31 August 2012 Dear Shareholder Invitation to Participate in Silver Mines Limited's Share Purchase Plan On 30 August 2012, Silver Mines Limited (ACN 107 452 942) (SVL or Company) announced its intention to offer existing shareholders an opportunity (Offer) to participate in a Share Purchase Plan (Plan) to subscribe for ordinary fully paid shares and free attaching Options in the Company. The Company's Board of Directors is now pleased to make the Offer to eligible shareholders on the Terms and Conditions enclosed with this letter. Shareholders eligible to participate in the Plan The right to participate in the Plan is optional and is only available to shareholders who are registered as holders of fully paid ordinary shares (Shares) in the capital of the Company at 5:00pm (Sydney time) on the Record Date of 29 August 2012 with a registered address in Australia or New Zealand (Eligible Shareholders). Share Purchase Plan The Plan entitles Eligible Shareholders in the Company, irrespective of the size of their shareholding, to purchase up to A$10,000 worth of Shares at $0.06 per Share, free of brokerage and commission. Each share will come with free attaching Options, on the basis of one (1) new Option for every two (2) shares applied for. The Options will have an exercise price of 10 cents and expire 13 November 2013. Options Terms are set out in Appendix 1. The average market price of the Company's Shares on the Australian Securities Exchange (ASX) during the 5 trading days immediately prior to the announcement date of the Offer was $0.072. Details of the Offer are set out in this letter and the enclosed Terms and Conditions, together with an Application Form. Current projects Details of the Company's current activities are set out in the announcements made by Silver Mines to the ASX and are available from the ASX or the Company's website at [ www.silverminesltd.com.au ]. The funds raised under the Plan will be used by the Company primarily to continue exploration drilling at the Company's Webbs Silver Project, for regional exploration, and for working capital purposes. How much can you invest? Under the Plan, Eligible Shareholders may purchase Shares in A$5,000 parcels up to a maximum of A$10,000 worth of Shares (being 166,667 Shares at the Offer price of $0.06 per Share). The maximum investment any Eligible Shareholder may apply for will remain A$10,000 even if they receive more than one Offer (whether in respect of a joint holding or because they have more than one holding under a separate account). Subscription, application procedure and closing date Eligible Shareholders may participate by selecting one of the following Offers to purchase Shares under the Plan: ---------------------------------------- Offer Amount AUD Shares ---------------------------------------- Offer A: $5,000 83,334 ---------------------------------------- Offer B: $10,000 166,667 ---------------------------------------- If you would like to participate in the Offer, please return your completed Application Form (enclosed), together with your cheque or bank draft for the subscription moneys as relevant, for the Shares you wish to acquire, to: ----------------------------------------------- By delivery: By Post: ----------------------------------------------- Boardroom Pty Ltd Boardroom Pty Ltd Level 7, 207 Kent Street GPO Box 3993 SYDNEY NSW 2000 SYDNEY NSW 2001 ----------------------------------------------- If you elect to pay by BPAY, you will not need to return the Application Form but you will need to make the payment by 5:00pm (Sydney time) Wednesday, 26 September 2012 in accordance with the instructions on the Application Form and quoting your personalised BPAY reference number provided on the Application Form. Applications (together with payment) or BPAY must be received on or before the Closing Date of 5:00pm (Sydney time) on Wednesday, 26 September 2012. No late applications will be accepted. Once an application has been made, it cannot be revoked. All valid applications shall be deemed accepted if received before the Closing Date. Please refer to the Plan Terms & Conditions for details of the certification you will be deemed to provide when you participate in the Offer by returning an Application Form or by paying by BPAY. Purchase price and acceptance of risk factors The purchase price of Shares under the Offer is A$0.06 per Share. On the trading day immediately prior to the announcement date of the Offer (Announcement Date), the closing price of the Company's Shares traded on the ASX was A$0.068. The Offer price of A$0.06 per Share represents a 20% discount to the average price of the Company's Shares over the five (5) days prior to the Announcement Date. The market price of the Shares in the Company may rise and fall between the date of the Offer and the date that any Shares are allotted to you as a result of your acceptance of this Offer. By accepting the Offer and applying for Shares under the Plan, each Eligible Shareholder will be acknowledging that, although the Offer price is at a discount to the Share price on the Announcement Date, Shares are a speculative investment and the price of Shares on the ASX may change between the date of the Company announcing its intention to make an Offer and the date of issue of Shares under that Offer and that the value of the Shares received under the Plan may rise or fall accordingly. The Board recommends that you obtain your own financial advice in relation to the Offer and consider price movements of Shares in the Company prior to accepting this Offer. Additional information and important dates The Offer cannot be transferred and the Board reserves the right to reject any application. Shares allotted under the Plan will be issued as soon as practicable after the Closing Date of the Offer. Application for quotation on the ASX of the new Shares will be made immediately following the issue of those Shares. Subject to meeting the requirements of the ASX Listing Rules, the Company may seek listing of the Options, in the event the Options are not listed, the Options will be unlisted. A maximum of 29.683 million Shares and 14.84 million Options may be issued pursuant to the Offer. In the event of an oversubscription by the Closing Date, the Directors may, in their absolute discretion, scale-back all applications on a pro-rata basis. If the Company rejects or scales-back an application or purported application, the Company will promptly return to the shareholder the relevant application moneys, without interest. New Zealand offer restrictions The Plan Shares are not being offered or sold to the public within New Zealand other than to existing shareholders of the Company with registered addresses in New Zealand and to whom the Offer is being made in reliance on the Securities Act (Overseas Companies) Exemption Notice 2002 (New Zealand). This document has not been registered, filed with or approved by any New Zealand regulatory authority under the Securities Act 1978 (New Zealand). This document is not an investment statement or prospectus under New Zealand law and is not required to, and may not, contain all the information that an investment statement or prospectus under New Zealand law is required to contain. Shortfall placement If less than 29.68 million Shares are applied for pursuant to this Offer, the shortfall may be placed at the Directors' discretion. Indicative timetable ------------------------------------------------------------------------------------- Event Date ------------------------------------------------------------------------------------- Record Date Wednesday, 5:00pm (Sydney Time) 29 August 2012 ------------------------------------------------------------------------------------- Announcement Date Thursday, 30 August 2012 ------------------------------------------------------------------------------------- Opening Date Wednesday, 5 September 2012 ------------------------------------------------------------------------------------- Closing Date 5:00pm (Sydney time) Wednesday, 26 September 2012 ------------------------------------------------------------------------------------- Issue of Shares under the Plan Tuesday, 2 October 2012 ------------------------------------------------------------------------------------- Dispatch date for holding statements Tuesday, 2 October 2012 ------------------------------------------------------------------------------------- Quotation of Shares on ASX Wednesday, 3 October 2012 ------------------------------------------------------------------------------------- These dates are indicative only. The Company may vary the dates and times of the Offer without notice. Accordingly, shareholders are encouraged to submit their Application Form as early as possible. Should you wish to discuss any information contained in this letter further, do not hesitate to contact the Company's Share Registry, Boardroom Pty Ltd on +61 2 9290 9600. Yours sincerely Charles Straw Managing Director SILVER MINES LIMITED SILVER MINES LIMTED ACN 107 452 942 Shareholder Share Purchase Plan - Terms and Conditions Purpose The purpose of the Shareholder Share Purchase Plan (Plan) is to offer existing shareholders of Silver Mines Limited (Company) the opportunity to acquire additional fully paid ordinary shares and Options in the Company (Shares) at A$0.06 per Share up to a maximum of A$10,000 (when combined with any Shares issued under any share purchase plan in the 12 months preceding the date of the Plan) without the need to pay brokerage costs and without the need for the Company to issue a Prospectus. The Plan Terms and Conditions have been determined by the Board of Directors of the Company. Shareholders eligible to participate The right to participate in the Plan is optional and is only available to shareholders who are registered as holders of fully paid ordinary shares in the capital of the Company at 5:00pm (Sydney time) on the Record Date of 29 August 2012 with a registered address in Australia or New Zealand (Eligible Shareholders). Due to foreign securities laws, it is not practical for shareholders resident in other countries to be offered the opportunity to participate in the Plan. Participation in the Plan is optional and is subject to these Terms and Conditions. Offers made under the Plan are non- renounceable (that is, Eligible Shareholders may not transfer their rights to any Shares offered under the Plan). The maximum amount, which any Eligible Shareholder may subscribe for in any consecutive 12 month period under the Plan, is A$10,000. The Board may also determine in its discretion, the minimum amount for participation, the multiple of Shares to be offered under the Plan and the period the Offer is available to Eligible Shareholder. Custodians, trustees and nominees If you are an Eligible Shareholder and hold Shares as a custodian (as defined in ASIC Class Order CO 09/425 (refer below) (Custodian) or in any more specific ASIC relief granted to the Company in relation to the Plan), you may apply for up to the maximum number of new Shares and Options for each beneficiary for whom you act as custodian, provided you annexe to your Application Form a certificate to the Company (Custodian Certificate) confirming the following: - that you held Shares on behalf of one or more other persons (each a Participating Beneficiary) at 5:00pm (Sydney time) on the Record Date and have subsequently been instructed by those Participating Beneficiaries to apply for Shares and Options under the Plan on their behalf; - the number of Participating Beneficiaries and their names and addresses; - the number of Shares that you hold on behalf of each Participating Beneficiary; - the dollar amount of Shares and Options that each Participating Beneficiary has instructed you, either directly or indirectly through another Custodian, to apply for on their behalf; - that the application price for Shares and Options applied for under the Offer for each Participating Beneficiary for whom you act, plus the application price for any other Shares and Options issued to you as custodian for that Participating Beneficiary under any arrangement similar to the Plan in the prior 12 months does not exceed A$10,000; - that a copy of the written offer document was given to each Participating Beneficiary; and - where you hold Shares on behalf of a Participating Beneficiary indirectly, through one or more interposed custodians, the name and address of each interposed custodian. For the purposes of ASIC Class Order CO 09/425, you are a "Custodian" if you are a registered holder that: - holds an Australian financial services licence that allows you to perform Custodian or depositary services or operate IDPS accounts; - is exempt from holding an Australian financial services licence by virtue of Class Order CO 03/184 or by relying on the Australian financial services licence of your master Custodian under regulation 7.1.06(k) of the Corporations Regulations 2001 (Cth); - is a trustee of a self managed superannuation fund; - is a trustee of superannuation master trusts; - is a responsible entity of IDPS-like schemes; or - is noted on the Company's register of members as holding the shares on account of another person. If you hold Shares as a trustee or nominee for another person or persons but are not a Custodian as defined above, you cannot participate for beneficiaries in the manner described above. In this case, the rules for multiple single holdings (above) apply. Custodians should request a Custodian Certificate when making an application on behalf of Participating Beneficiaries. To request a Custodian Certificate and further information on how to apply, contact the Company's Share Registry, Boardroom Pty Limited on +61 2 9290 9600 at any time from 8:30am to 5:00pm (Sydney Time) Monday to Friday during the Offer period. The Company reserves the right to reject any application for Shares and Options to the extent it considers that the application (whether alone or in conjunction with other applications) does not comply with these requirements. The Company reserves the right to reject applications in accordance with these Terms and Conditions. Price of Shares The price for Shares and the free attaching Options to be issued under the Plan is A$0.06 per Share. Applications, notices and certification At the Board's discretion, the Company will send Eligible Shareholders a Letter of Offer and acceptance procedures, inviting them to subscribe for Shares and Options under the Plan accompanied by the Terms and Conditions of the Plan and an Application Form. Applications will not be accepted after the Closing Date of the Offer. Oversubscriptions to the Offer may be refunded without interest. Notices and statements made by the Company to participants may be given in any manner prescribed by its Constitution. By returning an Application Form with correct payment or by paying by BPAY, an applicant: (a) acknowledges that the application is irrevocable; (b) acknowledges and warrants they are an Eligible Shareholder; and (c) certifies that the aggregate of the application price for the following does not exceed A$10,000: (i) the Silver Mines Shares and Options that are the subject of the application; and (ii) any other Silver Mines Shares and Options applied for by the applicant under the Plan (or any similar arrangement in the 12 months prior to the application), whether: (A) in the applicant's own right; or (B) jointly with one or more persons; or (C) in the applicant's capacity as a Beneficiary (as defined below), but not including in the applicant's capacity as a trustee or nominee where it is expressly noted on the Company's register of members that the shareholding is held on account of another person. If two or more persons are recorded in the register of members as jointly holding the Shares to which an applicant's application relates, they are taken to be a single registered holder and these statements are taken to be given by all of them. If a trustee or nominee is expressly noted on the Company's register of members as holding the shares to which an application relates on account of another person (Beneficiary), these statements and confirmations are taken to be given by the Beneficiary in respect of him/her/itself (and not the trustee or nominee). By returning an Application Form together with payment or by paying by BPAY, the applicant confirms that it has read, understood and agreed to the Terms and Conditions of the Plan. Placement of Shortfall Any shortfall from the Offer may be placed at the Board's discretion. Issue of Shares and Options Shares and Options to be issued under the Plan will be issued as soon as reasonably practicable after the Closing Date. Shares issued under the Plan will rank equally in all respects with all other fully paid ordinary shares in the Company from the date of issue. Holding statements or CHESS notification will be issued in respect of all Shares and Options issued under the Plan. The Company will, promptly after the issue of Shares under the Plan, make application for those Shares to be listed for quotation on the Official List of ASX. All shares issued on exercise of the Options will rank pari passu in all respects with the Company's then issued shares. Subject to meeting the requirements of the ASX Listing Rules, the Company may seek listing of the Options, in the event the Options are not listed, the Options will be unlisted. Modification and termination of the Plan The Company may modify or terminate the Plan at any time. The Company will notify the ASX of any modification to, or termination of, the Plan. The omission to give notice of any modification to, or termination of, the Plan or the failure of the ASX to receive such notice will not invalidate the modification or termination. Without limiting the above, the Company may issue to any Eligible Shareholder fewer Shares and Options than the Eligible Shareholder applied for under the Plan if the issue of the Shares and Options applied for would contravene any applicable law or the Listing Rules of the ASX. Dispute resolution The Company may, in any manner it thinks fit, settle any difficulties, anomalies or disputes which may arise in connection with or by reason of the operation of the Plan, whether generally or in relation to any participant, application or Shares and Options. The Company's decision in this respect will be conclusive and binding on all shareholders and other persons to whom that determination relates. The Company reserves the right to waive strict compliance with any provision of these Terms and Conditions. The Company's powers under these Terms and Conditions may be exercised by the Directors of the Company or any delegate of the Directors of the Company. Questions and contact details If you have any questions regarding the Plan or how to deal with this Offer, please contact your stockbroker or professional adviser or the Company Registry, Boardroom Pty Limited on +61 2 9290 9600. APPENDIX 1 Rights Attaching to Options The Options have an exercise price of $0.10 per share and will lapse at 5.00pm, (Sydney time) on 13 November 2013. (a) The Options have an exercise price of $0.10 per share and will lapse at 5.00pm, (Sydney time) on 13 November 2013; (b) Each Option shall be issued for no consideration; (c) Each Option entitles the holder to subscribe for one Share in the Company upon the payment of the exercise price per Share subscribed for; (d) The Options will vest immediately; (e) Each Option shall entitle the Option holder to acquire one (1) share in the capital of the Company; (f) Each Option may be exercised by delivering to the registered office of the Company a notice in writing during the period referred to in condition (a) stating the intention of the Option holder to exercise a specified number of Options, accompanied by an Option certificate, if applicable, and a cheque made payable to the Company for the subscription monies due, subject to the funds being duly cleared funds. The exercise of only a portion of the Options held does not affect the holder's right to exercise the balance of any Options remaining; (g) All shares issued on exercise of the Options will rank pari passu in all respects with the Company's then issued shares. Subject to meeting the requirements of the ASX Listing Rules, the Company may seek listing of the Options, in the event the Options are not listed, the Options will be unlisted; (h) The Options are transferable; (i) Any notice of exercise of an Option received by the Company will be deemed to be a notice of the exercise of that Option as at the date of the receipt; (j) There are no participating rights or entitlements inherent in the Options and holders will not be entitled to participate in new issues of securities offered to Shareholders of the Company during the currency of the Options. However, the Company will ensure that for the purpose of determining entitlements to any such issue, the record date will be at least 10 Business Days after the issue is announced so as to give holders the opportunity to exercise their Options before the date for determining entitlement to participate in any issue; (k) Shares allotted pursuant to the exercise of the Options will be allotted following receipt of all the relevant documents and payment and will rank equally with existing issued Shares; and (l) In the event of a reconstruction (including consolidations, subdivision, reduction or return) of the issued capital of the Company, all rights of the Option holder shall be reconstructed in accordance with the ASX Listing Rules. 

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