South American Silver Files First Quarter 2012

Financial Statements and MD&A and Project Update

14 May 2012, Vancouver, British Columbia-South American Silver Corp. (TSX:SAC, US OTC: SOHAF) reports the release of its unaudited condensed interim consolidated financial statements for the three months ended March 31, 2012 and the related management's discussion and analysis of financial position and results of operations ("MD&A"). The Company is also pleased to provide an update on the Malku Khota silver-indium project in Bolivia and the Escalones copper -gold project in Chile. In this press release, all amounts are expressed in U.S. dollars, unless otherwise indicated.

As at March 31, 2012, the Company had working capital of $21.8 million, including cash and cash equivalents of $23.4 million. Subsequent to March 31, 2012, the Company raised gross proceeds of Cdn. $16 million through the completion of a private placement of 10 million units at a price of Cdn. $1.60 per unit. Taking into account the subsequent financing, on a pro forma basis, the Company had approximately $38 million in cash and cash equivalents as at March 31, 2011. With these funds in place, the Company is in a very strong financial position to accelerate the advancement of its Malku Khota project toward feasibility, and its Escalones project to the preliminary economic assessment stage. Further details including the full financial statements and information on each of the Company's projects, including the resource estimate and Preliminary Economic Assessment study at Malku Khota and the resource estimate at Escalones, are available on the Company's website at www.soamsilver.com and on SEDAR at www.sedar.com.

President's Message  

The past few months of 2012 have continued the challenging market conditions for global equities and the resource markets from 2011, despite relatively stable gold, silver and copper prices.  Global economic policy continues to have an expansionary and inflationary bias which should be positive for commodities in the long term. The fundamentals from a production side remain constrained in terms of bringing significant new production to market and the prospects for continued industrial growth of metal consumption and sustained investor demand appears to remain positive.

So far in the year, South American Silver has tabled the technical report for the new NI 43-101 qualified resource on its Escalones copper-gold project with the discovery of a 4 billion pound copper deposit in Chile and has initiated new exploration programs on both the Malku Khota silver-indium and Escalones copper-gold projects as part of its ongoing project advancement strategy.

In addition, the recent closing of a $16 million strategic financing at a premium to market with Asian based high technology groups from Taiwan, Hong Kong, Japan and Korea will help facilitate rapid development of our projects and puts the Company in a strong financial position with approximately $38 million in cash and no debt.

Current activities are anticipated to deliver value to shareholders over the coming quarters in what promises to be another exciting year for the Company.

At the Malku Khota silver-indium project, a 20,000 meter exploration program is underway with an updated Economic Assessment focused on production expansion and optimization slated for June 2012. Feasibility work is slated to begin in the second half of 2012. The Company has also continued with expansion of its government and community relations initiatives as part of the Impact and Benefit type agreements signed with local indigenous communities in the project area.

At the Escalones copper-gold project in Chile, a 7,000 meter exploration program is presently underway for an updated resource estimate along with initial metallurgical testing for use in a first Preliminary Economic Assessment Study by Q4-2012.

With two actively advancing projects, the Company anticipates significantly increased news over coming quarters as we complete resource and engineering updates on the projects which should deliver meaningful milestones for increasing shareholder value.

South American Silver offers some of the best value and leverage to silver of any development stage silver company in the industry, with nearly 4 ounces of silver per share and nearly 8 ounces of silver equivalent value including the Company's copper, indium and gallium resources. This equates to more than $230 worth of metal in the ground per share.

Current market and economic conditions

After a relatively positive first 3 months of the year with precious metals and precious metals equities prices generally higher, April and early May have brought a return to high market volatility and further consolidation to the precious metals sector.  Prices for silver had steadily climbed to highs of nearly $36/oz by the end of February, after ending 2011 below $28/oz and gold had reached highs of nearly $1800/oz, up from early January prices of under $1600/oz.   April and early May have seen silver and gold retest the $29/oz and $1,600/oz level bringing the two metals to nearly flat for the year-to-date period.

In contrast the precious metals equities are down sharply for this same period with the Junior Miners Index and larger Gold Miners index, which includes the producers, being down approximately 20% year-to-date.  South American Silver has held up on a relative performance basis better than the precious metals equity indices above during the period, though as of early May was down approximately 5% for the year.

Though the bull market in gold has been in place since 2001 and is up nearly 115% from its 1980 nominal high of $850/oz, gold remains well below its inflation adjusted highs of approximately $2350/oz in 2012 dollars.  Silver remains 42% below the 1980 nominal high of $50/oz at current prices and well below its highs of $140/oz in real terms.

Since early 2010, silver has nearly doubled in value, significantly outperforming gold, which has increased by about 60% over the same period. The current gold to silver price ratio of just under 55:1 is approximately the 5 year average ratio but well off of its 2010 lows in the 60-80:1 range and well below the historic highs ratios of silver to gold of 15-20:1.

The fundamentals for both silver and gold appear to remain 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 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 continued demand last year in both investment and industrial use. Industrial demand for silver is closely tied to global economic growth particularly in developing countries with applications ranging from biomedical to high technology.  Based on the recently issued World Silver Survey from GFMS, silver saw continued strong industrial demand and strong investor demand again in 2011. A recent industry report on silver by Byron Capital highlighted that the sustained growth in use of silver in technology usage alone which has risen an average of 20 million ounces per year over the past 10 years may be enough to support silver at twice the current price levels.

With global mining production of silver only increasing 1.4% during 2011, in a strong year for silver prices, it supports the case for higher silver prices going forward with increased total demand tied to overall population growth and growing industrial use and constrained production growth.  Primary silver production actually declined in 2011 vs 2010, with the top two primary silver mines decreasing by a total of 11 million ounces alone, and 8 of the top 15 primary silver mines showing declines in production.  This decrease was primarily due to falling ore grades at those top mines.  This decline in primary silver production was only off-set by a modest increase in by-product silver production from lead/zinc and gold mining. This small increase in total silver production points to the need for new deposits to be developed in the silver sector to meet growing global demand.  The increased timelines from discovery through exploration and then through engineering, permitting and construction, make it challenging for the industry to bring new significant deposits online in less than 10 years from discovery to production of metal.  This creates a potential significant time lag between increased market demand and new sources of supply to meet that demand.

After correcting from highs of nearly $700/kg in November 2011, the indium and gallium market has begun to show more strength in 2012, currently trading at prices of nearly $600/kg, well above trough pricing of around $500/kg during the global economic slowdown of 2008/2009.  Recent developments in the indium and gallium markets continue to suggest a compelling supply/demand dynamic for these 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. In total, global indium use has grown approximately ten times since 1990.

Base metals have also seen significant ranges in their prices over the past year but have held relatively steady year-to-date despite global economic uncertainty with copper in the $3.70 to $3.90 range and zinc in the $0.90 to $0.95 range.  Recent price fluctuations in base metals appear to have been driven largely by short term economic concerns and general market volatility.  Long term growth in demand for copper and zinc is likely to continue to be driven largely by growth in developing economies particularly in Asia where per capita consumption levels remain well below that of more developed nations.

With one of the largest development stage silver and indium resources, a significant new copper discovery in Chile, strong fundamentals and an attractive valuation level relative to peers, South American Silver has substantially outperformed both the metals and the silver and gold equity indexes over the past 2 years and has been one of the strongest performers on a year to date basis through early May 2012.

Property review

Malku Khota silver-indium project, Bolivia

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 kilometers north of Potosi. Malku Khota is one of the world's largest silver, indium and gallium resources with a NI 43-101-qualified Indicated Resource of 255 million tonnes of mineralized material containing 230.3 million ozs of silver, 1,481 tonnes of indium and 1,082 tonnes of gallium at a grade of 28.7 g/t silver, 5.8 g/t indium and 4.3 g/t gallium (43.8 g/t silver equivalent), and an additional Inferred Resource of 230 million tonnes containing 140 million ozs of silver, 935 tonnes of indium, and 1,001 tonnes of gallium at a grade of 18.9 g/t silver, 4.1 g/t indium and 4.3 g/t gallium (33.0 g/t silver equivalent). An updated Preliminary Economic Assessment study released in March 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 with over 13.2 million ounces of silver production annually over the first 5 years. The project is road-accessible, with commercial scale natural gas and electricity nearby.

Engineering and metallurgical process work is underway to further optimize the project production levels and process flowsheet. These studies have looked at increasing overall scale to better optimize the resource. An updated NI 43-101 qualified Economic Assessment study based on the work over the past year for Malku Khota is targeted for release in June 2012. In addition, exploration activities are currently underway on a 20,000 meter drill program. This drill program will include infill drilling to convert inferred resources to measured and indicated resources and eventually into reserves and to test further resource expansion at depth and between the two known deposits. To date, only about 30% of the known prospective mineralized host stratigraphy at Malku Khota has been drill tested. The 2012 drill program will also include drilling to test several additional high-priority, near surface targets based on surface sampling and geophysics.

Due to the bulk mineable and heap leachable nature of the deposit, there remains excellent potential to continue to expand production levels beyond the 13.2 million ounces of silver per year level in the 2011 Economic Assessment study through further optimization of the resource and increases in overall mine throughput. Current optimization studies are targeting expansion of annual silver production toward 18 to 20 million ounces per year as part of the updated Economic Assessment and would make Malku Khota one of the largest producing silver mines in the world.

Over the past year South American Silver has significantly broadened its community relations activities and the Company has entered into Impact and Benefit-type agreements with local indigenous communities to facilitate local economic and business development through the various stages of project implementation. The project contributes significantly to the local economy and it is estimated that the construction phase would likely create as many as 1,000 new jobs in the region with over 400 full time workers directly employed during mine operations. Feasibility and baseline environmental work is planned to begin in the second half of 2012. The Company anticipates continuing to build on its community relations initiatives to support the feasibility and permitting stages in 2012 and 2013.

During the quarter ended March 31, 2012 expenditures on the Malku Khota project totaled approximately $1.1 million. Work focused on drilling, engineering optimization studies, metallurgical testing, environmental baseline data collection and increased community programs based on the signed Impact and Benefit agreements with the local land owning Ayllus in the project area.

Escalones copper-gold project, Chile

The Escalones copper-gold project is located in the world-class central Chilean mining district which includes the nearby El Teniente deposit - the world's largest underground copper mine. The project is accessible by road and is approximately 100 kilometers south-east of Santiago. South American Silver filed a detailed NI 43-101 technical report for the Escalones resource estimate in February 2012.

The newly defined Inferred Resource of 420 million tonnes of mineralized material contains 3.8 billion lbs of copper, 56.9 million lbs of molybdenum, 610,000 ozs of gold and 16.8 million ozs of silver at a grade of 0.41% copper, 0.05 g/t gold, 1.24 g/t silver and 61 ppm molybdenum using a 0.2% Cu Equivalent cut-off grade (see December 19th, 2011 News Release). This is a copper-equivalent content of 4.5 billion lbs of copper grading 0.49% based on approximate 3-year average metal prices as of December 2011.

The Escalones deposit remains open to expansion laterally and down dip with 90% of the current resource hosted in copper, gold and silver replacement-style mineralization, and only limited drilling testing porphyry-style mineralization. Initial interpretation of a ZTEM and aeromagnetic survey shows several large areas of untested conductivity anomalies which may represent areas of potential additional sulfide mineralization related to both replacement style and porphyry mineralization. 2D and 3D modeling and interpretation of these geophysical targets is in progress.

A Phase II exploration program is underway with two core drills currently working on the site. Holes targeting both porphyry and replacement-style mineralized zones have been completed with the final holes in the program before the South American winter season designed to test new targets based on the recently completed aerial ZTEM and magnetic surveys.  The planned program for 2012 is for 7,000 meters of drilling with a resource update to support development of a first Preliminary Economic Assessment of the project in Q4-2012. Initial engineering work including metallurgical testwork has been started to determine recovery of copper, gold, silver and molybdenum and concentrate characteristics of the deposit. Updates on Escalones will be provided as drill results are received and interpreted.

During the quarter ended March 31, 2012 expenditures at the Escalones copper-gold project totaled approximately $1.8 million. Work primarily focused on drilling, sample analysis, metallurgical testing and geophysical modeling.

Looking Forward

The period ahead includes a number of important milestones for South American Silver with engineering and optimization studies underway at the Malku Khota silver-indium project and a major economic assessment update due out in June 2012.  A number of improvements in the process approach are being considered for that assessment that look to further optimize more of the resource and increase annual production levels and cash flows.

In particular the technical team at South American Silver is focused on adding shareholder value at Malku Khota through a process of refining engineering with the start of feasibility studies in the second half of 2012.  That refinement process will include refinement of capital and operating cost estimates, and optimizing production levels from the deposit. Work will also focus on understanding the potential level of further resource expansion and collecting baseline environmental information to be able to begin the permitting process while working closely with the local communities to facilitate local economic and business development.

The current phase of the program includes in-fill confirmatory drilling to move additional inferred resources into measured and indicated resources, as well as, testing expansion along trend and down dip to expand the project resources which remain open in nearly all directions.

We believe that the above will support the move toward a fairer market valuation for the Malku Khota project reflecting the world class scale of the resource, production potential and robust economics.

At the Escalones copper-gold project, the on-going exploration drill program is anticipated to begin to highlight the exceptional value of that newly discovered resource as well.  The exploration activities underway are expected to allow for an updated resource and initial metallurgical work to support a first Preliminary Economic Assessment Study by Q4-2012.

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.

Greg S. Johnson

President & CEO