31st July, 2012 To: Company Announcement officer ACTIVITIES REPORT FOR THE QUARTER ENDED 30th JUNE 2012 HIGHLIGHTS - Metallurgical Test work demonstrates excellent potential to recover over 90% of silver to doré bars as; - 96% Ag is recovered to flotation concentrate and 98% Ag recovered via cyanide leach after Albion Process (TM). Silver then recovered to doré through Merrill-Crowe process. - Potential to recover base metal (zinc and copper) concentrates to be investigated. - Further test work is underway. - Results will be used to estimate capital and operating costs to Scoping study level. - Drill planning is well advanced at Webbs and is aimed at increasing the resource base. - Drilling planned for Silver Mines' regional targets in New England aimed at demonstrating the potential for Webbs style mineralisation in the region. EL5674 (Webbs) 1. Metallurgical Testwork Silver Mines has engaged Mineralurgy Pty Ltd to oversee a metallurgical testwork program for the Webbs Silver Project. Mineralurgy is a world recognised metallurgical consultancy, with particular expertise on complex polymetallic projects in Australia and overseas. Mineralurgy conducted a review of metallurgical data related to the Webbs project, including testwork conducted by Silver Mines and previous explorers. Based upon this review the flow sheet decided upon for testing was; produce a bulk sulphide concentrate for further processing to extract silver to doré using the Albion Process (TM) and possibly produce Zn and Cu concentrates. This current testwork program has utilised the following key phases; 1. Following on from sighter flotation testwork a bulk sulphide flotation concentrate was produced at the relatively coarse grind of 212 microns. This recovered 95.9% of the silver to a 12% mass pull (ASX news release 31st May 2012) which assayed 2.2 kg/t Ag and also recovered appreciable amounts of Cu, Zn and Pb. 2. The bulk concentrate was then subjected to the Albion Process (TM) which consists of ultra-fine grinding down to a product size of 80% passing 8-12 microns followed by oxidative alkaline leaching. 3. The Albion leach residue was then treated with conventional cyanidation. Cyanide soluble silver analysis showed 98.4% recovery of Ag. 4. This testwork results in total silver recovery of 94.3% into cyanide solution. Recovery of silver into doré from the cyanide solution has not been investigated as yet, however the well recognised Merrill-Crowe process is currently favoured which, based on many commercial applications SVL would expect to recover over 95% of the silver from the silver cyanide solution, thus delivering greater than 90% silver recovery overall to doré bars . These results have the potential to be a major step for the Webbs Silver project. Once the test work is completed, Core Resources will prepare capital and operating cost estimates to Scoping Study level to evaluate a 500,000 tonne per year processing facility, capable of producing up to 4Moz of silver per annum. Test work is ongoing and results will be reported as they come to hand. However, at this stage all indications are very positive that a potentially economic metallurgical flow sheet utilising the Albion Process (TM) to produce silver doré is taking shape. 2. Exploration Silver Mines is preparing to re-commence drilling at Webbs in around 4 weeks. This program will consist of RC and diamond drilling and will target potential for near surface extensions as well as extensions at depth to the existing deposit. At this stage the company is expecting to drill up to 12,000m of RC and diamond drilling prior to delivering an updated resource estimate for the Webbs deposit. Further resource increases are anticipated following additional deeper and extensional drilling as the deposit still remains open along strike to the south and down plunge at Webbs Main and Webbs South. These targets are considered high priority as some of the widest and highest grade intercepts are still open at relatively shallow depth of approximately 80-140m below surface. EL6771-EL6114 (Mole River) The Mole River projects are highly prospective for silver rich polymetallic mineralisation as demonstrated by the vast number of documented mineral occurrences combined with exploration results achieved by Silver Mines and previous explorers. None of the targets in this project area have ever been drill tested. Silver Mines anticipates that reconnaissance drilling will be undertaken at the Burra, Ecquador and Torny prospects by the end of 2012. EL6269 (Walla Walla Joint Venture) Silver Mines has elected to withdraw from this joint venture with Australia Oriental Minerals. PLANNED ACTIVITIES for the SEPTEMBER QUARTER 2012 The September Quarter will continue to be an exciting time for Silver Mines with the following key programs underway or planned to commence; - Establish optimal grind size, oxidative leach conditions, sulphide oxidation requirements and cyanide leaching parameters for Albion Process(TM)-Cyanide Leach-Merrill Crowe flow sheet. - Investigate options for Zn, Cu and Pb recovery post Albion leach. - Complete bench scale and bulk sulphide testwork on composite sample for Webbs South deposit using similar flotation and leach conditions to the existing work on the Main Zone. - Develop capital and operating cost estimates to Scoping study level for an Albion plant at Webbs to treat 0.5Mt per year. - Extensional drilling at the Webbs Silver project aimed at growing the Webbs resource. - Exploration drilling on regional targets aimed at demonstrating potential for high grade silver rich polymetallic mineralisation similar to 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. Appendix 5B Mining exploration entity quarterly report 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 30 June 2012 Consolidated statement of cash flows Current quarter Year to date (12 Cash flows related to operating activities $A'000 months) $A'000 1.1 Receipts from product sales and related debtors 1.2 Payments for (a) exploration & evaluation (560) (2,778) (b) development (c) production (d) administration (222) (832) 1.3 Dividends received 1.4 Interest and other items of a similar nature 8 77 received 1.5 Interest and other costs of finance paid (1) (5) 1.6 Income taxes paid 1.7 Other (provide details if material) Pre paid drilling (775) (3,538) Net Operating Cash Flows Cash flows related to investing activities 1.8 Payment for purchases of: (a) prospects (b) equity investments - - (c) other fixed assets (1) (40) 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) (1) (40) Net investing cash flows 1.13 Total operating and investing cash flows (776) (3,578) (carried forward) 1.13 Total operating and investing cash flows (776) (3,578) (brought forward) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 703 1,007 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 703 1,007 Net increase (decrease) in cash held (73) (2,571) 1.20 Cash at beginning of quarter/year to date 873 3,371 1.21 Exchange rate adjustments to item 1.20 1.22 Cash at end of quarter 800 800 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 26 15 5.2 Deposits at call 774 858 5.3 Bank overdraft - - 5.4 Other (provide details) - - Total: cash at end of quarter (item 1.22) 800 873 Changes in interests in mining tenements Tenement Nature of interest Interest Interest reference (note (2)) at at end of beginning quarter of 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 security (see note note 3) (cents) 3) (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 148,611,201 148,611,201 securities 7.4 Changes during quarter (a) Increases 12,504,733 12,504,733 6 cents per share 6 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 13,609,882 13,609,882 Options Expiring 31 October factor) exercisable at 2013 35 cents per share 2,000,000 - Unlisted Options, Expiry 27 August exercise price 24 2012.Vest 27 cents February 2011 2,000,000 - Unlisted Options, Expiry 27 August exercise price 40 2013. Vest - 27 cents, Expiry 27 August 2011 August 2013. Vest - 27 August 2011 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 2012 20 cents 3,000,000 - Performance Rights 7.8 Issued during 6,252,367 - Unlisted Options Expiring 31 October quarter exercisable at 2013 10 cents per share 7.9 Exercised during quarter 7.10 Expired during 5,000,000 Unlisted Options, Expiry Date 1 May quarter exercise price 2012 35 cents 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: July 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. + See chapter 19 for defined terms. 

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