South American Silver files second quarter 2011 financial statements and MD&A and project update

President’s Message

This past quarter has been an eventful period in the global markets with concerns about the U.S.economy and seasonally low trading volumes contributing to volatility in the North American markets. However, South American Silver has continued to move forward with our project development plan at both our Malku Khota silver-indium-gallium project and the Escalones, copper-silver-gold project in Bolivia and Chile, respectively.

Engineering activities to refine the metallurgical characteristics of the Malku Khota deposit, as well as optimization studies to further increase estimated productions levels have been ongoing throughout the second quarter. Camp construction plans to support accelerated project development activities at Malku Khota are currently in progress in preparation for a significant pre-feasibility drill campaign.

Also during the second quarter an initial exploration program was concluded at Escalones with results anticipated over the next couple of months. Preparations are being made for a drill program to define a first resource during the second half of 2011.

On March 31st, the Company announced results from an updated Preliminary Economic Assessment (“PEA”) for the Malku Khota silver-indium-gallium project. The technical report was filed in its entirety on May 13^th, 2011. Results of the PEA more than doubled estimated mine production levels for the first 5 years of production from the 2009 PEA to over 13.2 million ounces of silver per year, at a cash cost of $2.94 per ounce net of by-product credits at “base case” 3 year average metal prices, putting it in the lower quartile of producer costs. Additionally it more than doubled indium production to 80 tonnes of indium per year and reported the first projected production figures for gallium at 15 tonnes/year. With further resource optimization there remains excellent potential to extend the mine life beyond 15 years or to expand annual production levels further.

The report showed robust economic results with Pre-tax NPV of $704 million and IRR of 37.7% at conservative “base case” metal prices of $18.00/oz silver, and $500/kg indium at a 5% discount rate. At the “middle price case” of $25.00/oz silver the NPV at 5% increases to $1.536 billion and IRR to 64.3%, and at current prices of $35/oz silver, the NPV at 5% increases to $2.571 billion. On a cash flow basis, the first 5 years increased to average $185 million per year at the base case, to $287 million per year at the middle case and to $430 million per year for the recent price case.

In addition to the updated PEA, the Company announced an updated resource estimate for the Malku Khota project expanding Measured and Indicated resources 60% to 230 million ounces of silver with an additional Inferred resource of 140 million ounces of silver. In addition to the increasingly abundant silver, the updated resource estimate also included a Measured and Indicated resource of 1,481 tonnes of indium and 1,082 tonnes of gallium, plus 935 tonnes of indium and 1,001 tonnes of gallium in the Inferred category.

Approach to business

South American Silver Corp.’s growth strategy has been to identify mineral properties that have significant scale potential to develop large resources in well established mining districts of Bolivia and Chile. Management looks to leverage its exploration and development expertise to bring additional resources and value to shareholders and to reduce development risk and expense through its focus on community relations and corporate social responsibility. The Company will continue to look for additional opportunities that can bring value to South American Silver’s shareholders through its approach to business. Responsible mining and community collaboration are a key part of South American Silver’s business strategy on its projects, where the Company is committed to upholding high environmental and social standards while focusing on delivering the financial growth its shareholders expect.

As part of the Company’s ongoing community relations approach to Malku Khota, community relations personnel are working closely with the surrounding local communities. The Company will look to facilitate local and regional economic development through the various stages of project development.

Current market and economic conditions

Prices for silver and gold have remained relatively strong throughout the summer months following a brief, but sharp correction in the spring when silver fell to $33/oz (still approximately 80% higher compared to May 2010) and gold with a more moderate correction to just below $1500/oz. Since then, silver has continued to trend upward, reaching nearly $42 in early August while gold has moved to record highs of over $1700/oz. a nearly 100% increase from its 1980 nominal high of $850/oz. On an inflation adjusted basis, however, silver remains well below its high of $140/oz in real terms as does gold with an adjusted high of $2400/oz.

Since August 2010, silver has doubled in value, outperforming gold, which has increased by about 45% over the same period. The current gold to silver price ratio of 40:1 remains well below its historic high range of 10-15:1 but is now well off of its 2010 low price range for silver of 60-80:1 range.

The U.S. government’s recent decision to raise the statutory debt limit to avoid defaulting on federal debts followed by a first ever credit rating downgrade from AAA to AA+ by Standard & Poor, has put pressure on North American markets and contributed to the weakening of the U.S. dollar. Those economic dynamics, combined with strong demand for commodities and continued historic low interest rates remain contributing factors to the strength in metals prices.

The fundamentals for both silver and gold appear strongly supportive for continued higher prices as governments continue to combat economic concerns with stimulus strategies to encourage economic growth and increase their sovereign debt. Increasingly, investors are returning to hard assets as a store of value and hedge against inflation and currency devaluation resulting in increased investment demand is being seen for both silver and gold in all forms, including Exchange Traded Funds (ETF’s), new physical metal investment trusts, bars and coins.

For silver specifically, its hybrid nature as both a precious and industrial metal shows in the significant increases last year in both investment and industrial demand growth up 40% and 21% respectively. Industrial demand for silver is closely tied to global economic growth particularly in developing countries with applications ranging from biomedical to high technology. Silver appears to have resumed the multi-year trend prior to the recent global economic crisis of increasing overall industrial demand.

With total demand rising 18% in 2010 and total supply growth including mining, secondary silver sources and government sales only up 8%, demand growth considerably outstripped supply. Mining production only rose a total of 2.5% with by-product silver production from both gold and copper mining falling in 2010 even with rising silver prices. Total by-product production of silver from base metal mining is anticipated to decline in coming years demonstrating that by-product silver production is largely price inelastic. With anticipated continued growth in industrial use coupled with strong investment demand, the fundamentals remain positive for higher silver prices. With one of the largest development stage silver resources, strong fundamentals and attractive valuation level relative to peers, South American Silver substantially outperformed both the metals and the silver and gold equity indexes for the greater part of 2010, continuing into 2011.

The indium and gallium market has shown tremendous strength in 2011 as well, surging from trough pricing during the global economic slowdown of around $500/kg to the $800-$1,000/kg over the past couple of months. News of possible short-term supply disruptions and export restrictions in indium from China and rebounding global demand seem to be the drivers to the recent rise in indium and gallium prices. Recent developments in the indium and gallium markets continue to present compelling supply/demand dynamics for the high technology metals.

The main usages for indium and gallium are in flat panel displays and touch screens, high efficiency solar panels and high-efficiency, long life LED lighting. Global indium and gallium consumption is anticipated to continue to grow significantly in these rapidly expanding market sectors. According to a recent report on the global outlook for indium, consumption of indium for flat panel display (FPD) applications is expected to grow at a rate of 17%/year while LED lighting and solar applications could increase at 30-40%/year. In total, global indium use has grown approximately ten fold since 1990.

With one of the largest NI 43-101 qualified resources of primary indium and gallium, South American Silver is attracting additional investor interest due to its large exposure to this rapidly growing high technology driven market.

Copper and zinc have also rebounded significantly from their lows of 2008 of less than $1.50/lb and $0.50/lb respectively to trade recently above $4.00/lb for copper and $1.00/lb for zinc. Demand for copper and zinc is being driven largely by growth in Asia and particularly China and India where industrialization remains a long-term supporting factor for basic materials.

Commodity markets and commodity related equities in general have been very volatile in recent months. Silver and silver equities have been particularly so with the move of the silver price toward its highs of $50/oz earlier this year and the sharp consolidation afterward. Most silver equities have seen consolidation from their spring highs and many today are near their 200-day moving averages, even as the metals have rebounded back toward new highs. The broad silver equity ETF the SIL, which includes the producers, is off about 30% since its highs of late April. Over the past two years South American Silver Corp. has significantly outperformed the key gold and silver equity indexes such as the broad Toronto Gold Index and the U.S. Amex Gold Miners Index. South American Silver remains at a very attractive investment valuation levels compared to many of its silver exploration and development stage peers.

Property review

Malku Khota

South American Silver’s most advanced project is the Malku Khota silver-indium-gallium project located in the world-class silver mining district of central Bolivia, approximately 200 kilometres north of Potosi. Malku Khota is one of the world’s large silver, indium and gallium resources with an NI 43-101-qualified indicated resource of 230.3 million ozs of silver, 1,481 tonnes of indium and 1,082 tonnes of gallium, and an additional inferred resource of 140 million ozs of silver, 935 tonnes of indium, and 1,001 tonnes of gallium. An updated PEA earlier in 2011 showed robust economics for a bulk-mineable heap leach operation with the potential to be one of the largest new silver, indium and gallium producing mines in development. The project is road-accessible, with power available within 15 kilometres of site.

The Company has recently added a new Vice President of Operations and Social Responsibility and a Director of Community Relations to the project’s community relations team. The Company anticipates continuing to build on its community relations team to support bringing the project into feasibility and permitting stages in 2012. With the acceleration of activities at the project, the community relations activities have also increased and discussions are underway with the surrounding communities to look at ways to facilitate local economic and business development through the various stages of project implementation. The recent update to the PEA estimated that the construction phase would facilitate the creation of approximately 1,000 new jobs in the region with over 400 employees needed during operations. For the remainder of 2011 Pre-feasibility activities will be the focus of work on the project.

Disseminated silver and indium mineralization at Malku Khota begins at the surface and remains open to further expansion laterally and at depth in a regionally extensive sandstone unit which continues for over 15 kilometres on the property. To date, only about 30% of the known prospective mineralized host stratigraphy at Malku Khota has been drill tested. As part of the pre-feasibility activities, the Company will look to undertake a significant drill program focused on infill work designed to convert inferred resources to measured and indicated resources and eventually into reserves and to complete further resource expansion drilling. That future program will include drilling to test several additional high-priority, near surface targets based on surface sampling and geophysics, along with greater step out drilling laterally and to depth from the known mineralization.

South American Silver continues to refine the metallurgical characteristics of the deposit through ongoing process-related test work for the pre-feasibility study to optimize the leach recovery of the silver, indium, gallium and associated lead, zinc and copper mineralization in both heap leach and milling options.

Due to the large scale, near surface, bulk mineable nature of the deposit there remains excellent potential to continue to expand production levels beyond the 13 million ounces of silver per year level through further optimization of the resource and increases in overall mine throughput. Optimization studies to look at further production level increases will be included as part of the Pre-Feasibility studies.

During the 2^nd quarter ended June 30, 2011, expenditures at the Malku Khota project totaled approximately U.S.$1.0 million. Work focused on metallurgical testing, environmental baseline data collection, community meetings and various engineering optimization studies.

Escalones

The Escalones copper-silver-gold porphyry related project is located approximately 100 kilometres south-east of Santiago by road in central Chile. The property is 35 kilometres east of El Teniente, one of the world’s largest underground copper mines and shows high grades at surface at over 1% copper with significant silver, gold and molybdenum credits. Exploration has focused on a large, 4 square kilometre area of alteration, and shallow drilling has intersected zones of 75 to 100 metres grading over 1% copper and a single deeper hole intercepted 176 metres of porphyry mineralization grading 0.6% copper. These grades and significant widths of mineralization indicate the presence of a strong mineralizing system at Escalones.

At the Escalones project, the Company has completed an initial exploration program in early 2011 including follow-up geochemical sampling, and geophysical interpretation in connection with the planned issuance of an initial copper-gold-silver resource at this large scale, high potential porphyry project in the second half of 2011. A substantial drill program designed to extend zones of known mineralization and test additional geologic and geophysical targets is planned for later in the year based on drill rig availability. A total of U.S.$570,000 was incurred at the Escalones project in the second quarter on the exploration program, including a cash option payment of U.S.$450,000.

Looking Forward

With the completion of the updated resource and Preliminary Economic Assessment at the Malku Khota silver-indium-gallium project in Q1-2011, the Company now moves its focus to Pre-Feasibility work which began mid-year. The next phase of the program will include further engineering studies, in-fill confirmatory drilling to confirm the predictability of the geologic model at the Limosna, Wara Wara and Sucre Zones and to move resources into reserves with the completion of a pre-feasibility study on the project. The Company will also look to complete additional resource expansion drilling to continue to grow the resource along trend and down dip. The Company has budgeted approximately U.S.$16.7 million toward exploration and development work at Malku Khota during the pre-feasibility phase.

At the Escalones copper-gold project, the Company has completed initial exploration program that include follow-up geochemical sampling, and geophysical interpretation in connection with the planned issuance of an initial copper-gold-silver resource at this large scale, high potential porphyry project in the second half of 2011. Planning is underway for a substantial drill program designed to extend zones of known mineralization and test additional geologic and geophysical targets is planned for later in the year based on drill rig availability. The Company has budgeted exploration expenditures of U.S.$3.2 million to be incurred at Escalones in 2011.

In the months ahead, we are committed to reporting on a number of important project milestones which we believe will broaden shareholder value as we advance each of our South American projects through the next stages of development. I would like to thank all of our shareholders for their continued support, and to also thank our dedicated employees and management team for their hard work, which has helped position South American Silver as a leading development stage precious metals company.

Greg S. Johnson, President & CEO

About South American Silver Corp.

South American Silver Corp. is a growth focused mineral exploration company creating value through the exploration and development of the 100% owned Malku Khota Silver-Indium project in Bolivia, one of the world’s largest undeveloped silver and indium deposits, and the 100% owned large-scale Escalones Copper-Gold project in Chile. The Company’s approach to business combines the team’s track record of discovery and advancement of large projects, key operational and process expertise and effective community relations to increase shareholder value. Management has extensive experience in the global exploration and mining industry with much of that focused in Bolivia, Chile, Peru and Argentina. The Company’s shares are listed on the Toronto Stock Exchange under the symbol “SAC” and on the US OTC market as “SOHAF.” Additional information related to South American Silver Corp. is available at www.soamsilver.com and on SEDAR at www.sedar.com.

Read the full news release here.