Project Classification

Producing silver mine with exploration and development potential.

Ownership Structure

In 2008, the Erbahuo Silver Mine was spun off from Sino-Top and put under a separate entity, i.e. Chifeng Silver Dragon Resources & Technologies, Ltd. ("Chifeng Silver"), an American-Chinese joint venture that is currently 70% owned by Silver Dragon and 30% owned by HIC. On December 2, 2010, the Company announced that it would commence production in Q2 2011.

The mine will be an open pit, heap leach process, and is scheduled to produce dore silver bars by the third quarter of 2011, which will be sold to smelters for further refining. The mine will be developed and operated by Huaguan Industrial Corp (“HIC”) and Guangxi Hongteng Mining, Ltd. (“GHM”) as part of a five-year arrangement. HIC and GHM anticipate processing 100,000 tonnes of ore, yielding up to eight (8) tonnes of silver in the first year. Silver Dragon Resources will receive 30% of the net proceeds, before taxes.

History

Silver was discovered in the Erbahuo area following analysis by the Comprehensive Gross Exploration Department from 1989 to 1992, when exploration was carried out for the purpose of finding the necessary silver reserves projected to be required to satisfy China’s growing industrial demands. A geological survey at scales of 1:10000 and 1:2000 has been completed. In 1992, the department committed the Nonferrous Metal Metallurgy Institute in Beijing to complete the primary metallurgical trial. In 1997, the department completed detailed geological survey work. From 1998 to 2002, exploration and development was carried out leading to the eventual mining of approximately 30,000 tons of ore with an average grade of 248.02 gpt silver at a cut-off grade of 200 gpt Ag.

Property Location

The property is located on the structural join where the north edge of the North China platform meets with the south edge of the Hercynian fold belt of the Great Xingan Mountains. Its position is at the southern end of the discordogenic fault of Xilamulonghe which is extended in an east-west direction. It has a boundary with the North American plate and has been subjected to multiple structural events. This entire tectonic setting provides a dynamic geologic environment for the development of mineralizing systems. The magmatic activity in the area is strong.

The Erbahuo Silver Mine is located at the common boundary of Keshiketeng county and Wengniute county in Inner Mongolia, within the Wufendi town of Wengniute county. The property is about 1.2 km²

The Concession is located according to the following four corner points:

Accessibility, Climate, Local Resources, Infrastructure

The northern end of the property is 12 km away from Tuchengzi Village of Keshiketeng County and the eastern boundary is 10 km away from Maoshandong Village of Wenniute County. Access to the property is 110km via paved highway from Chifeng City to the village of Maoshandong and then west 10 km by a secondary road to the property.

The climate in the region is classified as plateau continent type, and from November through April is the cold season. Annual rainfall occurs mainly in the month of June. Topography on the property ranges in elevation from 1100m to 1222m. Vegetation covers the shady slope of the hillsides. Farmers in the area plant various subsistence crops. The labor force in the area is plentiful. A 10kv electricity power net passes through the concession and the electrical power is adequate for mining purposes.

Geological Setting

The following information was taken from a previous NCGEA 1998 geological report.

Erbahuo Silver Mine is located on the bordering region between the northern rim of the North China platform and the southern side of the Xilamulun River Faultage which runs in an east-west direction. The structure of this region is characterized by the joint between the east-west ancient formation and the NE-E and NE formations, with complication geological structures. The general structure is that the north-west trending Xilamulun River Faultage constitutes the basic frame and upon that due to the Mesozoic structure magmatite activities another set of north-east and northeast-east apophysis and volcanic basins were developed. The formations in the faultage in the mining region are primarily in two groups and in north-west and north east directions respectively. The north-west direction faultage is the main faultage in the region, which runs (Fl) 330~3400, slanting towards southwest direction with a angle of 60~700 and a total length of 1200M. This is the main structure controlling and storing the mine. Faultage Number 2 is distributed in the northwest part of the mining area, presumably developed only after the formation of the mine. The volcanic structure is of the type of a volcanic dome in the mining area, which is located in the northern end of the Erbahuo-Youfang faultage and takes the shape of a slowly rising hunch, with a total area of 3km². This is closely related to the mine formation in the region.

Except the quaternary loose sediment, the exposed geological layers of the mining area are of continental volcanic eruption acidic lava and clasolite of upper Jurassic Manketouebo formation.

The magmatites of the mining area are subvolcanic rocks of late phase of volcanic activity, which are found in the volcanic pipelines and creaks. Rocks here include porphyry rhyolite, quartz porphyry, quartz porphyry, ryyo-cryptoexplosion breccia conglomerate, Cryptoexplosion breccia conglomerate, etc., which normally takes the nervation shape and runs in north-west direction, with length ranging from tens of meters to hundreds of meters and width between several meters to tens of meters. The common forms of metallic mineralization found in the rocks are mainly of pyritization, galena, sphalerite mineralization, etc. Some of the rocks have silver content ranging from 250 to 840 g/t.

In general, the geological conditions of this area host the following characteristics:

1. Most of the rock beds are distributed in the volcanic rocks of the Mesozoic and Cenozoic Eras.
2. Structural movements provide favorable conditions to the mine-forming hot liquid activities, which has created mineralized zones in such environments as faults, fractured zones and calderas.
3. Most of the deposition of ore-forming rocks are volcanic in nature.

Deposit Types

In the area of the Erbahuo project, alteration is caused by middle to low temperature hot liquids in which silica is the most extensive and significant form of alteration, and relates closely to the formation of silver mineralization. Within the fractured zones and cryptoexplosion breccia conglomerates, are also found sericite, chlorite and carbonate alteration.

Mineralization

The main metallic minerals include the following: Pyrolusite, Psilomelane, Limonite, Pyrite, Galena, Sphalerite, Chalcopyrite, and other Silver related minerals.

Geochemistry

Geochemical samples have been taken over the property. The anomalies are extensive, covering the total terrain from Youfang and Erbahuo to Xiabadayingzi and Qifendi Dole Hill, with the anomalies aligned in a north-east direction and having a length of 35 km and a width of 10 km.

Rock Chip Sampling, Trenching and Tunnelling

Rock chip sampling has been done on available outcrops. Trenches and adits have also been used to collect rock samples.

Mineral Processing and Metallurgical Testing

The following statements were also taken from the 1998 geological report:

According to the test data for the silver heap leach method, with sodium chloride (acid leaching method) done to Erbahuo mine several years ago, the recovery rate for silver was approximately 65%; however, there are large quantities of 100 – 200g/t silver ore which have not yet been mined. Silver is mixed primarily in pyrolusite and pyrite in the form of an allomerism mixture and also exists as an independent mineral in pyrite and limonite. Since the ore is oxidized, it is suitable for fluoridation.

In 1992 entrustments were made to the Beijing Nonferrous Metallurgy Research Institute to test mill run results. Results show that acid soaking and fluoridation methods have much better recovery results than the normal sulfuration methods.

Mineral Resource

The No. 2 silver mine body is of 330-340 grade category (Soviet Grade Classifications). The length is 250 meters and extends to a depth of at least 65 meters with silver concentrations ranging from between 93.83 to 649.2g/t. There are numerous drill holes of which several ore bodies have been identified.

The mineable deposit is located approximately 70 meters below the surface. From 1998 to present a total of approximately 30,000 tons of ore was mined with an average grade of 248.02g/t

Report Excerpt

Excerpted from a report
Prepared for Silver Dragon Resources Inc.
by the
North China Nonferrous Geological Prospecting Bureau
General Exploration Agency (NCGEA)

About the NCGEA

The North China Nonferrous Geological Prospecting Bureau General Exploration Agency (NCGEA) was founded in 1974. At that time it was composed of a team of geologists engaged in mineral exploration and development. Through years of development, the agency has evolved to become a group company engaging in mine exploration, mine development, mine engineering and commodities trading services. Currently there are approximately 760 people in the agency.

Summary of Past Activities

Over the past three decades, the NCGEA has conducted exploration and mining activities in almost all parts of China. Key exploration and mining activities include the following:

• Eastern Hebei Province iron mine project
• Anshan-Benxi iron mine project
• Zhangjiakou-Xuanhua iron mine project
• Yangshan iron mine project
• Baiyunebo iron mine project
• Huanggangliang-Mengentaogai zinc and multiple metal mine project in Inner Mongolia
• Jilinbaolige silver and multiple metal mine project in Inner Mongolia
• Daxinganling southern secton and northern rim of Huabei area exploration project
• Gold and silver mine exploration projects in eastern Zhaowudameng, southern Bianbianshan-Longtoushan-Tuofengshan
• Middle Deshengtun lead-zinc-copper multiple metal mine exploration project
• Wengniute Qi Erbaohuo – Maodongshan silver/copper multiple metal exploration project
• Keshiketeng Qi Youfangxi silver mine and Haolaibao copper mine exploration
• Xinjiang Xinyuan iron mine exploration
• Xinjiang Hejing County copper mine
• Gold and silver mine exploration and evaluation in many locations in Hebei Province