31st October, 2012 Silver Mines Ltd. ACTIVITIES REPORT FOR THE QUARTER ENDED 30th SEPTEMBER 2012 HIGHLIGHTS - SPP completed with approximately 50% take-up by shareholders raising over $833,000; - Soil and rock chip sampling completed on high priority targets on Mole River prospects, north of Webbs; - Drilling began in mid October on Mole River Prospects to test previously un-drilled targets; - Final statutory report lodged with NSW Department Trade and Investment - Resources and Energy for drilling approval at Webbs as per new requirement introduced in September; - Drilling at Webbs is expected to commence by December, pending environmental approval; and - Metallurgical testwork is now complete. Scoping level study to be completed by year end. 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. The mineral occurrences form a zone over 11km long and 2km wide. Only a small part of one prospect was ever drill tested by previous explorers. Silver Mines anticipates that reconnaissance drilling will be undertaken at the Burra, Ecquador, Torny, Hazeledean and Mt Morgan prospects by the end of 2012. EL5674 (Webbs) Metallurgy The testwork program is now complete. Recently completed work focussed on establishing cyanide consumption. Results are yet to be reported. The testwork program has demonstrated that mineralisation at both Webbs Main and Webbs South is highly amenable to the Albion Process with overall silver to dore of over 90%. It is anticipated that Scoping level study investigating a 500,000tpa flotation/Albion plant producing around 4Moz of silver in dore per annum will be completed by year end. Silver Mines will use the results of this study to assist with project evaluation. Drilling Silver Mines has been awaiting environmental approval for drilling at Webbs since it lodged a 'Review of Environmental Factors' in February 2012. Since this time the government on several separate occasions has requested additional information, which Silver Mines has provided expeditiously. The latest request was for an Agricultural Impact Statement as per new requirements only introduced in September 2012. Drilling at Webbs is planned to commence by December, pending approvals. Initial drilling will focus on shallow targets. Deeper drilling is planned to commence as soon as possible but will depend on drill rig availability. Silver Mines still has 5,000m of RC drilling pre-paid with our preferred drill contractor. Results of Security Purchase Plan The Company announced on 31 August 2012 that Shareholders were invited to participate in the Company's Security Purchase Plan (SPP). Shareholders eligible to participate were entitled to receive up to $10,000 worth of Shares at $0.06 per Share and one option per every two shares applied for. The Options had an exercise price of $0.10 and expire on 13 November 2013. The SPP raised $833,150 for the Company and was completed 26 September 2012. PLANNED ACTIVITIES for the DECEMBER 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; - 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. - Completion of Scoping level study on processing plant. 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. 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 September 2012 Consolidated statement of cash flows Current quarter Year to date (3months) 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 (391) (391) (b) development (c) production (d) administration (310) (310) 1.3 Dividends received 1.4 Interest and other items of a similar nature 3 3 received 1.5 Interest and other costs of finance paid (1) (1) 1.6 Income taxes paid 1.7 Other (provide details if material) Pre paid drilling (699) (699) 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 (3) (3) 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) (3) (3) Net investing cash flows 1.13 Total operating and investing cash flows (702) (702) (carried forward) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 830 830 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 830 830 Net increase (decrease) in cash held 128 128 1.20 Cash at beginning of quarter/year to date 800 800 1.21 Exchange rate adjustments to item 1.20 1.22 Cash at end of quarter 928 928 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 300 4.2 Development 4.3 Production 4.4 Administration 300 Total 600 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 16 26 5.2 Deposits at call 912 774 5.3 Bank overdraft - - 5.4 Other (provide details) - - Total: cash at end of quarter (item 1.22) 928 800 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 163,997,091 163,997,091 securities 7.4 Changes during quarter (a) Increases 15,385,890 15,385,890 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 Listed Options Expiring 31 October factor) exercisable at 2012 35 cents per share 13,195,339 - Unlisted Options Expiring 13 Nov exercisable at 2013 10 cents per share 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 7.8 Issued during 6,942,972 - Unlisted Options Expiring 13 Nov quarter exercisable at 2013 10 cents per share 7.9 Exercised during 1,500,000 - Performance - quarter Rights 7.10 Expired during 3,500,000 - Employee Options, Expiry Date 6 July quarter exercise price 2012 20 cents 2,000,000 - Unlisted Options, Expiry 27 August exercise price 24 2012.Vest 27 cents February 2011 1,500,000 - Performance - Rights 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: ..October 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. == == == == == 

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