Silver Mines conducted preliminary sighter testwork to investigate the cyanide solubility of silver at Webbs, and thereby the potential to produce silver doré. All samples were pulverised to -75 microns. The results indicate that silver extraction from old tailings samples average 75% and ranged from 56-85%. Tests on fresh diamond core samples from DDH019 yielded a lower average silver extraction of 27% and ranged from 20- 36%. The increased silver extraction in the tailings samples is likely due to the fact the stockpile contains material from 2-10mm in size which has been exposed at surface for 50-100 years resulting in the partial oxidation of tetrahedrite. This has liberated much of the contained silver thereby increasing its cyanide solubility. Results from this early stage evaluation are considered very encouraging as they demonstrate that at least some of the silver at Webbs is cyanide soluble thereby indicating the production of silver doré may be possible. The increased recovery of silver from the oxidised tailings could indicate that a weakly oxidative pre-treatment of concentrate followed by cyanide leaching may recover appreciable silver. Additional detailed testwork is required but the results demonstrate this is a potential treatment route worth investigating. 3. Resource Update Silver Mines resource consultants are in the final stages of completing a new resource model for the Webbs silver deposit. Unfortunately some delays have been experienced due the decision to incorporate several key diamond drillhole intersections into the resource. These delays were further exacerbated by the Christmas break, the processing of core, the receipt of assay data and the incorporation and interpretation of the new data in the resource database. The new resource estimate will be released as soon as it becomes available which is expected in the very near term. PLANNED ACTIVITIES for the MARCH QUARTER 2012 The March Quarter will continue to be an exciting time for Silver Mines with the following key programs underway or planned to commence; - New resource estimate for the Webbs deposit - Complete diamond core assaying in preparation for selection of metallurgical samples for Webbs Main - Commence metallurgical testwork program - Exploration drilling on regional targets. - Plan and prepare for deeper drilling at Webbs - Continued rehabilitation of drill sites at Webbs Please direct any queries regarding the content of this report to Charles Straw (CEO) on +61 2 9253 0900 or [ cstraw@silverminesltd.com.au ]. The information in this Document that relates to Exploration Results, Mineral Resources or Ore Reserves is based on information compiled by Mr David Hobby, consulting geologist to SVL, who is a Member of The Australasian Institute of Mining and Metallurgy. Mr Hobby 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 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr Hobby consents to the inclusion in the report of the matters based on his information in the form and context in which it appears. Table 1. Diamond drilling: Hole details and intersections Hole ID MGA MGA Dip Azi Hole From To Int# Ag Cu Pb Zn East North MGA Depth (m) (m) (m) (g/t) (%) (%) (%) DDH016 6751766 358879 -70 285 117.5 62.0 66.0 4.0 326 0.30 0.57 3.32 DDH016 incl. 65.0 66.0 1.0 832 0.53 0.41 2.70 DDH016 83.0 97.0 14.0 1704 1.63 0.93 6.84 DDH016 incl. 83.0 86.5 3.5 5830 5.27 0.63 8.79 DDH016 incl. 85.0 86.0 1.0 11212 9.70 0.49 9.50 DDH016 incl. 92.0 92.6 0.6 3430 2.49 4.95 10.00 DDH017 6751662 358922 -55 270 216 169.8 195.7 25.9 337 0.29 0.17 2.93 DDH017 incl. 169.8 179.7 9 686 0.52 0.17 5.91 DDH017 incl. 176.4 177.4 1 2560 0.8 0.3 10.8 DDH017 and 187 188.1 1.05 1210 1.47 0.3 3.6 DDH018 6751848 358926 -55 284 143.2 80.75 84.4 3.65 624 0.5 0.27 2.97 DDH019 6751778 358892 -50 285 57.4 40.7 48.0 7.3 538 0.40 1.95 3.04 DDH019 incl. 42.2 43.0 0.8 1940 0.82 1.29 7.53 DDH019 and 46.9 47.5 0.6 2270 2.12 16.2 4.89 DDH020 6751776 358898 -60 285 138.3 83.0 97.0 15.0 147 0.16 0.76 3.44 DDH020 incl. 91.0 92.0 1.0 509 0.44 0.21 4.61 DDH021 6751893 358921 -55 299 83.6 21.1 28 6.9 213 0.12 0.77 0.83 DDH021 incl. 26 27 1 1130 0.46 1.50 1.51 DDH022 6751714 358873.4 -50 298 64.9 30 47.4 17.4 194 0.18 0.46 1.43 DDH022 incl. 35 44 9 308 0.28 0.44 1.77 DDH023 6751619 358863.8 -55 295 189.2 82.9 84.75 1.85 142 0.19 1.06 0.88 incl. 83.9 84.75 0.85 239 0.32 1.61 1.39 DDH024 6752652 358986 -81 283 59.6 Did not reach target DDH025 6752650 358996.4 -78 265 46.6 43.6 46.6 3.0 28 0.04 0.34 0.42 Hit old workings at 46.6m # Down-hole intersections are NOT true widths due to the geometry of the lodes and angle of intersection of the drill hole. True widths are estimated to be approximately 45% of down-hole interval in holes with dips of -55 degrees and approximately 33% of down-hole intervals in holes with dips of -70 degrees. Sampling and Assaying HQ diamond core samples are cut lengthways to produce half core. Samples are usually taken at 1m intervals or as geology dictates. Silver Mines have opted to utilise the services of ALS-Chemex (Brisbane), a globally respected company servicing the mining industry. Samples are dispatched by TNT Couriers from Glen Innes to ALS. Core is crushed to -6mm and a 1kg split is then pulverised to provide the assay pulp. Routine assaying is conducted by ALS Method ICP41 This is acid digest with an ICP-AES finish analysing for Ag, As, Bi, Cu, Fe, Pb, S, Sb, Sn, W and Zn. When elements exceed upper detections limits of 100ppm for Ag and 1% for Cu, Pb and Zn they are reanalysed by and appropriate ore grade acid technique (ALS method OG46). For silver above 1500g/t a gravimetric technique is used. Certified Standards and blanks are routinely submitted in each assay batch to monitor QA-QC. Rule 5.3 Appendix 5B Mining exploration entity quarterly report Introduced 1/7/96. Origin: Appendix 8. Amended 1/7/97, 1/7/98, 30/9/2001, 01/06/10. Name of entity SILVER MINES LIMITED ABN Quarter ended ("current quarter") 45 107 452 942 31 December 2011 Consolidated statement of cash flows Current quarter Year to date (6 months) Cash flows related to operating activities $A'000 $A'000 1.1 Receipts from product sales and related debtors 1.2 Payments for (a) exploration & evaluation (895) (1,826) (b) development (c) production (d) administration (180) (451) 1.3 Dividends received 1.4 Interest and other items of a similar nature 28 58 received 1.5 Interest and other costs of finance paid (1) (2) 1.6 Income taxes paid 1.7 Other (provide details if material) Pre paid drilling Net Operating Cash Flows (1,048) (2,221) 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 1.11 Loans repaid by other entities 1.12 Other (provide details if material) - - Net investing cash flows 1.13 Total operating and investing cash flows (1,048) (2,221) (carried forward) 1.13 Total operating and investing cash flows (1,048) (2,221) (brought forward) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 113 304 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 (provide details if material) Net financing cash flows 113 304 Net increase (decrease) in cash held (935) (1,917) 1.20 Cash at beginning of quarter/year to date 2,389 3,371 1.21 Exchange rate adjustments to item 1.20 1.22 Cash at end of quarter 1,454 1,454 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 21 1.24 Aggregate amount of loans to the parties included in item 1.10 1.25 Explanation necessary for an understanding of the transactions Director Fees Non-cash 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. 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 - 4.2 Development 4.3 Production 4.4 Administration 350 Total 350 Reconciliation of cash Reconciliation of cash at the end of the quarter (as Current quarter Previous quarter shown in the consolidated statement of cash flows) to $A'000 $A'000 the related items in the accounts is as follows. 5.1 Cash on hand and at bank 33 94 5.2 Deposits at call 1,421 2,295 5.3 Bank overdraft - - 5.4 Other (provide details) - - Total: cash at end of quarter (item 1.22) 1,454 2,389 Changes in interests in mining tenements Tenement Nature of interest Interest at Interest at reference (note (2)) beginning of end of quarter quarter 6.1 Interests in mining tenements relinquished, reduced or lapsed 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. Total number Number quoted Issue price per Amount paid up per security (see note security (see note 3) 3) (cents) (cents) 7.1 Preference +securities (description) 7.2 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy- backs, redemptions 7.3 +Ordinary 136,106,468 136,105,618 securities 7.4 Changes during quarter (a) Increases 850 850 35 cents per share 35 cents per share through issues (b) Decreases through returns of capital, buy-backs 7.5 +Convertible debt securities (description) 7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted 7.7 Options Exercise price Expiry date (description and conversion factor) 2,000,000 - Unlisted Options, Expiry 27 August exercise price 24 2012.Vest 27 February cents, 2011 2,000,000 - Unlisted Options, Expiry 27 August 2013. exercise price 40 Vest - 27 August 2011 cents, Expiry 27 August 2013. Vest - 27 August 2011 5,000,000 - Unlisted Options, Expiry Date 1 May 2012 exercise price 35 cents, 8,500,000 - Unlisted Employee Expiry Date 23 Options, exercise December 2015 price 50 cents, Unlisted 3,500,000 - Employee Options, Expiry Date 6 July exercise price 20 2012 cents, 3,000,000 - Performance Rights 7.8 Issued during quarter 7.9 Exercised during quarter 7.10 Expired during quarter 7.11 Debentures (totals only) 7.12 Unsecured notes (totals only) 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 4). 2 This statement does give a true and fair view of the matters disclosed. Sign here: ............................................................Date: .. January 2012.............. (Company secretary) Print name: ...Kevin Lynn...................................................... 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 1022: Accounting for Extractive Industries and AASB 1026: Statement of Cash Flows apply to this report. 5 Accounting Standards ASX will accept, for example, the use of International Accounting 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. == == == == == 

Contributing Sources

---

Market Wire