Mr. Greg Johnson reports

SOUTH AMERICAN SILVER CORP.: UPDATED MALKU KHOTA STUDY DOUBLES PRODUCTION LEVELS AND 1ST 5 YEAR CASHFLOW ESTIMATES

South American Silver Corp. is providing positive results from an updated preliminary economic assessment including an updated resource estimate for its 100-per-cent-owned Malku Khota silver-indium project. A detailed NI 43-101 technical report will be filed within 45 days on SEDAR.

Highlights:

• Updated Malku Khota economic assessment study doubles mine throughput to 40,000 tonnes per day (tpd) for a 15-year mine life with excellent potential for extension through additional drilling.
• Annual silver production for the first five years is 13.2 million ounces at a cash cost of $2.94 per ounce net of byproduct credits at base case metal prices, putting it in the lower quartile of producer costs.
• Annual production is at 80 tonnes per year of indium and 15 tonnes of gallium.
• Pretax net present value at a 5-per-cent discount rate is $704-million and internal rate of return is 37.7 per cent at base case metal prices of $18 per ounce silver and $500 per kilogram indium, increasing to a net present value, 5 per cent, of $1,536-million and IRR to 64.3 per cent at middle price case of $25 per ounce silver and to a net present value, 5 per cent, of $2,571-million at the recent price case of $35 per ounce silver.
• Cash flows for the first five years increase 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.
• Updated resource estimate expands measured and indicated resources 60 per cent to 230 million ounces of silver with an additional inferred resource of 140 million ounces of silver.
• Two thousand ten drill program successfully confirms the geologic model with over 80 per cent of the life-of-mine silver resources classified as the measured and indicated category in the pit model.
• During the construction phase approximately 1,000 new jobs would be created in the region with over 400 employees likely during operations.
• Budget of $16-million approved for 2011 with prefeasibility activities beginning in the second quarter.

Commenting on the updated economic assessment, Greg Johnson, president and chief executive officer, said: "We are very excited about the positive results of the PEA update which demonstrate that the Malku Khota project has the potential to become one of the largest new primary silver-producing mines in the world. The study shows that annual production for the first five years has increased to 13.2 million ounces from 6.4 million ounces of silver per year. Additionally, the project will be one of the largest producers of the high-technology metals indium and gallium, with annual production of 80 tonnes and 15 tonnes per annum respectively.

"Projected cash flows have strengthened considerably to over $185-million per year for our first five years at $18 per ounce silver and more than $430-million per year for our recent metal price scenario, highlighting the tremendous leverage to silver of this long-life asset. There remain a number of significant opportunities to further optimize and enhance the economics of the Malku Khota project as we move into prefeasibility in 2011 and feasibility in 2012. In particular, we believe there is exceptional potential to expand the project resource base prior to the start of production, resulting in substantial extension of the overall mine life to beyond the projected 15 years. Additional development and operation of the project will provide significant economic benefits to the local region and to Bolivia as a whole."

Malku Khota updated preliminary economic assessment

This study is a comprehensive update to the preliminary economic assessment and resource estimate for Malku Khota that was completed in March, 2009, by Pincock Allen & Holt (PAH). Since that time considerable work has advanced on the resource, engineering and metallurgical testing and will continue as the project moves into prefeasibility (PFS) in 2011. The PEA update contemplates the construction and operation of a 40,000-tonne-per-day open pit acid-chloride heap leach operation. The PEA estimates that approximately 200 million tonnes of leach material would be mined over a 15-year mine life with production of 13.2 million ounces of silver per year for the first five years and over 10.5 million ounces per year for the life of the mine. Additionally, the mine is anticipated to produce approximately 80 tonnes of indium and 15 tonnes of gallium per annum. The mine would also annually produce several million pounds of byproduct lead, copper and zinc, contributing to the project's low operating costs which are projected to be in the lower quartile of primary silver producers.

        OPERATIONAL AND PRODUCTION SUMMARY

Plant throughput               40,000 tonnes/day
LOM plant feed                200 million tonnes
Strip ratio                                 2.23
Mine life                               15 years
Initial capital cost              $411.4-million
Sustaining capital                  $209-million

                    Silver    Indium   Gallium    Copper      Lead      Zinc

Recoveries           73.6%     81.0%     26.9%     84.8%     51.1%     62.0%
First five years
(averages)
                     42.42      7.55      4.28
Grades                 g/t       g/t       g/t    0.023%    0.084%    0.023%
annual
production
(recovered          13.2 M      80.7    15,184    5.64 M   12.48 M    4.42 M
 metal)                 oz    tonnes        kg        lb        lb        lb
Life of mine
(averages)
                     33.60      7.35      3.98
Grades                 g/t       g/t       g/t    0.024%    0.085%    0.050%
annual
production
(recovered          10.5 M      78.9    14,198    5.87 M   12.76 M    9.04 M
metal)                  oz    tonnes        kg        lb        lb        lb
Life of mine         158 M     1,184   212,962      88 M     191 M     135 M
Recovered metal         oz    tonnes        kg        lb        lb        lb

Economic modelling for the updated Malku Khota PEA demonstrates a robust project with strong operating cash flow, high rates of returns, and low capital and operating costs, particularly on a cost-per-ounce basis. Three metal price scenarios were selected to show the project's sensitivity to varying metal prices using the same pit model: a base case scenario using the approximate three-year trailing average price for metals, a middle case with approximate one-year trailing average metal prices and a recent case which reflects recent monthly average metals prices. At higher metal prices, updated mine models would likely increase total metal production.

                              FINANCIAL SUMMARY

                                               Base case  Mid case    Recent
Metal prices
Silver (U.S. $/ounce)                              18.00     25.00     35.00
Indium (U.S. $/kg)                                500.00    570.00    650.00
Lead (U.S. $/lb)                                    0.90      1.00      1.20
Zinc (U.S. $/lb)                                    0.90      1.00      1.10
Copper (U.S. $/lb)                                  3.00      3.70      4.30
Gallium (U.S. $/kg)                               500.00    570.00    730.00
Average operating cash flow
First five years (per year) (millions)               185       287       430 
Life of mine (per year) (millions)                   124       208       325 
Net cash flow (undiscounted) (millions)            1,261     2,528     4,298 
NPV at 5% discount rate (millions)                   704     1,482     2,571 
NPV at 8% discount rate (millions)                   505     1,104     1,942 
Internal rate of return (IRR) (%)                   37.7      63.0      92.9
Payback period (months)                               27        19        15 
First five years
Silver cash costs before credits
(U.S. $/ounce)                                      9.70      9.70      9.70
Silver cash costs after credits (U.S. $/ounce)      2.94      2.01      0.86
Life of mine
Silver cash costs before credits
(U.S. $/ounce)                                     13.87     13.87     13.87
Silver cash costs after credits (U.S. $/ounce)      5.06      3.85      2.39

On an operating cash-flow basis the project generates from $185-million per year for the base case for the first five years, increasing to $287-million per year for the mid price case and $430-million per year for the recent case prices. The study shows a base case pretax net present value (NPV) at a 5-per-cent discount rate of $704-million with an internal rate of return of 37.7 per cent and a payback of 27 months. The mid case shows that the NPV at a 5-per-cent discount rate increases to $1,482-million, while the IRR jumps to 63 per cent and payback drops to 19 months. The recent case, with recent monthly average metal prices, shows that the NPV at a 5-per-cent discount increases to $2,571-million with a corresponding significantly increased IRR and decreased capital payback period.

In the first five years net of byproduct credits, cash costs are under $3 per ounce of silver using base case pricing and under $1 per ounce using the recent case pricing.

The financial model has been used to test the sensitivity of the project to a range of variables. The sensitivity analysis shows that the NPV is most sensitive to changes in the silver prices and recoveries (approximately $17-million NPV 5-per-cent change for each 1-per-cent change in price or recovery) followed by changes to the operating costs (approximately $12-million) and then to changes in capital costs (approximately $3.5-million). Processing costs have almost twice the impact on NPV as mining costs. The economic analysis in this study is a preliminary economic assessment and further studies will be required to demonstrate a higher degree of economic certainty. All dollar amounts in this news release are in United States dollars.

Resource estimates

Mineral resources have been estimated as of March 30, 2011, for this PEA update by Allan Armitage, PhD, PGeo, of GeoVector Management. The new resource estimate for Malku Khota, which takes account of additional drilling since the 2009 PAH resource estimate, is summarized in the table at a 10-gram-per-tonne-silver-equivalent cut-off grade.

Resource                          Ag (g/t)     In (g/t)      Ga (g/t) Cu (%)
                 tonnes grade           oz grade tonnes grade  tonnes  grade

Measured     30,989,448  33.4   33,319,487   6.1    188   4.5     139   0.02
Indicated   224,001,987  27.3  196,960,598   5.8  1,293   4.3     943   0.02
M+I         254,991,434  28.1  230,280,085   5.8  1,481   4.3   1,082   0.02
Inferred    230,013,794  18.9  140,027,216   4.1    935   4.3   1,001   0.02

Resource        Cu (%)            Pb (%)            Zn (%)        AgEq (g/t)
                    lb grade          lb grade          lb grade          oz

Measured    13,947,823  0.07  48,665,367  0.02  16,239,090  48.2  47,943,510
Indicated  106,366,881  0.07 404,649,086  0.05 230,573,723  42.5 306,119,818
M+I        120,314,704  0.07 453,314,453  0.04 246,812,812  43.2 354,109,119
Inferred   102,081,329  0.07 362,157,607  0.05 246,150,339  32.5 240,292,377

Drilling in 2010 was primarily focused on confirmation and infill drilling, with a focus on increasing the density of drilling in the areas that fall within the pit model. The updated resource estimate expands the measured and indicated resources by 60 per cent from the 2009 estimate to 230 million ounces of silver with an additional inferred resource of 140 million ounces of silver. The 2010 drill program successfully confirmed the geologic model with over 80 per cent of the life-of-mine in-pit silver resources classified in the measured and indicated category.

Drilling in 2011 will aim to further convert the remaining inferred resources in the pit model to measured and indicated along with step-out drilling along trend and down dip of the mineralized horizon where it remains open to further expansion.

This PEA is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves and there is no certainty that the preliminary assessment will be realized. Mineral resources that are not mineral reserves do not have economic viability.

Production, processing and metallurgy

For this PEA, the preferred development approach is a 40,000-tonne-per-day acid-chloride heap leach project, based on a conventional shovel-and-truck open-pit mining operation, with material hauled initially in 100-tonne trucks, phasing to 150-tonne trucks as the pit deepens. Material will be hauled to a heap leach pad that is located within two kilometres of the open cut. Waste will be hauled to dumps within two kilometres of the pit. In this study, mining operations assumed an owner-operated mining fleet. Over the 15-year life of mine, approximately 200 million tonnes of leach material will be mined at an average strip ratio of 2.23:1. Silver equivalent grades for the first five years of production average 58 grams per tonne, with silver and indium grades of 42.2 g/t and 7.55 g/t, respectively, with the remaining value from copper, lead and zinc credits. Over the life of mine, the silver equivalent grade is approximately 50 g/t, with silver and indium grades that average 33.6 g/t and 7.35 g/t.

Run-of-mine material will be crushed to one-quarter inch in a three-stage crushing circuit and stacked in a heap leach pad where a leaching agent made up of hydrochloric acid mixed with salt and sodium hypochlorite will be applied. The heap leach will be designed as an on/off pad to receive 40,000 tonnes per day in a single eight-metre lift sized for a 120-day leach cycle. The leach pad design contemplates six terraced cells with a total footprint of 540,000 square metres. Pregnant solution will be collected in ponds located downslope of the leach pad before advancing to the metals recovery plant. Average leaching recoveries used in the design are 73.6 per cent for silver, 81.0 per cent for indium, 51.1 per cent for lead, 62.0 per cent for zinc, 84.8 per cent for copper and 29.2 per cent for gallium, based on the testing program undertaken at SGS Lakefield Laboratories.

The metal recovery processes start with acid recovery and proceed through several steps of metals extraction and recovery in three main streams. A cemented product containing silver, gold and copper will be further processed into a silver-gold-copper dore. Indium-gallium hydroxide precipitate will be refined into pure indium and gallium ingots. Separately precipitated lead and zinc sulphides will be refined off site as concentrates. Over 15 years of operations, Malku Khota is projected to produce 158 million ounces of silver, 1,184 tonnes of indium, 191 million pounds of lead, 135 million pounds of zinc, 88 million pounds of copper and 212 tonnes of gallium.

Considerable work has been completed on metallurgical testing including an extensive acid-chloride and cyanide leach testing program undertaken at SGS Lakefield Laboratories. Preliminary geotechnical testing and hydrodynamic testing have shown that the mineralized material is suitable for treatment with heap leach using either acid chloride or cyanidation. Kinetic tests and acid optimization testing was started in 2010 and is continuing. Bench-scale acid recovery amenability tests have also been successfully completed.

A number of mining and treatment options have been evaluated with the aim of narrowing the range of alternatives to be studied in the PFS. This work has considered alternatives to heap leaching including vat and agitated leaching, both of which have potential to achieve higher recoveries than can be achieved with heap leaching. This optimization work is considered to be potentially attractive and will be progressed along with further test work to confirm crushing and grinding characteristics as part of the PFS level work on the project.

The project is also amenable to a cyanide leach process which would focus only on recovery of silver with gold and copper credits. The value added by the indium, lead, zinc and gallium from the acid leach process is significant and allows for greater exploitation of the deposits, longer mine life, more metal production and higher NPV. As well, the indium and gallium are regarded as strategic metals that give the project future upside potential. For these reasons the acid leach option is considered the preferred option. Mining for the cyanide option would be similar to that for acid leach except at a lower treatment rate. Heap leaching would also be similar except at the lower treatment rate and using cyanide as the leaching agent in place of acid. Recovery of gold and silver would be achieved using the Merrill-Crowe process. Tailings and other infrastructure would be similar to the base case but smaller due to the simpler process, lower treatment rate and shorter mine life.

Facilities and construction

South American Silver project personnel have met with engineering and construction contractors in Bolivia, Chile and Peru to assess local capability and cost factors for the capital and operating cost estimates. Site construction is expected to take around 18 months during which the construction work force is expected to peak at over 1,000 people. Once in commercial production, Malku Khota will provide direct employment to over 400 employees and contractors, most of whom will be sourced from surrounding communities. Oruro has a capable supply of labour, equipment and service requirements for exploration- and mining-related activities.

Preliminary hydrology, hydrogeology and power studies of the property have been completed by experienced contractors in the region. Maximum use will be made of water recovered from the residue facility, which will be returned for reuse in the process plant. Using the natural terrain to advantage, residues will be disposed into lined facilities located downstream of the heap leach pads. Water supply for the project will come from pit dewatering, regional flows and groundwater sources, which have been confirmed in preliminary investigations as sufficient to meet project needs. Groundwork has also been laid for environmental and social baseline studies to get under way in the prefeasibility phase.

Capital and operating costs

Mining capital including preproduction capital and initial mining fleet are based on a project-specific pit design and production schedule with equipment selection and quantities based on equipment vendor's recommendations and engineer experience of similar operations. Costs are based on budget pricing and engineer cost database where appropriate.

Process plant capital costs for crushing, leaching and metal recovery facilities are factored estimates based on process flow sheets, mass balances and equipment lists developed specifically for the project based on the metallurgical test work. Leach pads, ponds and residue facilities were estimated based on quantities derived from conceptual layouts overlain on the topographical plans of the site. Infrastructure costs for power supply, water supply and roads are budget estimates from consultant's reports and allowances based on recent costs for similar projects constructed in Bolivia. Unit cost rates were applied using estimator's database. Indirect construction costs for freight, taxes and duties, construction camp and catering, EPCM, commissioning, spares and first fills, and owner's costs are included. Estimated capital costs are displayed.

                           CAPITAL COST SUMMARY
                          (millions of dollars)

Mine preproduction                                                    3.8 
Mining fleet                                                         83.1 
Process plant and infrastructure                                    149.9 
Leach pads and residues facilities                                   81.3 
Indirect costs                                                       93.3 
Total initial capital                                               411.4 

Sustaining capital is estimated at $169-million in the mine, mainly for mining fleet additions and replacement, and $40-million in the processing facilities, mainly for on/off heap leach materials handling and progressive residue facility construction, for a life-of-mine total of $209-million. Working capital requirements for the financial model are based on 90 days between production and receipt of payment. Allowances of $10-million for reclamation costs and $2-million salvage value at the end of mine life are included in the financial model.

Operating costs have been developed for each major area based on project-specific requirements. Mining and processing costs are based on year-round 24-hour-per-day operations. Power is estimated at 4.2 cents per kilowatt hour and diesel fuel at 54 cents per litre reflecting Bolivian costs. The project has an estimated maximum power requirement of 40 megawatts, which will come from the Bolivian national grid approximately 20 kilometres from the site. Operational manning is based on approximately 90 per cent of labour being locally sourced supported by a small expatriate contingent involved in management and training.

Mining costs are based on pit designs, mine production and waste dump schedules developed specifically for the project. Processing costs were developed for reagents on a cost-per-tonne (of production) basis using consumption rates arising from the metallurgical test work and unit costs derived from engineer's database and Bolivian sources where possible. Estimated average life-of-mine costs are displayed.

                      OPERATING COST SUMMARY

Mining                                      $1.08 per tonne mined
Processing                      $6.41 per tonne of leach material
G&A                          80 cents per tonne of leach material

Capital and operating cost estimates are expressed in United States dollars, based on first-quarter 2011 costs and have a scoping study accuracy range of plus/minus 35 per cent to 50 per cent and do not include inflation risks or price escalation factors.

Project development plan

The company proposes to advance toward development of Malku Khota in a number of study phases that involve increasing levels of detail starting with a prefeasibility study (PFS) commencing in second-quarter 2011 and to follow up with a detailed feasibility study (DFS) in 2012 before advancing to construction.

The PFS will further define the project in a greater level of technical and financial detail in preparation for a subsequent DFS. The DFS would describe the project in detail and ultimately provide the basis for the investment decision. Both the PFS and the DFS will include additional definition drilling to progressively promote inferred resources to the measured and indicated categories and ultimately to demonstrate sufficient mineral reserves in the DFS to support an investment decision. Further metallurgical test work will also be required for both the PFS and DFS phases.

Environmental and social baselining (data collection) will be carried out in parallel with the PFS with the aim of collecting at least 12 months data to feed into the environmental and social impact assessment (ESIA) process. The ESIA process starts toward the end of the PFS and would be based on the project defined by the DFS. The ESIA ultimately leads to the development of the environmental management plans (EMPs) that are designed to mitigate the impacts. These processes lead into the project permitting process.

Opportunities and upsides

As well as the normal studies associated with feasibility studies, there are a number of opportunities to enhance the project that will be investigated in the next phases.

• Preliminary test work indicates that leaching recoveries improve at finer material sizes suggesting that vat leaching or possibly agitated leaching could produce higher economic returns than heap leaching. These options will be investigated further as part of the PFS.
• Early-stage test work suggests that significant recovery gains could be achieved at higher leach reaction temperatures. Higher solution temperatures are also a benefit in metals recovery circuits. This would allow more value to be extracted from the orebody and warrants further investigation.
• Acid consumption is a significant cost of operation and an on-site acid plant has the potential to reduce costs and simplify logistics.
• There are in-country examples that power can be generated using Bolivia's inexpensive natural gas supplies at a saving to buying power from Bolivia's electrical grid. The benefit would become more pronounced for development options involving high power consumption such as milling.
• The competitiveness of the cyanide case or a blended cyanide/acid leach case increases as the silver price increases relative to other metals and the cyanide alternative will be kept current as the project advances, particularly while high silver prices prevail.
• The company may look at staged construction concepts which may allow for faster initial production and cash-flow generation with a step-up to full capacity in phases.

Qualified persons

This news release was prepared under the supervision of Ralph Fitch, executive chairman for South American Silver, and Felipe Malbran, Geo, vice-president, exploration, for South American Silver, who are the company's qualified persons for the purposes of NI 43-101. The technical report for the updated PEA and resource estimate is a collaborative effort involving the following qualified persons for the purposes of NI 43-101: Mr. Fitch; Mr. Malbran; Mr. Armitage; Pierre Desautels, PGeo, AGP Mining Consultants Inc.; Gordon Zurowski, PEng, AGP Mining Consultants; and William Pennstrom (Pennstrom Consulting Inc.).

We seek Safe Harbor.