Arbitration Claim against the Bolivian Government for the Expropriation of Malku Khota Project 

The Malku Khota project is located approximately 200 kilometres north of Potosi, Bolivia. 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 ).

Exploration commenced at Malku Khota in 2003 and work on the Project continued through to the expropriation in August 2012. After completing a total of 42,700 meters of drilling in 121 diamond core holes, and undertaking metallurgical testwork, process development and engineering design, a Preliminary Economic Assessment study was published in May 2011 showing 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 Preliminary Economic Assessment showed a Pre-tax Net Present Value (NPV) for the project using a 5% discount rate of $1.5 billion and an Internal Rate of Return (IRR) of 63% at the "middle price case” of $25.00 per ounce of silver.

After the publication of the Preliminary Economic Assessment study, the pre-feasibility study (PFS) phase was started in June 2011. The ongoing work program, which was designed to expand mineral resources and enhance project economics, included the development of social and community programs to benefit indigenous communities, baseline studies for the environmental review and assessment program, exploration, metallurgical testwork, flowsheet development, engineering design and preparations to construct a modern 150 person exploration camp near the exploration site. The planned work programs including the PFS were not completed due to the expropriation.

On July 10, 2012, the Bolivian government announced to the media its intention to nationalize the Malku Khota project and on August 1, 2012, issued Supreme Decree No.1308 nationalizing the Malku Khota project. On October 23, 2012 the Company’s wholly-owned subsidiary, South American Silver Limited, delivered a formal letter to the Bolivian government notifying it of an investment dispute between South American Silver Limited and Bolivia. The dispute has arisen as a result of acts and omissions of the Government of Bolivia including the issuance of Supreme Decree No.1308 which revoked mining concessions held by Compańia Minera Malku Khota S.A. (CMMK), a wholly-owned subsidiary of South American Silver Limited, without any compensation.

South American Silver Limited is a company incorporated in the Bermuda Islands, an overseas territory of the United Kingdom, which through its wholly owned Bahaman subsidiaries, Malku Khota Ltd., G.M. Campana Ltd. and Productora Limited., owns one hundred per cent of the outstanding shares of CMMK. South American Silver Limited is a protected investor under the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Bolivia for the Promotion and Protection of Investments ("UK-Bolivia Treaty”), and the actions and omissions of the Bolivian Government are in violation of the UK-Bolivia Treaty and of international law. Bolivia has breached the Treaty’s requirement to provide full protection and security to foreign investors and their investments, as well as the Treaty’s protections against, among other things, expropriation without just and effective compensation, unfair and inequitable treatment, and less favorable treatment than afforded to Bolivian nationals or nationals of third states. Notification of the investment dispute triggered a six-month cooling-off period during which the disputing parties could negotiate a settlement.

Arbitration provides the forum for the Company to pursue fair value compensation for the expropriation of the Malku Khota project. Since the expropriation Supreme Decree, the Company has appointed the international legal firm, King & Spalding, to prepare and handle the claim. King & Spalding is supported by prominent local counsel in Bolivia. Financial experts to assess the value of the damages have also been appointed.

On August 1, 2012, September 4, 2012, December 12, 2012, January 16, 2013 and February 14, 2013, South American Silver Limited delivered letters to the Bolivian Government reiterating its willingness to attend meetings with Bolivian Government representatives to resolve the dispute amicably. The Government of Bolivia finally responded on February 21, 2013 requesting a meeting with South American Silver Limited representatives on April 17, 2013 to discuss a potential amicable resolution to the dispute to which South American Silver Limited responded on March 4, 2013 expressing its willingness to meet but subject to certain conditions. These conditions were not met by the Bolivian Government hence on April 12, 2013 South American Silver Limited notified the Bolivian Government that its attorneys would be attending the April 17 meeting as the only representatives of South American Silver Limited. On April 17, 2013 the meeting was held but no resolution was reached and no compensation was offered.

The cooling-off period ended on April 23, 2013 and on April 30, 2013 the Company announced in News Release 13-09 that its wholly-owned subsidiary, South American Silver Limited had commenced international arbitration proceedings against the Government of Bolivia under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) pursuant to the UK-Bolivia Treaty seeking compensation based on fair market value of the Malku Khota project. Concurrent with the Notice of Arbitration issued to Bolivia, South American Silver Limited appointed its arbitrator to the arbitral tribunal. The arbitral tribunal will be comprised of 3 members: one appointed by South American Silver Limited, one appointed by Bolivia and the third, who will act as president of the tribunal, to be appointed by the other two members. The Bolivian Government had until May 30, 2013 to respond to the Notice of Arbitration but requested a 30 day extension which South American Silver Limited granted subject to certain conditions which Bolivia agreed to meet. On June 28, 2013 the Bolivian Government responded to the Notice of Arbitration and appointed its own arbitrator. On July 12, 2013 South American Silver Limited challenged the appointment of Bolivia’s arbitrator on grounds of justifiable doubts as to his independence and impartiality and on July 31, 2013, Bolivia challenged South American Silver Limited arbitrator appointment on the same grounds. The challenges were rejected by the parties and the Permanent Court of Arbitration. Accordingly the arbitrator appointed by South American Silver Limited and the arbitrator appointed by Bolivia now have until November 29, 2013 to appoint a third arbitrator who will act as president of the arbitral tribunal.

Once the tribunal is formed, the tribunal will set a provisional timetable for the arbitration itself. This will include a schedule for submission of a Statement of Claim, Statement of Defense and oral hearings at the court of arbitration. Unless there is a negotiated settlement of the dispute, it is expected that the arbitration can take up to 2-3 years from commencement of proceedings until rendering of a final award.

On May 23, 2013 the Company entered into an agreement (the "Arbitration Costs Funding Agreement”) with a third party funder (the "Fund”) pursuant to which the Fund will cover most of South American Silver Limited future costs and expenses related to its international arbitration proceedings against Bolivia. The non-brokered funding is on a non-recourse basis and includes costs and expenses of the enforcement of any award rendered by the arbitral tribunal. The Fund specializes in the funding of international arbitration proceedings and in providing assistance in connection with the enforcement of arbitration awards.

Under the terms of the privileged arbitration funding agreement, the Company has given certain warranties and covenants to the Fund and has provided security for its obligations. In consideration for the funding, South American Silver Limited and the Company have agreed to pay to the Fund a portion of any recoveries received by South American Silver Limited pursuant to the arbitration proceedings or any settlement with Bolivia. South American Silver Limited continues to have control over the conduct of the international arbitration proceedings and to have the right to settle with Bolivia, discontinue proceedings, pursue the proceedings to trial and take any action it considers appropriate to enforce any resulting judgment or award




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