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Liquidity and Capital Resources

6 Months Ended

Jun. 30, 2012

2. Liquidity and Capital Resources

At June 30, 2012 the Company’s aggregate cash and short-term investments totaled $23.1 million and based on the assumptions described below, we expect to have a cash balance of approximately $4.0 million at December 31, 2012. We have commenced efforts to secure funding from external sources, which may include a debt or equity financing transaction. Our efforts and projections are described further below. There is uncertainty regarding whether the Company will be successful in obtaining sufficient funding from any of these actions or sources in the future on terms acceptable to us or at all. We expect that in the absence of additional funding, our current cash and investment balance would be depleted in the first quarter of 2013.

Assuming metals prices of $25.00 per ounce of silver and $1,500 per ounce of gold during the remainder of 2012 the Company expects to generate a negative gross margin, which the Company defines as sales proceeds less cash costs of production, from the sale of metals of approximately $3.3 million during the remaining two quarters of 2012. With the cash and investment balance at June 30, 2012 of $23.1 million, an anticipated $3.3 million of negative gross margin from the sale of metals at the Velardeña Operations and an estimated $1.5 million reduction of working capital, the Company plans to spend the following amounts during the remaining two quarters of 2012 pursuant to its long-term business strategy:

1. Approximately $10.0 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;

2. Approximately $1.5 million at the El Quevar project to fund maintenance activities and the continuation of project evaluation costs;

3. Approximately $2.5 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;

4. Approximately $3.5 million on general and administrative costs and $1.5 million on other working capital.

Assuming metals prices of $25.00 per ounce of silver and $1,500 per ounce of gold during the remainder of 2012, we expect that gross margin from the sale of metals will be positive at the Velardeña Operations beginning in the first quarter 2013. However, because of the delay in mine development and slower ramp up of production that has occurred at the Velardeña Operations, we now expect lower gross margin from the sale of metals during 2013. Based on anticipated gross margin, development and capital expenditures at the Velardeña Operations during the remainder of 2012 and into the first half of 2013 to continue the ramp up to 850 tonnes per day, significantly reduced expenditures for exploration and El Quevar, and corporate administrative expenditures, we expect that in the absence of additional funding our current cash and investment balance would be depleted in the first quarter 2013. The actual amount that we spend through year-end 2012 and the first half of 2013 may vary significantly from the amounts specified above and will depend on a number of factors, including amounts of saleable metals produced, metals prices, the results of continuing ramp up at the Velardeña Operations, whether the Company is able to monetize portions of its exploration portfolio and the amount and timing of cash generated by these activities. A $4.00 average change in the price of silver during the remainder of 2012 would result in a $1.1 million change in the expected cash flow during that period while an average $250.00 change in the price of gold during the period would result in a $0.9 million change in the expected cash flow during the period. If saleable metals production is lower than anticipated or metals prices decline from the levels noted previously, we would be required to further preserve our cash and investments by delaying our expansion plans at the Velardeña Operations and reducing exploration and other expenses.