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Liquidity and Capital Resources

3 Months Ended

Mar. 31, 2012

2. Liquidity and Capital Resources

At March 31, 2012 the Company’s aggregate cash and short-term investments totaled $32.3 million, which were comprised of $32.2 million of cash and cash equivalents and $0.1 million of short term investments. The Company expects to produce approximately 590,000 ounces of silver and 9,400 ounces of gold during 2012 from the Velardeña Operations. Assuming metals prices of $30.00 per ounce of silver and $1,500 per ounce of gold the Company expects to generate a negative gross margin from the sale of metals of approximately $1.0 million during the remaining three quarters of 2012. With the cash and investment balance at March 31, 2012 of $32.3 million and an anticipated $1.0 million of negative gross margin from the sale of metals at the Velardeña Operations and approximately $1.0 million from royalties and other income during the remainder of 2012, the Company plans to spend the following amounts during the remaining three quarters of 2012 pursuant to its long-term business strategy:

· Approximately $13.5 million on capital and development costs related to the continued development of the San Mateo drift and other mine development and capital expenditures intended to increase the capacity and productivity of mine operations and plant facilities;

· Approximately $2.5 million at the El Quevar project to fund maintenance activities and the continuation of project evaluation costs;

· Approximately $4.0 million on other exploration activities and property holding costs related to our portfolio of exploration properties located in South America and Mexico as we pursue strategies to monetize portions of the portfolio;

· Approximately $6.0 million on general and administrative costs.

Based on these projections, and assuming no cash generated by monetization of the exploration properties, the Company would have at year-end 2012 a cash and investment balance of approximately $6.0 million. Assuming metals prices of $30.00 per ounce of silver and $1,500 per ounce of gold during the remainder of 2012 the Company expects that gross margin from the sale of metals will be positive at the Velardeña Operations in the fourth quarter 2012.

The actual amount that the Company spends through year-end 2012 may vary significantly from the amounts specified above and will depend on a number of factors, including metals prices, the results of continuing operations and the timing of possible phased expansion projects at the Velardeña Operations and the results of continued project assessment work at El Quevar and other exploration properties, and whether the Company is able to monetize portions of its exploration portfolio and the amount and timing of cash generated by these activities or other external funding efforts. There can be no assurance that the current expenditures planned for the Velardeña Operations will result in the anticipated silver and gold production. If the anticipated production does not occur, or metals prices decline from the levels noted previously, the Company would be required to preserve its cash and investments by reducing project evaluation, exploration work, and general and administrative expenses; relying on the monetization of non-core assets; or securing external funding from debt or equity. There can be no assurance that the Company would be successful in obtaining sufficient funding from any of these actions or sources in the future on terms acceptable to it or at all.