Silver Mines
LSE : SVLP

August 31, 2012 11:13 ET

Annual Financial Report

                                                SILVER MINES LIMITED
                                                
                                                   ACN 107 452 942
     
     
                                                          
                                                          
                                                  STATUTORY REPORT
                                                          
                                                    30 JUNE 2012
     
     
     
     
     
     
Contents



                                                                                        Page

Directors' Report                                                                        2
Auditor's Independence Declaration                                                       14
Statement of Comprehensive Income                                                        15
Statement of Financial Position                                                          16
Statement of Changes in Equity                                                           17
Statement of Cash Flows                                                                  18
Notes to the Financial Statements                                                        19
Directors' Declaration                                                                   40
Independent Audit Report                                                                 41
Corporate Directory                                                                      43

                                                 SILVER MINES LIMITED
                                                  DIRECTORS' REPORT


The Directors present their report on the Company for the year ended 30 June 2012.

Directors

The Directors of Silver Mines Limited during the financial year and until the date of this report are:

David Henty Sutton - Non Executive Director - Chairman
Malcolm Harvey Bird - Non Executive Director
Charles David Straw - Managing Director

Principal Activities

During  the 12 months to 30 June 2012 Silver Mines Limited continued to aggressively explore its NSW tenements  (Map
1).  The  majority of work and expenditure again focused on the 100% owned Webb's Silver Project on EL5674.  Results
from  all  projects, in particular Webbs, continue to add value to our property portfolio of silver focused projects
in NSW with many new drilling targets defined.

Highlights for 2012 Financial Year

    *   SVL  announced  a 400% upgrade of its Indicated and Measured JORC resource at Webbs to  969,000  tonnes
        averaging 269 g/t Ag for a contained resource of 8.45 million ounces of silver at its fully-owned Webbs silver
        project in north-eastern NSW. Additional inferred resources of 3.4 million ounces of silver also exist.



        Table 1: Resource estimate for Webb's Silver Project at 70g/t Ag cut-off.
        http://media3.marketwire.com/docs/SILVERA.jpg
               
            -    Updated geological model of Webbs shows excellent potential for substantial increase in resource inventory
                 down dip.
        
            -    Strike extensions to the south of Webbs South remain un-tested by drilling as well as other near surface
                 gaps in the current drill pattern.

    *   Positive  results  from flotation and Albion Process(TM) testwork at Webbs which demonstrated  excellent
        potential to recover over 90% of silver to dore bars as:
            
            -    96% Ag is recovered to flotation concentrate and 98% Ag recovered via cyanide leach after Albion Process(TM).
                 Silver then recovered to dore through Merrill-Crowe process.
           
            
            -    Potential to recover base metals (zinc, copper and lead) to be investigated.
      
            
            -    Further test work is underway.
        
    *   Completion of 2232.5m of diamond drilling (DDH) in 19 holes and 7996m of reverse circulation (RC) drilling
        in 98 holes.
               
Webbs Silver Project (EL5674)

During  the  financial  year ending 30 June 2012, SVL completed a number of drilling programs totalling  2232.5m  of
diamond drilling (DDH) in 19 holes and 7996m of reverse circulation (RC) drilling in 98 holes.  The new drilling was
again  highly successful in delineating additional high grade silver rich polymetallic mineralisation in  the  Webbs
trend.  This drilling delivered a 400% upgrade of Indicated and Measured JORC resources to 969,000 tonnes  averaging
269  g/t Ag for a contained resource of 8.45 million ounces of silver. This result reconfirmed Webbs position as the
highest grade undeveloped silver project in Australia.

The  current  resource  estimate at Webbs is 1.49Mt averaging 245 g/t Ag, 0.27% Cu, 0.71%  Pb  and  1.56%  Zn  which
contains approximately 11.75Moz, including measured and indicated resources of 8.4Moz of silver at 269 g/t Ag.

Metallurgy

Metallurgical  testwork carried out in early 2012 indicates that silver recoveries of over 90%  to  dore  bars  were
likely to be attained from an onsite processing facility. The metallurgical testwork has successfully recovered  96%
silver  via  flotation with 98% subsequent recovery via cyanide leach from the Albion Process(TM).  Silver  is  then
recovered  to  dore through the traditional Merrill-Crowe process. This results in total silver recovery  of  around
90%.

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
dore 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 dore 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
dore 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
dore is taking shape.

The  Webbs  project  continues  to deliver with drilling during the year again providing  further  exciting  results
demonstrating the potential of the project to grow. The Company has a defined exploration target extending to
350 below surface. Initial testing of this target has focussed on near surface potential down to 250m below
surface, in and around the current resource and along strike to the north and south. Many high grade zones along the
Webbs trend remain open at depth.

Drilling

During the year the Company drilled at total of 10228.5 m of RC and DDH drilling in 117 holes.  Drilling results  to
date provide the following results:

-----------------------------------------------------------------------------------------
HoleID        from     to (m)    Interval   Ag (g/t)      Cu (%)     Pb (%)      Zn (%)
               (m)                     (m)
-----------------------------------------------------------------------------------------
DDH016          62         66         4.00       326        0.30       0.57        3.32
DDH016          83         97        14.00      1705        0.58       0.70        4.73
DDH017      169.76        183        13.24       506        0.41       0.12        4.53
DDH017      186.15     195.67         9.52       210        0.22       0.25        1.64
DDH018       80.76       85.4         4.64       503        0.40       0.29        2.50
DDH019        40.7         48         7.30       536        0.40       2.05        3.44
DDH020          83         98        15.00       142        0.15       0.72        3.29
DDH021          26         27         1.00      1130        0.46       1.50        1.52
DDH022          30       47.4        17.40       191        0.18       0.45        1.42
DDH026       49.25      55.70         6.45       200        0.33       1.57        1.32
DDH027       34.10      39.25         5.15       398        0.66       3.19        2.10
DDH030       29.80      37.60         7.80       464        0.78       2.17        1.69
DDH030       30.90      32.90         2.00      1277        2.14       4.31        3.03
RC172          162        167         5.00       398        0.49       0.21        1.31
RC203           24         27         3.00       420        0.47       3.98        3.57
RC203           41         44         3.00       352        0.37       1.83        1.97
RC204           27         33         6.00       449        0.29       0.86        1.06
RC209            9         18         9.00       495        0.49       0.94        0.87
RC212           98        102         4.00       189        0.17       0.35        3.16
RC214           39         54        15.00       256        0.21       0.30        1.78
RC215           57         66         9.00       110        0.11       0.80        1.21
RC219           87         95         8.00       665        0.70       0.43        2.01
RC235           93         98         5.00       163        0.02       0.08        0.14
RC235          109        114         5.00       182        0.19       1.09        1.46
RC239           21         25         4.00       205        0.07       2.21        1.35
RC243           25         30         5.00       182        0.25       1.35        1.45
RC247           32         37         5.00       347        0.29       1.73        1.81
RC250          170        180        10.00       327        0.52       0.03        2.53
RC254           75         88        13.00       731        0.84       2.46        2.10
RC256           89         92         3.00       492        0.49       3.59        3.14
RC256           98        110        12.00       233        0.30       0.48        1.76
RC257           29         31         2.00       363        0.35       1.75        0.50
RC261           37         41         4.00       273        0.46       1.40        1.31
RC262           56         64         8.00       174        0.24       1.40        1.32
                                                          

Table 2: Selected drilling results from the Webb's Silver Project at 50 g/t Ag lower cut-off (with up
         to 3m downholde internal dilution at <50 g/t; no top cut off). Intervals are in
         downhole metres. True thickness varies from about 25-50% of the downhole
         interval.

Further  increases  in overall tonnage and contained silver ounces are anticipated following additional  deeper  and
extensional  drilling  as  the deposit remains open along strike to the south and down  plunge.  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. The upcoming drilling programs, which are due  to  commence  in  the
September  Quarter  2012, will initially involve a Reverse Circulation (RC) rig with follow up diamond  drilling.  A
third  small  footrprint  RC  rig  will  undertake shallow drilling and  target  potential  near  surface  zones  of
mineralisation.

2012 PLAN

The  Company anticipates that evaluation of the Webbs project will remain the key focus for the 2013 Financial Year.
Additional  deeper  and extensional drilling is planned at Webbs and is expected to continue to  grow  the  existing
resource, and move the project to feasibility.

SVL  also plans to conduct a metallurgical scoping study and review each of the processing sequences with a view  to
minimizing  capital  and  operating costs while maximizing potential revenues. These results  will  help  complement
subsequent  open  pit optimization studies and provide confidence in continuing to grow the existing  resource,  and
move the project towards feasibility.

OTHER PROJECTS

Webbs West (EL7602)

This  project  is located immediately west and north of the Webbs Silver Project and has potential for  discover  of
Webbs style deposits in metasediments adjacent to the Mole Granite.

Exploration has been limited to desktop studies and reviewing existing datasets such as stream sediment sampling and
aeromagnetics. Planned follow up work will include investigation of historical workings, ridge and spur mapping  and
sampling  in  anomalous catchments identified in stream sediment sampling followed by field checking of  geophysical
targets.

Mole River (ELs 6114 and 6771)

These  leases  are  approximately 35km north east of the Webbs Silver Project and part  of  a  contiguous  block  of
tenements fully owned by SVL.

The  project  area  hosts  more  than  100 documented metalliferous occurrences  along  a  broad  north  west  trend
approximately  25km  long  and  3km wide. The geology of the area is dominated by Permian  age  sediments  that  are
intruded by the Early Triassic Mole Granite, similar to Webbs.

Geological mapping and sampling by SVL along with geophysics has identified numerous drill targets in this area.

Webbs Consols (EL 6239)

This project is located approximately 10km south of the Webbs Silver Project. A data review is underway with the aim
of  commencing  drilling  in September 2012 on two groups of deposits - the westerly Webbs  Consols  group  and  the
eastern  Tangoa-Wellingrove  group. High grade silver mineralisation may occur  along  strike  of  known  historical
workings. More recent work has identified the potential for large low grade deposits of Ag, Pb and Zn.

Leadville (EL 7928)

The  Leadville  project area is at the northern margin of the Lachlan Orogen about 15km east of Dunedoo  in  central
eastern NSW.

Numerous  historical deposits are present in the area with recorded production in the late 19th  century  of  17,500
tonnes at recovered grades of around 600 g/t Ag and 10% Pb.

SVL  intends to follow up on drilling completed in 1990s by previous explorers as well as explore geochemical and/or
geophysical targets.

Boro (EL 7640)

Located  about  60km northeast of Canberra, the Boro area has had significant historical production  of  silver  and
associated minerals.

Drilling  is  proposed  on near surface zones of mineralisation that have been intersected in  limited  drilling  by
previous explorers. Many of these zones are open along strike and at depth.

EL6269 (Walla Walla Joint Venture)

Silver Mines has elected to withdraw from this joint venture with Australia Oriental Minerals.

TENEMENT SUMMARY

To view the table accompanying this announcement, please visit the following link: 

http://media3.marketwire.com/docs/SILVERB.jpg

Competent Persons' Statements

1  The  information in this Document that relates to Exploration Results, Mineral Resources or Ore Reserves is based
   on  information compiled by Mr Robin Rankin, who is a Member of the Australasian Institute of Mining and  Metallurgy
   (MAusIMM)  and  registered  as  a  Chartered Professional Geologist (CPGeo). Robin Rankin  is  Principal  Consulting
   Geologist  and  operator  of the independent geological consultancy GeoRes. He 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' (the  JORC Code). He consents to the inclusion  in  the
   report of the matters based on his information in the form and context in which it appears.

2  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'  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.

Results

The Company incurred a pre-tax operating profit of $737,251 (2011: loss $2,081,624) due mainly to write-off of Share
Option Reserve of $1,522,857.

Dividends

No  dividend  has  been  paid since the end of the previous financial year and no dividend is  recommended  for  the
current year (2011: $Nil).

Significant changes in the state of affairs

There were no significant changes in the state of affairs in the Company during the year.

Events subsequent to reporting date

There  has  not arisen in the interval between the end of the financial year and the date of this report  any  item,
transaction  or  event of a material and unusual nature likely, in the opinion of the Directors of the  Company,  to
affect significantly the operations of the Company, the results of those operations, or the state of affairs of  the
Company in future financial years.

Likely developments

Information on likely developments is included in the Chairman's Report accompanying this financial report.

Further  information about likely developments in the operations of the Company and the expected  results  of  those
operations  in  future financial years has not been included in this report because disclosure  of  the  information
would be likely to result in unreasonable prejudice to the Company.

Environmental issues

The Company's Project Areas are located on exploration licences issued by the Department of Mineral Resources.

The Company had statutory obligations to protect the environment in which it was exploring and to rehabilitate areas
disturbed as a result of exploration activities.

The  Company  prepared and lodged an updated Review of Environmental Factors (REF) for the planned drilling  program
scheduled to commence in the September Quarter 2012. This REF is a requirement under the license conditions and  the
Company is awaiting approval.

During  the  reporting period the Company received a stop work order from the NSW Department of Trade and Investment
(Resources  and  Energy)  for EL5674 until rehabilitation work was completed on drilling pads  and  other  disturbed
areas. This rehabilitation work was completed and the stop work order was subsequently lifted.

Information on directors

David Henty Sutton, Non-Executive Chairman
David  has many years' experience in stock broking and investment banking.  He is currently the Principal of  Dayton
Way Financial Group, which has offices in Sydney and Hong Kong.

The main business of Dayton Way is provision of corporate finance services, mainly to the resources sector.

Prior to his current position he has held director positions with other resource focused financial companies.

David has previously been a partner and Director of several stock exchange member firms including McNab Clarke.   He
became a member of the Stock Exchange of Melbourne and subsequently the Australian Stock Exchange.

His past experience of public company directorships includes the Hudson Group of Companies and Reef Mining Limited.

He is currently Chairman of Sinovus Mining Limited, a director of Precious Metals Investments Limited and a director
of Empire Energy Group Ltd, a producer of oil and natural gas in USA.

Other listed company directorships held during past 3 years:
------------------------------------------------------------
Earth Heat Ltd
Sinovus Mining Ltd
Empire Energy Group Ltd
Precious Metals Investments Limited

Charles David Straw, Managing Director
Charles is an economic geologist with over 15 years in the mining industry.  His experience is multi-faceted ranging
from  environmental management and planning through to mineral exploration, project development, valuation,  finance
and  corporate management.  He holds an honours degree in applied geology from UNSW in Sydney and is a member of the
CIM  and AUSIMM. He has lead the exploration and evaluation of precious and base metals projects in Australia, South
America and China.  He is currently a Director and CEO of TSX.V listed Artha Resources Corporation.

Other listed company directorships held during past 3 years:
------------------------------------------------------------
Precious Metals Investments Limited

Malcolm Harvey Bird, Non Executive Director
Malcolm has over 35 years experience in the stock broking industry with an emphasis on mining investments.  He was a
founder and director of Morning Star Gold NL and Central West Gold NL for 23 years and has an extensive knowledge of
mineral exploration in NSW.

Other listed company directorships held during past 3 years:
------------------------------------------------------------
Central West Gold NL

Company Secretary

Kevin Martin Lynn B.Bus, CA, FAIDC, FFin
Mr  Lynn  is  a Chartered Accountant with over 20 years corporate and finance and is also Company Secretary  and  or
Director of several listed companies.

Remuneration Report

Remuneration policy

The  remuneration  policy of Silver Mines Limited has been designed to align director and  executive  objectives
with  shareholder and business objectives by providing a fixed remuneration component and offering specific long
term  incentives based on key performance indicators affecting the Company's financial results.   The  Board  of
Silver  Mines Limited believes the remuneration policy to be appropriate and effective in its ability to attract
and retain the best executives and directors to run and manage the Company.

The Board's policy for determining the nature and amount of remuneration for Board members and senior executives
of the Company is as follows:

The  remuneration  policy,  setting  the  terms and conditions for the  executive  Directors  and  other  senior
executives, was developed by the Board. All executives receive a base salary (which is based on factors such  as
length  of  service  and  experience)  and superannuation.  The Board reviews  executive  packages  annually  by
reference  to the Company's performance, executive performance and comparable information from industry  sectors
and other listed companies in similar industries.

The  Board  may  exercise discretion in relation to approving incentives, bonuses and options.   The  policy  is
designed to attract the highest calibre of executives and reward them for performance that results in long  term
growth in shareholder wealth.

Executives are also entitled to participate in the employee share and option arrangements.
The  executive  Directors  and  executives  receive a superannuation  guarantee  contribution  required  by  the
government, which is currently 9%, and do not receive any other retirement benefits.

All remuneration paid to Directors and executives is valued at the cost to the Company and expensed. Options are
valued using the Black & Scholes methodology.

The  Board  policy is to remunerate Non Executive Directors at market rates for comparable companies  for  time,
commitment and responsibilities.  The Board determines payments to the Non Executive Directors and reviews their
remuneration  annually,  based on market practice, duties and accountability.  Independent  external  advice  is
sought  when  required.   The maximum aggregate amount of fees that can be paid to Non  Executive  Directors  is
subject  to approval by shareholders at the Annual General Meeting (currently $250,000).  Fees for Non Executive
Directors  are  not  linked  to  the  performance of the Company. However, to align  Directors'  interests  with
shareholder interests, the Directors are encouraged to hold shares in the Company and are able to participate in
employee option plans.

Performance based remuneration

The  Company  currently  has  no  performance based remuneration component built  into  the  Managing  Directors
executive remuneration package.

Company performance, shareholder wealth and directors' and executives' remuneration

The  remuneration  policy has been tailored to increase goal congruence between shareholders and  Directors  and
executives.   Currently,  this  is facilitated through the issue of options to the  majority  of  Directors  and
executives  to encourage the alignment of personal and shareholder interests.  The Company believes this  policy
will  be  effective  in  increasing shareholder wealth. At commencement of mine  production,  performance  based
bonuses  based  on  key  performance indicators are expected to be introduced.  For details  of  Directors'  and
executives' interests in options at year end, refer note 15 of the financial statements.

The Directors have set the base fees payable as follows -

Non-executive Chairman                                         $48,000 per annum
Non-executive Directors                                        $30,000 per annum
Audit Committee members                                           $Nil per annum

The Company does not have any schemes for retirement benefits for Non-Executive Directors.

Service agreements

There are no other service agreements.

Director remuneration for the year ended 30 June 2012:

------------------------------------------------------------------------------------------------------------------
                                                                                   Non-cash                  
                        Salary &         Non-          Super-     Retirement    share-based        Other          
                            Fees     monetary       annuation       benefits       payments      bonuses     Total
------------------------------------------------------------------------------------------------------------------
D Sutton        2012      48,000            -               -              -              -            -    48,000
                2011      48,000            -               -              -        402,556            -   450,556
------------------------------------------------------------------------------------------------------------------
M Bird          2012      30,000            -               -              -              -            -    30,000
                2011      30,000            -               -              -        402,556            -   432,556
------------------------------------------------------------------------------------------------------------------
C Straw         2012     150,020            -               -              -              -            -   150,020
                2011     224,750            -               -              -        402,556            -   627,306
------------------------------------------------------------------------------------------------------------------


Remuneration of the 5 named executives who receive the highest remuneration for the year ended 30 June 2012:

------------------------------------------------------------------------------------------------------------------
                                                                                    Non-cash                       
                                                                                 share-based                     
                       Salary &          Non-          Super-       Retirement      payments       Other          
                           Fees      monetary       annuation         benefits                   bonuses     Total
------------------------------------------------------------------------------------------------------------------
K Lynn          2012     48,000             -               -                -             -           -    48,000
                2011     44,000             -               -                -        88,778           -   132,778
------------------------------------------------------------------------------------------------------------------

Options and rights granted as part of remuneration

No options or performance rights were granted to Directors during the year.

For  details  of  Directors'  and executives' interests in options and rights at year end,  refer  note  17  of  the
financial statements.

Performance Income as a proportion of total remuneration

No  performance based bonuses have been paid to Directors during the financial year.  It is the intent of the Board
to include performance bonuses as part of remuneration packages when mine production commences.
       
Meetings of directors

The  following table sets out the number of meetings of the Company's Directors during the year ended 30  June  2012
and the number of meetings attended by each Director.

------------------------------------------------------------------------------------------------
Name                                                                       Board meetings
                                                                      Eligible       Attended
                                                                                         
David Henty Sutton                                                        6             6
Malcolm Harvey Bird                                                       6             6
Charles David Straw                                                       6             6
------------------------------------------------------------------------------------------------

In  light  of the current activities and size of the Company, it is not presently considered necessary for  separate
Audit,  Nomination and Remuneration Committees of the Board.  No Audit, Remuneration or Nomination and  Remuneration
Committee  Meetings  were held during the year, with all relevant matters being considered  by  the  full  Board  of
Directors.  This situation will be kept under constant review by the Board.

Shares and options

During the year the Company issued:

-  200,000 shares at 17 cents upon the conversion of unlisted options on 19 July 2011;
-  300,000 shares at 17 cents upon the conversion of unlisted options on 15 August 2011;
-  500,000 shares at 17 cents upon the conversion of unlisted options on 27 August 2011
-  6,728,525  listed  options at 1 cent with an exercise price of 35 cents to professional  and  sophisticated
   investors on 30 September 2011 and expiring 31 October 2012;
-  550 shares at 35 cents upon the conversion of listed options on 17 October 2011;
-  300 shares at 35 cents upon the conversion of listed options on 19 October 2011;
-  6,882,207  listed  options at 1 cent with an exercise price of 35 cents to professional  and  sophisticated
   investors on 24 October 2011 and expiring 31 October 2012;
-  12,504,733 shares at 6 cents per share to professional and sophisticated investors on 8 June 2012 together
   with 6,252,367 attaching free options at an exercise price of 10 cents expiring 13 November 2013.

Corporate governance

In  recognising the need for the highest standards of corporate behaviour and accountability, the Directors  support
and  have  adhered to the principles of corporate governance.  The Company's corporate governance statement  follows
the financial report.

Directors and officers indemnification

During  the financial year Silver Mines Limited paid premiums to insure and indemnify the Directors and Officers  of
the Group.

The  Company  has  agreed to indemnify and keep indemnified the Directors and Officers of the  Company  against  all
liabilities  incurred by the Directors or Officers as a Director or Officer of the Company and  all  legal  expenses
incurred by the Directors or Officers as a Director or Officer of the Company.

The  indemnity only applies to the extent and in the amount that the Directors or Officers are not indemnified under
any  other  indemnity, including an indemnity contained in any insurance policy taken out by the Company, under  the
general law or otherwise.

The indemnity does not extend to any liability:

* to the Company or a related body corporate of the Company; or
* arising out of conduct of the Directors or Officers involving a lack of good faith; or
* which  was incurred prior to 1 February 1996 and which is in respect of any negligence, default, breach  of
  duty or breach of trust of which the Directors or Officers may be guilty in relation to the Company or related body
  corporate.
      
Auditor's independence declaration

A  copy of the auditor's independence declaration as required under Section 307C of the Corporations Act is set  out
on page 14 and forms part of the Director's Report.

This report is made in accordance with a resolution of the Directors.

David Sutton
Director
29 August 2012

                                         AUDITOR'S INDEPENDENCE DECLARATION
                                   UNDER SECTION 307C OF THE CORPORATIONS ACT 2001
                                      TO THE DIRECTORS OF SILVER MINES LIMITED


In  accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration  of
independence to the directors of Silver Mines Limited.

As  lead audit principal for the audit of the financial statements of Silver Mines Limited for the financial  period
ended  30  June  2012, I declare that to the best of my knowledge and belief, that there have been no contraventions
of:
    
     (i) the auditor's independence requirements of the Corporations Act 2001 in relation to the audit; and
    
    (ii) any applicable code of professional conduct in relation to the audit.






Moyes Yong & Co Partnership                                      William M Moyes - Partner

Chartered Accountants                                            29 August 2012

Level 7, Norwich House
6 O'Connell Street
Sydney NSW 2000
                                                                  

                                                 SILVER MINES LIMITED
                                          STATEMENT OF COMPREHENSIVE INCOME
                                           FOR THE YEAR ENDED 30 JUNE 2012


                                                         ------------------------------------
                                                         Notes          2012             2011
                                                                           $                $
                                                         ------------------------------------

Revenues from ordinary activities                          2          77,386           79,737
                                                                                      
Expenses from ordinary activities                                                     
                                                                                      
Accounting/ company secretarial                                      (53,719)         (70,792)
Wages                                                                      -          (22,020)
Share registry                                                       (56,600)         (49,472)
Securities exchange fees                                             (50,728)         (45,494)
Bank fees                                                             (5,370)          (6,193)
Auditors                                                             (18,700)         (16,650)
Directors emoluments                                                 (78,000)         (97,811)
Office expenses                                                      (13,299)         (44,885)
IT & communications                                                  (35,903)         (51,555)
Rent                                                                       -           (7,020)
Management fees                                                     (240,000)        (140,000)
Depreciation                                                         (28,381)         (31,924)
Insurance                                                            (31,329)         (13,296)
Marketing                                                           (105,316)         (86,801)
Professional advisors                                                 (5,090)         (14,771)
Plus market listing fees                                             (49,869)         (42,369)
Other expenses from ordinary activities                              (90,688)        (123,861)
Write-off Share Option Reserve                                     1,522,857       (1,296,447)
                                                                  ----------------------------
Total expenses                                             3         659,865       (2,161,361)
                                                                  ----------------------------
                                                                                      
Profit/(loss) before income tax expense                              737,251       (2,081,624)
                                                                                      
Income tax expense                                         4               -                -
                                                                  ----------------------------
Profit/(loss) for the year                                           737,251       (2,081,624)
Other comprehensive income                                                 -                -
                                                                  ----------------------------
Total comprehensive profit/(loss) for the year net                   
of tax                                                               737,251       (2,081,624)
                                                                  ----------------------------
                                                                  ----------------------------

                                                                  ----------------------------
                                                                       Cents            Cents
                                                                  ----------------------------
                                                                                      
Basic earnings per share                                   23           0.01            (0.02)
Diluted earnings per share                                 23           0.01            (0.01)





The statement of comprehensive income is to be read in conjunction with the notes to the financial statements.


                                                SILVER MINES LIMITED
                                           STATEMENT OF FINANCIAL POSITION
                                                 AS AT 30 JUNE 2012


                                                         --------------------------------------------
                                                         Notes                   2012            2011
                                                                                    $               $
                                                         --------------------------------------------
Current assets                                                                         
Cash and cash equivalents                                  5                  800,383       3,371,757
Receivables                                                6                  596,674       1,201,356
                                                         --------------------------------------------
                                                                                                     
Total current assets                                                        1,397,057       4,573,113
                                                         --------------------------------------------
                                                                                                     
Non-current assets                                                                                   
Other financial assets                                     7                  110,000         120,550
Intangible assets:                                                                                   
Deferred exploration & development                         8               11,190,929       7,675,327
Property plant & equipment                                 9                   61,935          47,880
Investments                                                10                 100,000         100,000
                                                         --------------------------------------------
                                                                                                     
Total non-current assets                                                   11,462,864       7,943,757
                                                         --------------------------------------------
                                                                                                     
Total assets                                                               12,859,921      12,516,870
                                                         --------------------------------------------
                                                                                                     
Current liabilities                                                                                  
Payables                                                   11                 334,925         161,380
Provisions                                                 12                       -          32,598
                                                         --------------------------------------------
                                                                                                     
Total current liabilities                                                     334,925         193,978
                                                         --------------------------------------------
                                                                                                     
Non-current liabilities                                                                              
Payables                                                   11                  19,321          38,643
                                                         --------------------------------------------

Total non-current liabilities                                                  19,321          38,643
                                                         --------------------------------------------
                                                                                                     
Total liabilities                                                             354,246         232,621
                                                         --------------------------------------------
                                                                                                     
Net assets                                                                 12,505,675      12,284,249
                                                         --------------------------------------------
Equity                                                                                               
Contributed equity                                         13              15,868,861      14,861,829
Reserves                                                   14                       -       1,522,857
Accumulated losses                                         15              (3,363,186)     (4,100,437)
                                                         --------------------------------------------
                                                                                                     
Total equity                                                               12,505,675      12,284,249
                                                         --------------------------------------------
                                                         --------------------------------------------
                                                                                                      



The statement of financial position is to be read in conjunction with the notes to the financial statements.

                                                SILVER MINES LIMITED
                                           STATEMENT OF CHANGES IN EQUITY
                                           FOR THE YEAR ENDED 30 JUNE 2012

-----------------------------------------------------------------------------------------------------------------------
                                    Notes                Share-based                                           
                                                             payment     Share option                           
                                              Ordinary       reserve          reserve    Accumulated           
                                               shares              $                $         losses              Total
                                                 $                                                 $                  $
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                       
Balance at 30 June 2007                       5,612,981            -                -       (307,742)         5,305,239
Share-based payments during the
year                                                 -             -                -               -                -
Costs of funds raised                          (41,581)            -                -               -          (41,581)
Loss attributable to members of
the Company                                           -            -                -       (546,480)         (546,480)
                                              -------------------------------------------------------------------------
Balance at 30 June 2008                       5,571,400            -                -       (854,222)         4,717,178
                                              -------------------------------------------------------------------------
                                              -------------------------------------------------------------------------
                                                                                                                       
Share-based payments during the                                                                                 185,675
year                                            185,675            -                -               -
Costs of funds raised                           (9,283)            -                -               -           (9,283)
Loss attributable to members of
the Company                                           -            -                -       (673,091)         (673,091)
                                              -------------------------------------------------------------------------
Balance at 30 June 2009                       5,747,792            -                -     (1,527,313)         4,220,479
                                              -------------------------------------------------------------------------
                                              -------------------------------------------------------------------------
                                                                                                                       
Share-based payments during the               1,499,325            -                -               -         1,499,325
year
Costs of funds raised                          (72,591)            -                -               -          (72,591)
Loss attributable to members of                       
the Company                                           -            -                -       (491,500)         (491,500)
                                              -------------------------------------------------------------------------
Balance at 30 June 2010                       7,174,526            -                -     (2,018,813)         5,155,713
                                              -------------------------------------------------------------------------
                                              -------------------------------------------------------------------------
                                                                                                                       
Share-based payments during the                                                                                        
year                                          4,200,000            -        1,522,857               -         5,722,857
Conversion of options                         3,826,391            -                -               -         3,826,391
Costs of funds raised                         (339,088)            -                -               -         (339,088)
Loss attributable to members of                                                                                        
the Company                                           -            -                -     (2,081,624)       (2,081,624)
                                              -------------------------------------------------------------------------
Balance at 30 June 2011                      14,861,829            -        1,522,857     (4,100,437)        12,284,249
                                              -------------------------------------------------------------------------
                                              -------------------------------------------------------------------------
                                                                                                                
Share-based payments during the                                                                               
year                                            750,284           -      (1,522,857)                -         (772,573)
Conversion of options                           306,405           -                -                -           306,405
Costs of funds raised                          (49,657)           -                -                -          (49,657)
Profit attributable to members of                                                                               
the Company                                           -           -                -          737,251           737,251
                                              -------------------------------------------------------------------------
Balance at 30 June 2012                      15,868,861           -                -      (3,363,186)        12,505,675
                                              -------------------------------------------------------------------------
                                              -------------------------------------------------------------------------
                                                                                                                

The  statement  of  changes  in equity is to be read in conjunction with  the  notes  to  the  financial
statements.

                                                SILVER MINES LIMITED
                                               STATEMENT OF CASH FLOWS
                                           FOR THE YEAR ENDED 30 JUNE 2012


                                                           ------------------------------------------
                                                           Notes               2012              2011
                                                                                  $                 $
                                                           ------------------------------------------
                                                                                       
Cash flows from operating activities                                                   
Interest received                                                            77,386            79,737
Interest paid                                                               (4,823)           (4,824)
Payments to suppliers and employees                                       (652,443)       (1,051,428)
                                                                      -------------------------------
                                                                                                     
Net cash outflows from operating activities                  20           (579,880)         (976,515)
                                                                      -------------------------------
                                                                                                     
Cash flows from investing activities                                                                 
Proceeds from/(payments for) exploration bonds                               10,550          (60,000)
Payments for property plant & equipment                                    (42,436)          (14,948)
Payments for exploration expenditure                                    (2,947,319)       (3,593,387)
Payments for investments                                                          -         (100,000)
                                                                      -------------------------------
                                                                                                     
Net cash outflows from investing activities                             (2,979,205)       (3,768,335)
                                                                      -------------------------------
                                                                                                     
Cash flows from financing activities                                                                 
Proceeds from the issue of shares                                         1,056,689         8,086,714
Payments for fund raising costs                                            (49,657)         (339,088)
Payments for borrowings - finance leases                                   (19,321)          (19,321)
                                                                      -------------------------------
                                                                                                     
Net cash inflows from financing activities                                  987,711         7,728,305
                                                                      -------------------------------
                                                                                                     
Net (decrease)/increase in cash held                                    (2,571,374)         2,983,455
Cash at the beginning of the financial year                               3,371,757           388,302
                                                                      -------------------------------
                                                                                                     
Cash at the end of the financial year                        5              800,383         3,371,757
                                                                      -------------------------------
                                                                      -------------------------------
                                                                                       

The statement of cash flows is to be read in conjunction with the notes to the financial statements.
                                                          

                                                SILVER MINES LIMITED
                                          NOTES TO THE FINANCIAL STATEMENTS
                                           FOR THE YEAR ENDED 30 JUNE 2012


1.    STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

(a)   Reporting entity
      
      Silver  Mines Limited (the "Company") is a public company domiciled in Australia.  The financial report covers
      Silver  Mines  Limited as an individual entity.  The financial report was authorised for issue  on  29  August
      2012 by the Board of Directors.
      
      The Company primarily is involved in the exploration for minerals in Australia.
      
(b)   Basis of preparation
      
      The  financial  report  is  a  general purpose financial report which has been  prepared  in  accordance  with
      Australian  Accounting Standards, Australian Accounting Interpretations and other authoritative pronouncements
      of  the  Australian  Accounting  Standards Board and the Corporations Act 2001.   Compliance  with  Australian
      Accounting  Standards  ensures  the financial statements and notes also comply  with  International  Financial
      Reporting Standards.
      
      The  financial report is presented in Australian dollars which is also the functional currency.  The financial
      report  is  prepared on an accruals basis and is based on historical costs modified where applicable,  by  the
      measurement of fair value of selected non-current assets, financial assets and financial liabilities.
      
      The  preparation  of a financial report requires management to make judgments, estimates and assumptions  that
      affect  the application of accounting policies and the reported amounts of assets and liabilities, income  and
      expenses.   The  estimates  and associated assumptions are based on historical experience  and  various  other
      factors  that  are believed to be reasonable under the circumstances, the results of which form the  basis  of
      making the judgments about carrying values of assets and liabilities that are not readily apparent from  other
      sources. Actual results may differ from these estimates.
      
      The  estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates
      are  recognised in the period in which the estimate is revised if the revision affects only that period or  in
      the period of the revision and future periods if the revision affects both current and future periods.
      
      Material  accounting  policies set out below have been applied consistently to all periods  presented  in  the
      financial report.

      Reporting basis and conventions
      The financial report is presented in Australian dollars.
      The  preparation of a financial report in conformity with Australian Accounting Standards requires  management
      to  make judgments, estimates and assumptions that effect the application of policies and the reported amounts
      of assets, liabilities, revenue and expenses.
      
      - Critical accounting estimates and judgments
      - The estimates and judgments incorporated into the financial report are based on historical experiences and
        the best available current information on current trends and economic data, obtained both externally and 
        within the Company. The estimates and judgments made assume a reasonable expectation of future events but 
        actual results may differ from these estimates.
      
      - Key estimates - Impairment
         The Company assesses impairment at each reporting date by evaluating conditions specific to the Company
         that may lead to impairment of assets.  Where an impairment trigger exists, the recoverable amount of
         the asset is determined.  Value-in-use calculations performed in assessing recoverable amounts
         incorporate a number of key estimates.
        
      Rehabilitation
      The  Company is required to estimate the rehabilitation costs of its operations in the accounting policy  note
      in paragraph (c).  The estimate is based on management best estimate of the cost.
      
      Exploration and evaluation costs
      The  Company applies judgment in determining which exploration costs should be capitalized or expensed as  per
      the accounting policy in paragraph (c).
      
      The  estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates
      are recognised in the period in which the estimate is revised if the revision effects only that period, or  in
      the  period of the revision and future periods if the revision affects both current and future periods.  There
      were no key adjustments during the year which required accounting estimates and judgments.
      
      The  financial report has been prepared on an accruals basis and is based on historical costs modified by  the
      revaluation  of  selected non-current assets, financial assets and financial liabilities for  which  the  fair
      value basis of accounting has been applied.
      
      The  following  is  a  summary  of the material accounting policies adopted by  the  economic  entity  in  the
      preparation  of  the  financial  report.   The accounting policies  have  been  consistently  applied,  unless
      otherwise stated.
      

(c)  Exploration and evaluation expenditure
      
     Exploration  and  evaluation  expenditure incurred is accumulated in respect  of  each  identifiable  area  of
     interest.   These  costs are only carried forward to the extent that they are expected to be recouped  through
     the  successful  development of an area or where activities in the area have not yet reached  a  stage,  which
     permits reasonable assessment of the existence of economically recoverable reserves.
      
     Accumulated costs in relation to an abandoned area are written off in full against profits in the  year  which
     the decision to abandon the area is made.
      
     A  regular  review  is undertaken of each area of interest to determine the appropriateness of  continuing  to
     carry forward costs in relation to that area of interest.
      
     Costs of site restoration are provided over the life of the facility from where exploration commences and  are
     included  in  the costs of that stage.  Site restoration costs include the dismantling and removal  of  mining
     plant,  equipment  and building structure, waste removal, and rehabilitation of the site  in  accordance  with
     clauses  of  the  mining  permits.  Such costs have been determined using estimates of future  costs,  current
     legal requirements and technology on an undiscounted basis.
       
     Any changes in the estimates for the costs are accounted on a prospective basis. In determining the costs  of
     site  restoration, there is uncertainty regarding the nature and extent of the restoration due  to  community
     expectations  and  future legislation.  Accordingly, the costs have been determined on  the  basis  that  the
     restoration will be completed within one year of abandoning the site.
       
     Exploration  and  evaluation assets are tested for impairment each year.  When the  facts  and  circumstances
     suggest that the carrying amount exceeds the recoverable amount, the carrying amount is written down  to  its
     likely recoverable amount.

(d)  Trade creditors
      
     A liability is recorded for goods and services prior to balance date, whether invoiced to the Company or not.
     Trade creditors are normally settled within 30 days.

(e)  Cash
      
     For the purposes of the statement of cash flows, cash and cash equivalents included cash on hand and at call
     deposits with banks or financial institutions, investments in money market instruments maturing within less
     than two months and net of bank overdrafts.
    
(f)  Net fair value
      
     The net fair value of cash, investments and trade creditors approximates their carrying value.
      
(g)  Revenue
      
     Interest  revenue is recognised on a proportional basis taking in to account the interest rates applicable  to
     the financial assets.
     Other revenue is recognised when the right to receive the revenue has been established.
             
(h)  Income tax
             
     The  charge  for  current  income  tax expense is based on the profit for the  year  adjusted  for  any  non-
     assessable  or  disallowed  items.   It is calculated using the tax rates  that  have  been  enacted  or  are
     substantially enacted by the balance sheet date.
       
     Deferred  tax  is accounted for using the balance sheet liability method in respect of temporary  differences
     arising  between  the  tax  bases  of  assets and liabilities and their carrying  amounts  in  the  financial
     statements.   No  deferred  income  tax  will be recognised from the  initial  recognition  of  an  asset  or
     liability,  excluding  a business combination, where there is no effect on accounting or  taxable  profit  or
     loss.
       
     Deferred  tax  is  calculated at the tax rates that are expected to apply to the period  when  the  asset  is
     realised  or liability is settled.  Deferred tax is credited in the income statement except where it  relates
     to  items  that  may  be  credited directly to equity, in which case the deferred tax  is  adjusted  directly
     against equity.  Deferred income tax assets are recognised to the extent that it is probable that future  tax
     profits  will  be available against which deductible temporary differences can be utilised.   The  amount  of
     benefits  brought  to  account or which may be realised in the future is based  on  the  assumption  that  no
     adverse  change will occur in income taxation legislation and the anticipation that the economic entity  will
     derive  sufficient  future  assessable income to enable the benefit  to  be  realised  and  comply  with  the
     conditions of deductibility imposed by the law.
       
(i)  Goods and services tax (GST)
      
     Revenues,  expenses  and  assets  are recognised net of the amount of GST, except  where  the  amount  of  GST
     incurred  is  not  recoverable  from  the Australian Taxation Office.  In  these  circumstances,  the  GST  is
     recognised  as part of the cost of acquisition of the asset or as part of an item of the expense.  Receivables
     and payables in the balance sheet are shown inclusive of GST.
     Cash  flows  are  included in the Cash Flow Statement on a gross basis and the GST component  of  cash  flows
     arising  from  investing  and financing activities, which is recoverable from or  payable  to  the  Australian
     Taxation Office, are classified as operating cash flows.
             
(j)  Acquisitions of assets
             
     The  cost  method of accounting is used for all acquisitions of assets regardless of whether shares or  other
     assets  are acquired.  Cost is determined as the fair value of the assets given up at the date of acquisition
     plus costs incidental to the acquisition.

(k)  Property, plant and equipment
             
     Plant  and  equipment is stated at cost less accumulated depreciation and any accumulated impairment  losses.
     Such  cost  includes  the  cost  of replacing parts that are eligible for capitalisation  when  the  cost  of
     replacing  the parts is incurred.  Similarly, when each major inspection is performed, its cost is recognised
     in  the  carrying  amount  of  the  plant  and  equipment as  a  replacement  only  if  it  is  eligible  for
     capitalisation.

     (i) The depreciation rates used are as follows:
       
     Plant and equipment                              33 1/3% straight line
     Office furniture and equipment                   33 1/3% straight line
     Motor vehicles                                   20% straight line
       
     The  assets'  residual  values,  useful  lives  and  amortisation  methods  are  reviewed,  and  adjusted  if
     appropriate, at each financial year end.
       
     (ii) Impairment
       
     The  carrying  values  of  plant  and  equipment are reviewed for impairment  at  each  reporting  date  with
     recoverable  amount being estimated when events or changes in circumstances indicate that the carrying  value
     may be impaired.
      
     The  recoverable amount of plant and equipment is the higher of fair value less costs to sell  and  value  in
     use. In assessing value in use, the estimated future cash flows are discounted to their present value using
     a  pre-tax  discount rate that reflects current market assessments of the time value of money and  the  risks
     specific to the asset.
       
     For  an asset that does not generate largely independent cash flows, recoverable amount is determined for the
     cash-generating  unit  to which the asset belongs, unless the asset's value in use can  be  estimated  to  be
     close to its fair value.
       
     Impairment  exists  when  the  carrying amount of an asset or cash-generating  units  exceeds  its  estimated
     recoverable amount.  The asset or cash-generating unit is then written down to its recoverable amount.
       
     For plant and equipment, impairment losses are recognised in the income statement.
       
(l)  Employee entitlements
      
     Wages, salaries and annual leave
      
     Provision  is  made  for  the  Company's liability for employee benefits arising  from  services  rendered  by
     employees  to  balance date.  Employee benefits that are expected to be settled within  12  months  have  been
     measured  at  the amounts expected to be paid when the liability is settled, plus related on-costs.   Employee
     benefits  payable  later than12 months have been measured at the present value of the  estimated  future  cash
     outflows to be made for those benefits.
      
     Long service leave
      
     A provision for long service leave is taken up where applicable for all employees.
       
     Equity-settled compensation
       
     The  Company operates a share-based compensation plan.  These include both a share option arrangement and  an
     employee  share  scheme.   The  bonus element over the exercise price of the employee  services  rendered  in
     exchange for the grant of shares and options is recognised as an expense in the income statement.  The  total
     amount  to be expensed over the vesting period is determined by reference to the fair value of the shares  of
     the options granted.
       
     Employee option plan
       
     The  establishment of the Silver Mines Limited Employee Share Option Plan (ESOP) was approved by shareholders
     at  the  annual  general  meeting  held on 29 November 2007.  The ESOP was  designed  to  provide  long  term
     incentives for Directors to deliver long term shareholder returns.
       
     The  fair  value  of  options  granted  under the ESOP is recognised as  an  employee  benefit  expense  with
     corresponding increase in equity.  The fair value is measured at grant date. The fair value at grant date  is
     measured  using  a Black-Scholes option pricing model that takes into consideration the exercise  price,  the
     term of the option, the impact of dilution and the share price at grant date.
       
     Upon  the exercise of options, the exercise proceeds received are allocated to share capital and the  balance
     of the share-based payments reserve relating to those options is transferred to share capital.
       
(m)  Impairment

     At  each  reporting  date, the Company reviews the carrying values of its tangible and  intangible  assets  to
     determine  whether  there  is any indication that those assets have been impaired.   If  such  an  indication
     exists,  the recoverable amount of the asset, being the higher of the asset's fair value less costs  to  sell
     and  value in use, is compared to the asset's carrying value.  Any excess of the asset's carrying value  over
     its  recoverable  amount  is expensed to the income statement. Impairment testing is performed  annually  for
     intangible assets with indefinite lives.

     Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates  the
     recoverable amount of the cash-generating unit to which the asset belongs.

(n)  Intangible assets

     Intangible  assets acquired in a business are initially measured at cost. Intangible assets  with  indefinite
     lives  are  tested  for impairment annually either individually or at the cash-generating  unit  level.  Such
     intangibles  are not amortised.  The useful life of an intangible asset with an indefinite life  is  reviewed
     each  reporting period to determine whether indefinite life assessment continues to be supportable.  If  not,
     the  change  in  the  useful life assessment from indefinite to finite is accounted for as  a  change  in  an
     accounting estimate and is thus accounted for on a prospective basis.
      

(o)  Issued capital
      
     Ordinary shares are classified as equity.  Incremental costs directly attributable to the issue of new  shares
     or  options  are  shown  in equity as a deduction, net of tax, from the proceeds. Incremental  costs  directly
     attributable to the issue of new shares or options, or for the acquisition of a business, are included in  the
     cost of the acquisition as part of the purchase consideration.
       
     If  the  Company  reacquires  its own equity instruments (e.g. as the result  of  a  share  buy-back),  those
     instruments  are deducted from equity and the associated shares are cancelled. No gain or loss  is  recognised
     in  the  profit or loss and the consideration paid including any directly attributable incremental costs  (net
     of income taxes) is recognised directly in equity.

(p)  Earnings per share
             
     Basic earnings per share
       
     Basic  earnings per share is determined by dividing net profit after income tax attributable  to  members  of
     the Company by the weighted average number of ordinary shares outstanding during the financial year.
     
     Diluted earnings per share
       
     Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to  take
     into  account  the  after  income tax effect of interest and other financing costs associated  with  dilutive
     potential  ordinary  shares and the weighted average number of shares assumed to  have  been  issued  for  no
     consideration in relation to dilutive potential ordinary shares.

(q)  Financial instruments
      
     Recognition and initial measurement
      
     Financial  instruments,  incorporating financial assets and financial liabilities,  are  recognised  when  the
     entity becomes a party to the contractual provisions of the instrument.  Trade date accounting is adopted  for
     financial assets that are delivered within timeframes established by marketplace convention.
      
     Financial  instruments are initially measured at fair value plus transactions costs where  the  instrument  is
     not  classified as at fair value through profit or loss.  Transaction costs related to instruments  classified
     as  at fair value through profit or loss are expensed to profit or loss immediately. Financial instruments are
     classified and measured as set out below.
      
     Derecognition
      
     Financial  assets are derecognised where the contractual rights to receipt of cash flows expires or the  asset
     is  transferred  to another party whereby the entity no longer has any significant continuing  involvement  in
     the  risks  and benefits associated with the asset.  Financial liabilities are derecognised where the  related
     obligations  are  either discharged, cancelled or expire. The difference between the  carrying  value  of  the
     financial  liability  extinguished or transferred to another party and the fair value of  consideration  paid,
     including the transfer of non-cash assets or liabilities assumed, is recognised in profit and loss.
      
     Classification and subsequent measurement
      
     Loans and receivables
      
     Loans  and  receivables are non-derivative financial assets with fixed or determinable payments that  are  not
     quoted  in an active market and are subsequently measured at amortised cost using the effective interest  rate
     method.
      
     Financial liabilities
      
     Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at  amortised
     cost using the effective interest rate method.
      
(r)  Lease payments

     Payments made under operating leases are recognised in profit or loss on a straight-line basis over the  term
     of  the lease.  Lease incentives received are recognised as an integral part of the total lease expense  over
     the term of the lease.
      
     Minimum  lease  payments  made  under finance leases are apportioned between  the  finance  expense  and  the
     reduction  of  the outstanding liability.  The finance expense is allocated to each period during  the  lease
     term  so  as  to  produce  a constant periodic rate of interest on the remaining balance  of  the  liability.
     Contingent  lease payments are accounted for by revising the minimum lease payments over the  remaining  term
     of the lease when the lease adjustment is confirmed.
      
(s)  Comparative figures
      
     Where  required  by  Accounting Standards, comparative figures have been adjusted to  conform  to  changes  in
     presentation for the current financial year.

(t)  New accounting standards for application in future periods

The  AASB  has  issued  new  and amended accounting standards and interpretations  that  have  mandatory
application dates for future reporting periods. The Company has decided against early adoption of  these
standards.  A discussion of those future requirements and their impact on the Company follows:

-------------------------------------------------------------------------------------------------------------------
                                                 Effective for annual       
                                                 reporting periods          Expected to be initially
                                                 beginning  on              applied in the financial
Standard/Interpretation                          or after                   year ending
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 9 'Financial Instruments, AASB 200911       1 January 2013             30 June 2014
Amendments to Australian Accounting
Standards arising from AASB 9  and
AASB 2010-7  Amendments to Australian
Accounting Standards arising from AASB 9
(December 2010)
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 10  Consolidated Financial Statements       1 January 2013             30 June 2014
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 11  Joint Arrangements                      1 January 2013             30 June 2014
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 12  Disclosure of Interests in Other        1 January 2013             30 June 2014
Entities
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 127  Separate Financial Statements          1 January 2013             30 June 2014
(2011)
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 128  Investments in Associates and Joint    1 January 2013             30 June 2014
Ventures (2011)
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 13  Fair Value Measurement and AASB         1 January 2013             30 June 2014
2011-8  Amendments to Australian Accounting
Standards arising from AASB 13
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 119  Employee Benefits (2011) and           1 January 2013             30 June 2014
AASB 2011-10  Amendments to Australian
Accounting Standards arising from AASB 119
(2011)
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 2010-8  Amendments to Australian            1 January 2013             30 June 2014
Accounting Standards - Deferred Tax: Recovery
of Underlying Assets
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 2011-4  Amendments to Australian            1 January 2013             30 June 2014
Accounting Standards to Remove Individual Key
Management Personnel Disclosure
Requirements
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 2011-7  Amendments to Australian            1 January 2013             30 June 2014
Accounting Standards arising from the
Consolidation and Joint Arrangements
standards
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
AASB 2011-9  Amendments to Australian            1 July 2012                30 June 2013
Accounting Standards - Presentation of Items of
Other Comprehensive Income
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
Interpretation 20  Stripping Costs in the        1 January 2013             30 June 2014
Production Phase of a Surface Mine and AASB
2011-12  Amendments to Australian Accounting
Standards arising from Interpretation 20
-------------------------------------------------------------------------------------------------------------------

The Company does not anticipate the early adoption of any of the above Australian Accounting Standards.
 
                                                SILVER MINES LIMITED
                                          NOTES TO THE FINANCIAL STATEMENTS
                                           FOR THE YEAR ENDED 30 JUNE 2012

                                                                   -----------------------------
                                                                         2012             2011
                                                                           $                $
                                                                   -----------------------------
2.    REVENUE                                                                   
                                                                                      
                                                                                      
Revenue from operating activities
Interest received                                                      77,386           79,737
                                                                   -----------------------------
3.    OPERATING EXPENSES
     
Expenses from operating activities:
Accounting/company secretarial                                        (53,719)         (70,792)
Wages                                                                       -          (22,020)
Share registry                                                        (56,600)         (49,472)
Securities exchange fees                                              (50,728)         (45,494)
Bank fees                                                              (5,370)          (6,193)
Auditors                                                              (18,700)         (16,650)
Directors emoluments                                                  (78,000)         (97,811)
Office expenses                                                       (13,299)         (44,885)
IT & communications                                                   (35,903)         (51,555)
Rent                                                                        -           (7,020)
Management fees                                                      (240,000)        (140,000)
Depreciation                                                          (28,381)         (31,924)
Insurance                                                             (31,329)         (13,296)
Marketing                                                            (105,316)         (86,801)
Professional advisors                                                  (5,090)         (14,771)
Plus market listing fees                                              (49,869)         (42,369)
Other expenses from ordinary activities                               (90,688)        (123,861)
Write-off Share Option Reserve                                      1,522,857       (1,296,447)
                                                                   -----------------------------
    
Total                                                                 659,865       (2,161,361)
                                                                   -----------------------------
                                                                   -----------------------------
    
4.    INCOME TAX
                                                                                                    
(a) Temporary differences
Current tax                                                                 -                -
Deferred tax                                                                -                -
                                                                   -----------------------------    
           Total                                                            -                -
                                                                   -----------------------------
                                                                   -----------------------------

(b) Reconciliation of income tax expense to prima facie tax payable

Operating profit/(loss) before income tax                             737,251       (2,081,624)
                                                                   -----------------------------
                                                                   -----------------------------
        
Prima facie income tax (expense)/benefit at 30% on operating         
profit/(loss)                                                        (221,175)         624,487
Add tax effect of:
Tax losses and temporary differences not recognised                   221,175         (624,487)
Non temporary differences                                                   -                -
                                                                   -----------------------------
        
Income tax attributable to operating profit/(loss)                          -                -
                                                                   -----------------------------
                                                                   -----------------------------

Directors  are of the view that there is insufficient probability that the Company  will  derive
sufficient  income  in  the foreseeable future to justify booking the tax losses  and  temporary
differences as deferred tax assets and deferred tax liabilities.

(c) There is no amount of tax benefit recognised in equity as the tax                     
    effect of temporary differences has not been booked
                                                                                            
(d) Tax losses

Unused tax losses for which no tax loss has been booked as a        3,363,186        4,100,437
deferred tax asset adjusted for non temporary differences

      Potential tax benefit at 30%                                  1,008,956        1,230,131
                                                                   -----------------------------
                                                                   -----------------------------

(e) Unrecognised temporary differences
                                                
Non deductible amounts as temporary differences                             -                -
Accelerated deductions for book compared to tax                             -                -
                                                                   -----------------------------
Total                                                               1,008,956        1,230,131
                                                                   -----------------------------
                                                                   -----------------------------

                                                                    
Potential effect on future tax expense                              1,008,956        1,230,131
                                                                   -----------------------------
                                                                   -----------------------------

5.    CASH AND CASH EQUIVALENTS
                                                       
Cash at bank and on hand                                              800,383        3,371,757
                                                                   -----------------------------
                                                                   -----------------------------

Cash at the end of the financial year as shown in the statement of cash flows is reconciled in the
related items in the statement of financial position as follows:
                                                                                      
Cash assets                                                           800,383        3,371,757
                                                                   -----------------------------
                                                                   -----------------------------
The effective interest rates on term deposits were 3.8% (2011:
4.8%).

6.    RECEIVABLES
     
Other debtors                                                         170,838          207,237
Provision for doubtful debts                                                -                -
Prepayments                                                           425,836          994,119
                                                                   -----------------------------

                                                                      596,674        1,201,356
                                                                   -----------------------------
                                                                   -----------------------------

7.    OTHER FINANCIAL ASSETS
                                                          
Non-current                                                                           
Performance guarantee bonds                                           110,000          120,550
                                                                   -----------------------------
                                                                   -----------------------------

8.    INTANGIBLE ASSETS
     
Non-current
Exploration expenditure
Costs carried forward in respect of areas of interest in:
Exploration and evaluation phase                                                      
Opening balance                                                     7,675,327        5,076,059
Expenditure in the period                                           3,515,602        2,599,268
Expenditure written off                                                     -                -
                                                                   -----------------------------

                                                                   11,190,929        7,675,327
                                                                   -----------------------------
                                                                   -----------------------------

9.    PROPERTY, PLANT AND EQUIPMENT                                                           
                                                                                                    
Plant and equipment - at cost                                         102,970           88,022
Financial lease assets                                                 96,607           96,607
Assets acquired                                                        42,436           14,948
Assets sold                                                                 -                -
Less: Accumulated depreciation                                       (180,078)        (151,697)
                                                                   -----------------------------
    
                                                                       61,935           47,880
                                                                   -----------------------------
                                                                   -----------------------------

Reconciliation

Reconciliation  of  the carrying amounts of each class of property, plant and equipment at the  beginning  and
end of the current financial year are as follows:

                                                     ----------------------------------------------- 
                                                       Plant &        Motor Vehicles
                                                      Equipment                              Total
                                                          $                 $                  $
                                                     -----------------------------------------------

Carrying value at start of year                          12,458           35,422           47,880
Additions                                                 4,860           37,576           42,436
Disposals                                                     -                -                -
Depreciation                                             (5,913)         (22,468)         (28,381)
                                                     -----------------------------------------------

Carrying value at end of year                            11,405           50,530           61,935
                                                     -----------------------------------------------
                                                     -----------------------------------------------

                                                                   -----------------------------
                                                                         2012             2011
                                                                           $                $
                                                                   -----------------------------

10.   INVESTMENTS
     
Investment in Precious Metals Investments Ltd                         100,000          100,000
                                                                   -----------------------------
                                                                   -----------------------------
    
11.   PAYABLES
     
Current
                                                                                                    
Trade creditors and accruals                                          315,665          142,120
Hire purchase creditors                                                19,260           19,260
                                                                   -----------------------------

                                                                      334,925          161,380
                                                                   -----------------------------
                                                                   -----------------------------
    
Non Current
                                                                                                    
Hire purchase creditors                                                19,321           38,643
                                                                   -----------------------------
                                                                   -----------------------------
    
12.   PROVISIONS

Employee entitlements                                                       -           32,598
                                                                   -----------------------------
                                                                   -----------------------------
    
Number of employees at year end                                             1                1
                                                                   -----------------------------
                                                                   -----------------------------

13.   CONTRIBUTED EQUITY

(a) Issued and paid up capital
   
Balance at the beginning of the financial year                     14,861,829        7,174,526
Issue of shares to raise capital                                      750,284        4,200,000
Conversion of options                                                 306,405        3,826,391
Share issue costs                                                     (49,657)        (339,088)
                                                                   -----------------------------
                         
Balance at the end of the financial year                           15,868,861       14,861,829
                                                                   -----------------------------
                                                                   -----------------------------
                  
Consisting of 148,611,201 ordinary shares (2011: 135,105,664 ordinary shares)

(b) Movements in ordinary share capital                                                              

------------------------------------------------------------------------------------------------------------------
                                                                             Number of   Issue           
               Date                  Details                                    shares   price           $
------------------------------------------------------------------------------------------------------------------

                       30 June 2009  Balance                                48,802,505                  5,747,792

                     28 August 2009  Placement                                 695,000  $0.035             24,325
                  16 September 2009  Placement                               3,200,000  $0.035            112,000
                     2 October 2009  Placement                               7,900,000  $0.040            316,000
                    9 December 2009  Placement                               1,957,687  $0.046             90,000
                   11 December 2009  Placement                               6,250,000  $0.080            500,000
                        7 June 2010  Placement                               5,376,470  $0.085            457,000
                                     Transaction Costs                                                    (72,591)
                                                                           ------------               ------------
                       30 June 2010  Balance                                74,181,662                  7,174,526

                        6 July 2010  Placement                              20,000,000     $0.09        1,800,000
                    7 December 2010  Placement                              10,000,000     $0.24        2,400,000
           Various up to 1 May 2011  Options exercised                      29,624,002     $0.12        3,554,880
                       5 April 2011  Options exercised                       1,000,000     $0.07           70,000
                       5 April 2011  Options exercised                         300,000     $0.17           51,000
                                     Option placement                                      $0.01          150,511
                                     Transaction costs                                                   (339,088)
                                                                           ------------               ------------
                       30 June 2011  Balance                               135,105,664                 14,861,829

                                     Adjustment                                    (46)                         -
                       19 July 2011  Options exercised                         200,000     $0.17           34,000
                     15 August 2011  Options exercised                         300,000     $0.17           51,000
                     27 August 2011  Options exercised                         500,000     $0.17           85,000
                  30 September 2011  Listed option placement                               $0.01           67,285
                    17 October 2011  Listed options exercised                      550     $0.35              193
                    19 October 2011  Listed options exercised                      300     $0.35              105
                    24 October 2011  Listed option placement                               $0.01           68,822
                        8 June 2012  Placement                              12,504,733     $0.06          750,284
                                     Transaction costs                                                    (49,657)
                                                                           ------------               ------------
                                                                           148,611,201                 15,868,861
                                                                           ------------               ------------

                                                                           ------------               ------------

(c) Issued and paid up capital

    Ordinary  shares entitle the holder to participate in dividends and the proceeds on winding up of the  Company
    in  proportion to the number of and amounts paid on the shares held. On a show of hands, every holder of fully
    paid  ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll each
    share is entitled to one vote.

(d) Share options

    At 30 June 2012 details of Listed and Unlisted Options are as follows:

    -------------------------------------------------------------------------------------------------------
                Details                  Number               Exercise price             Expiry date
    -------------------------------------------------------------------------------------------------------

        Unlisted options                   3,500,000             20 cents                      6 July 2012
        Unlisted options                   2,000,000             24 cents                   27 August 2012
        Unlisted options                   2,000,000             40 cents                   27 August 2013
        Unlisted options                   8,500,000             50 cents                 23 December 2015
        Listed options                    13,609,882             35 cents                  31 October 2012
        Unlisted options                   6,252,367             10 cents                 13 November 2013
        Performance rights                 3,000,000                                                      
                                         ------------
                                                     
        Total                             38,862,249 
                                         ------------
                                         ------------

(e) Capital management
      
    The Company's objectives when managing capital is to safeguard the ability to continue as a going concern,  so
    that  it  can continue to provide returns to shareholders and benefits for other stakeholders and to  maintain
    an optimal capital structure to reduce the cost of capital.
      
    Management effectively manages the Company's capital by assessing the Company's financial risks and  adjusting
    its  capital structure in response to changes in these risks and in the market. There have been no changes  in
    the strategy adopted by management to control the capital of the Company since the prior year.
      
                                                                                 -----------------------------
                                                                                       2012             2011
                                                                                      Number           Number
    Movements in options                                                         -----------------------------

    Balance at the beginning of the financial year                                25,000,000       8,017,503
    Performance rights issued                                                              -       3,000,000
    Options lapsed                                                                (5,000,000)       (950,483)
    Options exercised                                                             (1,000,850)    (29,618,152)
    Options issued                                                                19,863,099      44,551,132
                                                                                 -----------------------------
 
    Balance at the end of the financial year                                      38,862,249      25,000,000
                                                                                 -----------------------------
                                                                                 -----------------------------

                                                                                 -----------------------------
                                                                                    2012             2011
                                                                                     $                $
                                                                                 -----------------------------
14.   RESERVES
                                                                                                   
Share option reserve                                                                       -         847,857
Performance rights reserve                                                                 -         675,000
                                                                                 -----------------------------
     
                                                                                           -       1,522,857
                                                                                 -----------------------------
                                                                                 -----------------------------

15.   ACCUMULATED LOSSES                                                                       
                                                                                                           
Opening balance                                                                    4,100,437       2,018,813
Net (profit)/loss for year                                                          (737,251)      2,081,624
                                                                                 -----------------------------
     
Closing balance                                                                    3,363,186       4,100,437
                                                                                 -----------------------------
                                                                                 -----------------------------
     
16.   AUDITOR'S REMUNERATION
                                                                                                   
Remuneration for audit or review of the financial reports of the
Company:
Current auditors of the Company:
Audit and review of the financial statements
- Moyes Yong & Co                                                                     18,700          16,650
- Other services                                                                           -               -
                                                                                 -----------------------------
 
                                                                                      18,700          16,650
                                                                                 -----------------------------
                                                                                 -----------------------------

17.   REMUNERATION OF DIRECTORS AND EXECUTIVES
      
(a) Names of Directors and specified executives and positions held at any time during the year:

-------------------------------------------------------------------
Directors
       
D Sutton                            Chairman - Non-Executive
M Bird                              Director - Non-Executive
C Straw                             Managing Director

Specified executives
                        
K Lynn                              Company Secretary
-------------------------------------------------------------------

(b) Relevant interests in ordinary shares and options at the date of this report:

SHARES

-------------------------------------------------------------------------------------------------------------------
                                                                         Net change of             
                                      Balance          Net change          associated          Balance
Ordinary shares                     1 July 2011           other             entities         30 June 2012
-------------------------------------------------------------------------------------------------------------------

Directors                                                                                                  
D Sutton                              2,268,114                  -                  -          2,268,114
M Bird                                  631,850                  -                  -            631,850
C Straw                                 728,532                  -                  -            728,532
-------------------------------------------------------------------------------------------------------------------

OPTIONS and PERFORMANCE RIGHTS

-------------------------------------------------------------------------------------------------------------------
Employee                                               Options and                                 
options and                                            performance                                 
performance           Balance          Granted as      rights lapsed       Net change          Balance
rights              1 July 2011       remuneration                           other           30 June 2012
-------------------------------------------------------------------------------------------------------------------

Directors                                                                                                  
                                                                                                                   
D Sutton                3,500,000                   -                -                 -          3,500,000
M Bird                  3,500,000                   -                -                 -          3,500,000
C Straw                 3,500,000                   -                -                 -          3,500,000
                                                                                                                   
Specified executives                                                                                       
                                                                                                                   
K Lynn                  1,500,000                   -                -                 -          1,500,000
-------------------------------------------------------------------------------------------------------------------

(c) Directors' and senior officers' emoluments
       
    The  Remuneration  Committee is responsible for making recommendations to the Board on remuneration  policies
    applicable  to  Board  members and senior Officers of the Company.  The Board's  remuneration  policy  is  to
    ensure  the  remuneration  level  properly  reflects  the  person's  duties  and  responsibilities  and  that
    remuneration is competitive in attracting, retaining and motivating people of the highest quality.
       
Details of the nature and amount of the remuneration of each Director of the Company are set out below:

Director remuneration for the year ended 30 June 2012:

-------------------------------------------------------------------------------------------------------------------
                                                                                Non-cash                       
                       Salary &       Non-         Super-       Retirement     share-based      Other          
                         Fees       monetary      annuation      benefits       payments       bonuses       Total
-------------------------------------------------------------------------------------------------------------------

D Sutton        2012      48,000            -               -              -              -          -      48,000
                2011      48,000            -               -              -        402,556          -     450,556
-------------------------------------------------------------------------------------------------------------------

M Bird          2012      30,000            -               -              -              -          -      30,000
                2011      30,000            -               -              -        402,556          -     432,556
-------------------------------------------------------------------------------------------------------------------

C Straw         2012     150,020            -               -              -              -          -     150,020
                2011     224,750            -               -              -        402,556          -     627,306
-------------------------------------------------------------------------------------------------------------------

Remuneration of the 5 named executives who receive the highest remuneration for the year ended 30 June 2012:

-------------------------------------------------------------------------------------------------------------------
                                                                                Non-cash                       
                       Salary &       Non-         Super-       Retirement     share-based      Other          
                         Fees       monetary      annuation      benefits       payments       bonuses       Total
-------------------------------------------------------------------------------------------------------------------
                                                                                                               
K Lynn          2012      48,000            -               -              -              -          -      48,000
                2011      44,000            -               -              -         88,778          -     132,778
-------------------------------------------------------------------------------------------------------------------


(d)   Individual directors' and executives compensation disclosures

      The  Company  has not employed any executive officers, other than Directors, who were involved in,  concerned
      in,  or  who took part in the management of the Company's affairs.  Details of the nature and amount  of  the
      remuneration  of  each  Director  and  executive of the Company and some  equity  instrument  disclosures  as
      permitted  by  Corporations  Regulations are provided in the Remuneration Report section  of  the  Directors'
      Report.

      The  fair value of options at grant date is determined using the Black-Scholes formula. The model inputs  were
      a  share price of $0.26, an exercise price of $0.50, expected volatility of 52%, a term of 5 years and a risk-
      free interest rate of 6%.

      Performance  rights granted as part of remuneration have been valued using probability criteria  attaching  to
      each  of  the  performance  conditions  applying  under the Company's  Performance  Rights  Plan  approved  by
      shareholders at the Company's Annual General Meeting on 30 November 2010.

      Performance criteria:

      (i)     That the share price of the Company has increased by more than 50% for a period of 5 days since inception
               of the plan (probability 100%);

      (ii)    That a JORC  resource of 15 million ounces of silver is achieved by the Company by 31 December  2011
              (probability 50%);

      (iii)   That Directors remain as directors until 30 September 2012 (probability 100%); and

      (iv)    Overall probability calculated at 75% of the above three criteria occurring.
       
18.   RELATED PARTY TRANSACTIONS

      Related parties of the Company fall into the following categories:

18.1  Trading transactions

      During the year, the Company entered into the following trading transactions with related parties:

      (i)   Centric  Minerals Management Pty Ltd (CMM) was paid $653,667 (2011: $209,089) to provide management,
            administrative services (including provision of office space and facilities) and geological consulting
            services to the Company from 1 December 2010.  A break-down of these amounts paid is as follows:

                                                                              -------------------------------
                                                                                  2012                  2011
                                                                                   $                      $
                                                                              -------------------------------
     
            Office fit-out costs                                                16,773                     -
            Geological consulting services                                     305,002                25,850
            Office rent, accounting, investor relations, IT services           242,000               176,000
            etc
            General expense reimbursements                                       9,450                   991
            Website design and update                                            3,269                     -
            Company secretarial expenses                                        14,685                     -
            HS&E system design and implementation                               24.838                     -
            Marketing expenses                                                  37,650                 6,248
                                                                              -------------------------------
                                                                               653,677               209,089
                                                                              -------------------------------
                                                                              -------------------------------

            As  at  balance  date the company owed $3,740 (2011: $24,253) to CMM.  Messrs Sutton and  Straw  are
            directors  of CMM.  Neither Messrs Sutton or Straw received any direct financial benefit  from  CMM.
            CMM provides these services to other companies within the mineral exploration sector globally.

      (ii)  Dayton Way Financial Pty Ltd, an entity controlled by Mr Sutton, received $52,807 (2011: $125,394) from the
            Company in relation to fees associated with raising equity for the Company.

      (iii) Davcha Resources Pty Ltd, an entity controlled by Mr Straw, received $Nil (2011: $39,405) from the Company
            in relation to geological consulting services for the Company.

      (iv)  Strategy-Matters International Pty Ltd, an entity controlled by Mr Lynn, received $57,200 (2011: $123,475)
            from the Company in relation to accounting and secretarial services for the Company.

      (v)   During the financial year the Company paid $255,153 (2011: $1,191,594) for drilling services to  New
            Competitive Drilling Pty Ltd (NCD), an entity involved in drilling services to the exploration sector.

            At  the  beginning  of  the  financial year, the Company had prepaid drilling  expenses  to  NCD  of
            $956,550  representing  13,665  metres at $70 per metre.  During  the  financial  year  the  Company
            utilised  7,839  meters  at $70 per metre of this prepayment.  Therefore as  at  30  June  2012  the
            Company  has 5,826 metres at $70 per metre representing $407,820 available for future drilling.   Mr
            Straw is a director and Mr Lynn is company secretary of NCD.

18.2    Other related party transactions

18.2.1  Equity interests in related parties

      (i)  The Company holds 250,000 fully paid ordinary shares at 40 cents each in Precious Metals Investments Ltd
           (PMZ), an entity involved in exploration for precious metals.  Messrs Sutton, Straw and Lynn are directors 
           of PMZ.
      
19.   SEGMENT INFORMATION

      Business segments

      The Company operates in the mining industry in Australia only. Operations comprise mineral exploration.

                                                                            ---------------------------------
                                                                                  2012                  2011
                                                                                    $                     $
                                                                            ---------------------------------
20.     RECONCILIATION OF OPERATING PROFIT/(LOSS) AFTER INCOME TAX
        TO NET CASH FLOWS FROM OPERATING ACTIVITIES
                                                                                    
Operating profit/(loss) after income tax                                       737,251            (2,081,624)
Depreciation                                                                    28,381                31,924
                                                                            ---------------------------------
                                                                               765,632            (2,049,700)

Movements in working capital:                                                                    
Decrease/(increase) in receivables                                              36,399               (87,883)
Increase/(decrease) in payables                                                173,544              (328,654)
(Decrease)/increase in provisions                                              (32,598)               27,188
(Decrease)/increase in reserves                                             (1,522,857)            1,462,534
                                                                            ---------------------------------

Net cash outflows from operating activities                                   (579,880)             (976,515)
                                                                            ---------------------------------
                                                                            ---------------------------------

21.   COMMITMENTS FOR EXPENDITURE 
                                                                                    
Operating leases
Non-cancellable operating lease rentals are payable as
follows:
Due within one year                                                             19,260                19,260
Due beyond one year and within five years                                       19,321                38,643
                                                                            ---------------------------------

                                                                                38,581                57,903
                                                                            ---------------------------------
                                                                            ---------------------------------

The  Company  leases vehicles under non-cancellable operating leases expiring within five years.  The  Company
also  has  leases  which generally provide the Company with a right of renewal at which  time  all  terms  are
renegotiated.  Lease payments comprise a base amount plus an incremental contingent rental.

22.   FINANCIAL INSTRUMENT DISCLOSURES

The  Company's  activities expose it to a variety of financial risks: market risk (including  currency  risk,
interest  rate  risk and price risk), credit risk and liquidity risk.  The Company's overall risk  management
program  focuses on the unpredictability of financial markets and seeks to minimise adverse  affects  on  the
financial performance of the Company.  The Company uses different methods to measure different types of  risk
to  which it is exposed.  These methods include sensitivity analysis in the case of interest rates and  other
price risks and aging analysis for credit risk.

Risk  management  is  carried out by the Chief Financial Officer under policies  approved  by  the  Board  of
Directors.   The  Chief  Financial Officer identifies and evaluates the risks in close cooperation  with  the
Company's management and Board.

(a) Market risk

(i) Foreign exchange risk

The Company does not have any significant exposure to foreign exchange risk.

(ii) Price risk

The  Company in the current year did not have any significant exposure to investment or commodity price risk.
The  Company will have exposure to silver price risk if and when mining operations begin. Directors have  not
made any determination at this stage as to whether they will consider commodity price hedge arrangements.

(iii) Cash flow and fair value interest rate risk

The  Company  has exposure to interest rate risk which is the risk that a financial instrument's  value  will
fluctuate  as a result of changes in market interest rates and the effective weighted average interest  rates
on those financial assets and the financial liabilities.

The  Company  policy  is to ensure that the best interest rate is received for the short-term  deposits.  The
Company  uses a number of banking institutions, with a mixture of fixed and variable interest rates. Interest
rates are reviewed prior to deposits maturing and re-invested at the best rate.

The interest rate risk is detailed in the table below:

                                 ----------------------------------------------------------------------------
                                   Weighted                                                           
                                    average                                                            
                                   effective   Floating                                Non-            
                                    interest   interest      Fixed interest rate     interest          
                                      rate       rate             maturing            bearing       Total
                                 ----------------------------------------------------------------------------
                                                             Within 1     Over 1                        
                                                               year        year
                                      %           $             $            $           $            $
                                 ----------------------------------------------------------------------------
2012
FINANCIAL ASSETS
Cash assets                           3.8            -       709,348           -      26,035      735,383
Performance guarantee bonds           5.8            -       115,000           -      60,000      175,000
Other financial assets                               -             -           -     696,674      696,674
                                               --------------------------------------------------------------
                                                     -       824,348           -     782,709    1,607,057
                                               --------------------------------------------------------------
        
FINANCIAL LIABILITIES                                                                                        
Payables (Current)                                   -       (19,260)          -    (315,665)    (334,925)
Payables (Non-current)                               -             -     (19,321)          -      (19,321)
                                               --------------------------------------------------------------
                                                     -       (19,260)    (19,321)   (315,665)    (354,246)
                                               --------------------------------------------------------------
        
NET FINANCIAL                                        
ASSETS/(LIABILITIES)                                 -       805,088     (19,321)    467,044    1,252,811     
                                               --------------------------------------------------------------
                                               --------------------------------------------------------------

                                 ----------------------------------------------------------------------------
                                   Weighted                                                           
                                    average                                                            
                                   effective   Floating                                Non-            
                                    interest   interest      Fixed interest rate     interest          
                                      rate       rate             maturing            bearing       Total
                                 ----------------------------------------------------------------------------
                                                             Within 1     Over 1                        
                                                               year        year
                                      %           $             $            $           $            $
                                 ----------------------------------------------------------------------------

2011
FINANCIAL ASSETS
Cash assets                           4.8            -     3,281,561           -      90,196    3,371,757
Performance guarantee bonds           6.0            -        50,000           -      70,550      120,550
Other financial assets                               -             -           -   1,301,356    1,301,356
                                               --------------------------------------------------------------
                                                     -     3,331,561           -   1,462,102    4,793,663
                                               --------------------------------------------------------------

FINANCIAL LIABILITIES                                                                                        
Payables (Current)                                   -       (19,260)          -    (174,718)    (193,978)
Payables (Non-current)                               -             -     (38,643)          -      (38,643)
                                               --------------------------------------------------------------
                                                     -       (19,260)    (38,643)   (174,718)    (232,621)
                                               --------------------------------------------------------------

                                               --------------------------------------------------------------

NET FINANCIAL                                          
ASSETS/(LIABILITIES)                                 -     3,312,301     (38,643)  1,287,384    4,561,042
                                               --------------------------------------------------------------
                                               --------------------------------------------------------------

(b) Reconciliation of net financial assets per statement of financial position:
      
                                                                     ---------------------------------
                                                                           2012                  2011
                                                                             $                     $
                                                                     ---------------------------------

Net financial assets per above                                        1,252,811             4,561,042
Property plant & equipment                                               61,935                47,880
Deferred exploration & development                                   11,190,929             7,675,327
                                                                     ---------------------------------

Net assets per statement of financial position                       12,505,675            12,284,249  
                                                                     ---------------------------------
                                                                     ---------------------------------

(c) Credit risk
             
    The  maximum exposure to credit risk, excluding the value of any collateral or other security in  respect  of
    recognised financial assets, is the carrying amount as disclosed in the statements of financial position  and
    notes to the financial statements.

(d) Liquidity risk

    Prudent  liquidity risk management implies maintaining sufficient cash, the availability of  funding  through
    adequate  amount  of committed credit facilities and the ability to close out market positions.  The  Company
    manages  liquidity risk by continuously monitoring forecast and actual cash flows matching maturity  profiles
    of  financial  assets  and  liabilities. Surplus funds are generally only invested in  instruments  that  are
    tradable in highly liquid markets.
       
    The Company at trading date had deposits which mature within three months and cash at bank. Due to the cash
    available to the Company there is no use of any credit facilities at balance date.

(e) Net fair values

    The  fair  value  of  financial  assets  and financial liabilities must  be  estimated  for  recognition  and
    measurement  or  for  disclosure  purposes.  The  net fair values  of  the  financial  assets  and  financial
    liabilities approximate their carrying values.

    No financial assets and financial liabilities are readily traded on organised markets.

    The  aggregate  net  fair  values  and carrying amounts of financial assets  and  financial  liabilities  are
    disclosed in the statements of financial position and in the notes to the financial statements.

(f) Sensitivity analysis

    The  Company  has not performed a sensitivity analysis on price risk and its impact on current  year  results
    and  equity  which  could result from a change in this risk as the likely impact is insignificant  given  the
    minimal revenue generated from gold sales during the year.

                                                              -----------------------------
                                                                   2012             2011
                                                                   Cents           Cents
                                                              ----------------------------- 

23.   EARNINGS PER SHARE
                                                                                     
Basic earnings per share                                            0.01            (0.02)
Diluted earnings per share                                          0.01            (0.01)

                                                              -----------------------------            
                                                                  Number           Number
                                                              -----------------------------

Weighted average number of shares used as the denominator
                                                                                     
Weighted average number of ordinary shares used as the        
denominator in calculating basis earnings per share and
alternative basis earnings per share                           136,730,541     106,124,631
                                                              -----------------------------
                                                              -----------------------------

Weighted average number of ordinary shares and potential      
ordinary shares used as the denominator in calculating
diluted earnings per share and alternative diluted earnings   
per share                                                      162,763,718     142,007,466
                                                              -----------------------------
                                                              -----------------------------

                                                              -----------------------------
                                                                     $               $
                                                              -----------------------------

Reconciliation of earnings used in calculating earnings per                   
share
                                                                                     
Earnings used in calculating basic and diluted earnings per   
share                                                             737,251       (2,081,624)
                                                              -----------------------------
                                                              -----------------------------
     
24.   LEASED ASSETS
      
The  Company leases vehicles under non-cancellable operating leases. The leases provide the Company  with  the
option  to  purchase  equipment at a beneficial price.  At 30 June 2012, the net  carrying  amount  of  leased
vehicles was $38,581 (2011:  $57,903).
      
25.   EVENTS SUBSEQUENT TO REPORTING DATE
      
Other  than  the raising of additional capital, there has not arisen in the interval between the  end  of  the
financial  year  and the date of this report any item, transaction or event of a material and  unusual  nature
likely,  in  the  opinion  of  the Directors of the Company, to affect significantly  the  operations  of  the
Company, the results of those operations, or the state of affairs of the Company in future financial years.
            
26.   COMPANY DETAILS
                                                                                     
The registered office and principal place of business of the Company is
              
Silver Mines Limited
Level 5
17-19 Bridge Street
Sydney NSW 2000
Australia
             
       
Tel:                             +61 2 9253 0900
Fax:                             +61 2 9253 0901
              
                                                      

                                                SILVER MINES LIMITED
                                               DIRECTORS' DECLARATION


The directors declare that:

1       the  financial  statements and notes, as set out on pages 15 to 39 are in accordance with  the  Corporations
        Act 2001 and:

        (a) comply with Accounting Standards and the Corporations Regulations 2001; and

        (b) give  a  true  and  fair view of the financial position as at 30  June  2012  and  of  the
            performance for the year ended on that date of the Company and economic entity;

2       the Chief Executive Officer and Chief Finance Officer have each declared that:

        (a) the  financial records of the Company for the financial year have been properly maintained
            in accordance with section 286 of the Corporations Act 2001;

        (b) the  financial  statements and notes for the financial year  comply  with  the  Accounting
            Standards; and

        (c) the financial statements and notes for the financial year give a true and fair view;

3       in  the director's opinion there are reasonable grounds to believe that the Company will be able to pay  its
        debts as and when they become due and payable.


This declaration is made in accordance with a resolution of the Board of Directors.


David Sutton
Director
29 August 2012
      
                                            Independent Auditor's Report
                                                  To the members of
                                                Silver Mines Limited
                                                 A.C.N. 107 452 942
                                                          
                                              INDEPENDENT AUDIT REPORT



To the members of Silver Mines Limited:



Report on the financial report

We  have  audited  the  accompanying financial report of Silver Mines Limited (the  Company),  which  comprises  the
Statement  of Financial Position as at 30 June 2012 and the Statement of Comprehensive Income, Statement of  Changes
in Equity and Statement of Cash Flows for the year ended on that date, a summary of significant accounting policies,
other explanatory notes and the directors' declaration.

Directors' responsibility for the financial report

The  directors of the company are responsible for the preparation and fair presentation of the financial  report  in
accordance  with  Australian  Accounting  Standards and the Corporations Act  2001.   This  responsibility  includes
establishing  and maintaining internal controls relevant to the preparation and fair presentation of  the  financial
report  that  is free from material misstatement, whether due to fraud or error; selecting and applying  appropriate
accounting  policies;  and making accounting estimates that are reasonable in the circumstances.   In  Note  1,  the
directors  also  state, in accordance with Accounting Standard AASB 101 Presentation of Financial  Statements,  that
compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial
report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor's responsibility

Our  responsibility is to express an opinion on the financial report based on our audit. We conducted our  audit  in
accordance  with  Australian  Auditing Standards.  Those Auditing Standards require that  we  comply  with  relevant
ethical  requirements  relating to audit engagements and plan and perform the audit to obtain  reasonable  assurance
whether the financial report is free from material misstatement.

An  audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
report.   The  procedures  selected depend on the auditor's judgement, including the  assessment  of  the  risks  of
material misstatement of the financial report, whether due to fraud or error.  In making those risk assessments, the
auditor  considers  internal  control relevant to the entity's preparation and fair presentation  of  the  financial
report  in  order to design audit procedures that are appropriate in the circumstances, but not for the  purpose  of
expressing an opinion on the effectiveness of the entity's internal control.  An audit also includes evaluating  the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as
well as evaluating the overall presentation of the financial report.

We  believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our  audit
opinion.

Independence

In  conducting  our  audit,  we have complied with the independence requirements of the Corporations  Act  2001.  We
confirm that the independence declaration required by the Corporations Act 2001, provided to the directors of Silver
Mines  Limited  on 29 August 2012, would be in the same terms if provided to the directors as at the  date  of  this
auditor's report.

Auditor's opinion

In  our  opinion  the  financial report of Silver Mines Limited is in accordance with  the  Corporations  Act  2001,
including:

(a) giving a true and fair view of the company's financial position as at 30 June 2012 and of their performance
    for the year ended on that date; and

(b) complying with Australian Accounting Standards and the Corporations Regulations 2001.

The financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Report on the remuneration report

We  have  audited the Remuneration Report included on pages 10 to 12 of the directors' report for the year ended  30
June  2012.   The directors of the company are responsible for the preparation and presentation of the  Remuneration
Report in accordance with section 300A of the Corporations Act 2001.  Our responsibility is to express an opinion on
the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor's Opinion:

In  our  opinion  the  Remuneration Report of Silver Mines Limited for the year ended 30 June  2012,  complies  with
section 300A of the Corporations Act 2001.




Moyes Yong & Co Partnership                                      William M Moyes - Partner

Chartered Accountants                                            29 August 2012

Level 7, Norwich House
6 O'Connell Street
Sydney NSW 2000


                                                SILVER MINES LIMITED
                                                 CORPORATE DIRECTORY
                                                         
                                                         
Directors                                                Auditors
David Henty Sutton - Non Executive Chairman              Moyes Yong & Co
Malcolm Harvey Bird - Non Executive Director             Level 7
Charles David Straw - Managing Director                  Norwich House
                                                         6 O'Connell Street
Company Secretary                                        Sydney NSW 2000
Kevin Martin Lynn                                        Tel: +61 2 8256 1100
                                                         Fax: +61 2 8256 1111
Australian Company Number                                
107 452 942                                              Company's Solicitor
                                                         Macpherson + Kelly
Registered Office                                        Level 11
Level 5                                                  56 Pitt Street
17-19 Bridge Street                                      Sydney NSW 2000
Sydney NSW 2000                                          Tel: +61 2 8298 9533
Tel: +61 2 9253 0900                                     Fax: +61 2 9252 6276
Fax: +61 2 9253 0901
E-mail: info@silverminesltd.com.au
Website: www.silverminesltd.com.au

Bank
National Australia Bank Limited
255 George St
Sydney NSW 2000

Share Registry
Boardroom Pty Limited
Level 7
207 Kent Street
Sydney NSW 2000
Tel : +61 2 9290 9600
Fax : +61 2 9279 0664
Email: enquiries@boardroomlimited.com.au

Contact Information

  • Silver Mines