U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 40-F
Check One
¨
¨
Registration Statement Pursuant to Section 12 of the Securities Exchange Act of 1934
x
x
Annual Report Pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Commission File Number: 001-38141
Sierra Metals Inc.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English (if applicable))
Canada
(Province or other jurisdiction of incorporation or organization)
1021
(Primary Standard Industrial Classification Code Number (if applicable))
N/A
(I.R.S. Employer Identification Number (if applicable))
161 Bay Street, Suite 4260, Toronto, Ontario M5J 2S1 Canada, (416) 366-7777
(Address and telephone number of Registrant’s principal executive offices)
Cogency Global Inc.
10 East 40th Street, 10th Floor, New York, NY 10016, (800) 221-0102
(Name, address (including zip code) and telephone number (including area code of agent
for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Common Shares
Title of each class
NYSE American
Name of each exchange on which registered
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
For annual reports, indicate by check mark the information filed with this Form:
x
x
Annual information form x
x
Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Common Shares: 163,427,335
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x
x
No ¨¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Yes x
x
No ¨¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by checkmark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
¨¨
Not applicable
Emerging growth company xx
DISCLOSURE CONTROLS AND PROCEDURES
Sierra Metals Inc. (the “Company”) has designed disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) to ensure that material
information relating to the Company, including its consolidated subsidiaries, is made known to the Chief Executive Officer and Chief Financial Officer by others
within the Company, including its consolidated subsidiaries, on a regular basis, including during the period in which the Company’s Annual Report on Form 40-F
relating to financial results for the fiscal year ended December 31, 2018 is being prepared. The Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded, as of that evaluation date, that the Company’s disclosure controls and procedures were effective to ensure that the
material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the
Exchange Act, was (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (the “SEC” or the
“Commission”) rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROLS
For management’s report on internal control over financial reporting, see “Disclosure Controls and Internal Controls over Financial Reporting ("ICFR") in our
MD&A attached as Exhibit 99.2 to this Form 40-F and incorporated by reference herein.
2
This Annual Report does not include an attestation report of the Company's registered public accounting firm due to a transition period established by rules of the
SEC for companies that are newly public in the U.S.
AUDITOR ATTESTATION
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal year ended December 31, 2018, there were no significant changes in the Company’s internal controls over financial reporting, or in other factors
that could significantly affect such internal controls, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
The Company’s board of directors (the “Board”) has a standing audit committee (the “Audit Committee”) established in accordance with Section 3(a)(58)(A) of
the Exchange Act. The Audit Committee consists of the following three Board members: Douglas Cater, Philip Renaud and Jose Vizquerra Benavides.
IDENTIFICATION OF THE AUDIT COMMITTEE
AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that all three members serving on its Audit Committee are considered “audit committee financial experts”. Each of Douglas Cater,
Philip Renaud and Jose Vizquerra Benavides has been determined to be such an audit committee financial expert, within the meaning of Item 407 of Regulation S-
K. Each of Mr. Cater, Mr. Renaud and Mr. Vizquerra Benavides is independent, as that term is defined by the New York Stock Exchange’s listing standards
applicable to the Company. The Securities and Exchange Commission has indicated that the designation of each of Mr. Cater, Mr. Renaud and Mr. Vizquerra
Benavides as an audit committee financial expert does not make Mr. Cater, Mr. Renaud and Mr. Vizquerra Benavides an “expert” for any purpose, impose any
duties, obligations or liability on Mr. Cater, Mr. Renaud and Mr. Vizquerra Benavides that are greater than those imposed on Board members who do not carry this
designation, or affect the duties, obligations or liabilities of any other Board member.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers LLP acted as our independent registered public accounting firm for the fiscal years ended December 31, 2018 and 2017. For a description
of the total amount PricewaterhouseCoopers LLP billed to us for services performed in the last two fiscal years by category of service (audit fees, audit-related
fees, tax fees and all other fees), see the information under the caption "Audit Committee Information - External Auditor Fees" in our Annual Information Form
(“AIF”), which is attached as Exhibit 99.1 to this Form 40-F and incorporated by reference herein.
The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services, including the requirement that all non-audit services
to be performed by the external auditor must be pre-approved and monitored by the Audit Committee. Subject to National Instrument 52-110 Audit Committees of
the Canadian Securities Administrators, the engagement of non-audit services is considered by our Board, and where applicable the Audit Committee, on a case-
by-case basis.
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CODE OF ETHICS
The Board has adopted a Code of Business Conduct & Ethics (the "Code"), covering all employees, officers, directors, agents and contractors of our company, to
assist in maintaining the highest standards of ethical conduct in corporate affairs. In addition, the Board must comply with conflict of interest provisions in
Canadian corporate law, including relevant securities regulatory instruments, in order to ensure that directors exercise independent judgment in considering
transactions and agreements in respect of which a director or executive officer has a material interest. A copy of the Code is available on the Company’s website at:
https://s2.q4cdn.com/485819848/files/doc_downloads/corporate_gov/Code-of-Business-Conduct-and-Ethics-current.pdf .
All amendments and any waivers of the Code that apply to the officers covered by it will be posted on our website, furnished to the SEC as required, and provided
to any shareholder who requests them. During the fiscal year ended December 31, 2018, we did not grant any waiver, including an implicit waiver, from a
provision of the Code to any executive officer or director. With the exceptions of the Code, no information contained on the Company’s website shall be
incorporated by reference in this Form 40-F.
The Company has no off-balance sheet arrangements as defined in General Instruction B(11) to Form 40-F as of December 31, 2018.
OFF-BALANCE SHEET ARRANGEMENTS
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Within 1 year
$
1-2 years
$
2-5 years
$
After 5 years
$
Total
$
As at December 31,
2018
$
Accounts payable and accrued
liabilities
Loans payable
Interest on loans payable
Other liabilities
Total Commitments
36,092
27,520
198
8,908
72,718
-
6,000
127
1,081
7,208
-
22,733
250
-
22,983
-
-
-
-
-
36,092
56,253
575
9,989
102,909
36,092
56,253
575
9,989
102,909
CLASSIFICATION OF MINERAL RESERVES AND RESOURCES
In our AIF, the definitions of proven and probable mineral reserves, and measured, indicated and inferred mineral resources are those used by the Canadian
provincial securities regulatory authorities and conform to the definitions utilized by the Canadian Institute of Mining, Metallurgy and Petroleum (the "CIM"), as
the CIM Definition Standards on Mineral Resources and Mineral Reserves adopted by the CIM Council, as amended.
CAUTIONARY NOTE TO UNITED STATES READERS
CONCERNING MINERAL RESERVES AND RESOURCE ESTIMATES
Our AIF for the year ended December 31, 2018 attached to the Form 40-F as Exhibit 99.1 and incorporated by reference herein has been prepared in accordance
with the requirements of the securities laws in effect in Canada, which differ from the requirements of U.S. securities laws. The terms “mineral reserve”, “proven
mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with the Canadian Securities Administrators’ National
Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy and Petroleum as the CIM
Definition Standards on Mineral Resources and Mineral Reserves adopted by the CIM Council, as amended. These definitions differ from the definitions in SEC
Industry Guide 7 under the Securities Act. Under SEC Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves, the three-
year historical average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with
the appropriate governmental authority.
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In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required
to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and
registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted
into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility.
It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred
mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are cautioned not to assume that all or any part of an
inferred mineral resource exists or is economically or legally mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian
regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC Industry Guide 7 standards as in
place tonnage and grade without reference to unit measures.
Accordingly, information contained in our AIF may contain descriptions of our mineral deposits that may not be comparable to similar information made public by
U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.
MINE SAFETY DISCLOSURE
Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, issuers that are operators, or that have a subsidiary that
is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified
health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities under the regulation of the Federal Mine
Safety and Health Review Administration under the Federal Mine Safety and Health Act of 1977. During the fiscal year ended December 31, 2018, neither we nor
any of our subsidiaries operated a coal or other mine in the United States, and we were not subject to any citations, orders or other legal actions under the Federal
Mine Safety and Health Act of 1977.
DISCLOSURE PURSUANT TO SECTION 13(r) OF THE EXCHANGE ACT
Pursuant to section 13(r) of the Exchange Act, the Company is required to disclose whether it or any of its affiliates knowingly engaged in certain activities,
transactions or dealings related to both the Islamic Republic of Iran (“Iran”) and certain persons listed on the Specially Designated National and Blocked Persons
list maintained by the U.S. Department of Treasury Office of Foreign Assets Control, during the year ended December 31, 2018. Disclosure of these certain
activities, transactions or dealings is generally required even if conducted in compliance with applicable law and regulations. The Company is not aware that it or
any of its affiliates have knowingly engaged in any transaction or dealing reportable under section 13(r) of the Exchange Act during the year ended December 31,
2018.
5
ADDITIONAL INFORMATION
Additional information relating to our company, including our AIF, Audited Financial Statements and Management’s Discussion and Analysis (“MD&A”), can be
found on SEDAR at www.sedar.com, on the SEC website at www.sec.gov, or on our website at www.sierramatals.com . Shareholders may also contact the Vice
President, Corporate Development of the Company by phone at (866) 493-9646 or by email at info@sierrametals.com to request copies of these documents and
this annual report on Form 40-F.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
The Company undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish
promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to
which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
The Company has previously filed a Form F-X in connection with each class of securities to which the obligation to file this Form 40-F arises. Any change to the
name and address of the agent for service of process shall be communicated promptly to the Commission by amendment to Form F-X.
6
Pursuant to the requirements of the Exchange Act, the registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this
Form 40-F to be signed on its behalf by the undersigned, thereto duly authorized.
SIGNATURES
Dated: March 28, 2019
SIERRA METALS INC.
By:
/s/ Igor Gonzales
Igor Gonzales
President and Chief Executive Officer
7
The following documents are filed as exhibits to this Form 40-F:
Exhibit Number
Consents
EXHIBITS
Document
23.1
23.2
23.3
23.4
23.5
23.6
23.7
23.8
Certifications
31.1
31.2
Annual Information
99.1
99.2
99.3
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Consent of PricewaterhouseCoopers LLP
Consent of Matthew Hastings
Consent of Daniel H. Sepulveda
Consent of Giovanny J. Ortiz
Consent of Enrique Rubio
Consent of Augusto Chung
Consent of Gordon Babcock
Consent of Americo Zuzunaga
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated
March 28, 2019
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated
March 28, 2019
Annual Information Form for the year ended December 31, 2018
Management’s Discussion and Analysis for the year ended December 31, 2018
Audited Consolidated Financial Statements for the years ended December 31, 2018 and 2017
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Calculation Linkbase
XBRL Taxonomy Extension Definition Document
XBRL Taxonomy Extension Labels Linkbase
XBRL Taxonomy Extension Presentation Linkbase
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the inclusion in this Annual Report on Form 40-F of Sierra Metals Inc. (the Company) and to the incorporation by reference in the
Registration Statement on Form F-10 (No. 333-218076) of the Company, of our report dated March 27, 2019 relating to the consolidated financial statements of
the Company, which appears in this Annual Report.
“/s/PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 28, 2019
Exhibit 23.2
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re:
Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018, incorporated by reference into the Company’s Prospectus
Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and the Annual
Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the “Registration
Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the Annual Information Form
of the Company for the year ended December 31, 2018 (the “ AIF ”), and its incorporation by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit
to and incorporated by reference into the Form 40-F.
I hereby consent to the: (i) inclusion of the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA) for the Yauricocha Mine,
Peru ” dated effective July 31, 2017 (the “ Yauricocha PEA ”) in the AIF and any amendments thereto, and the incorporation of such report in the AIF, (ii)
incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's Registration Statement, including the prospectus contained therein,
as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments thereto, into the Prospectus Supplement and (iv) being named in, and
the use of the Yauricocha PEA, or portions thereof prepared, reviewed and/or approved by me, in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein that are
derived from the Yauricocha PEA, or within my knowledge as a result of the services I performed in connection with the Yauricocha PEA.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Matthew Hastings
Matthew Hastings, MSc Geology,
MAusIMM
2
Exhibit 23.3
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re:
Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018, incorporated by reference into the Company’s Prospectus
Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and the Annual
Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the “Registration
Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the Annual Information Form
of the Company for the year ended December 31, 2018 (the “ AIF ”), and its incorporation by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit
to and incorporated by reference into the Form 40-F.
I hereby consent to the: (i) inclusion of the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA) for the Cusi Mine,
Chihuahua State, Mexico” dated effective August 31, 2017 (the “ Cusi PEA ”) in the AIF and any amendments thereto, and the incorporation of such report in the
AIF, (ii) incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's Registration Statement, including the prospectus contained
therein, as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments thereto, into the Prospectus Supplement and (iv) being
named in, and the use of the Cusi PEA, or portions thereof prepared, reviewed and/or approved by me, in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein that are
derived from the Cusi PEA, or within my knowledge as a result of the services I performed in connection with or the Cusi PEA.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Daniel H. Sepulveda
Daniel H. Sepulveda, B.Sc. Metallurgist, SME-RM
2
Exhibit 23.4
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re:
Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018, incorporated by reference into the Company’s Prospectus
Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and the Annual
Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the “Registration
Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the Annual Information Form
of the Company for the year ended December 31, 2018 (the “ AIF ”), and its incorporation by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit
to and incorporated by reference into the Form 40-F.
I hereby consent to the: (i) inclusion of the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA) for the Cusi Mine,
Chihuahua State, Mexico ” dated effective August 31, 2017 (the “ Cusi PEA ”), and the summary section of the report entitled “ NI 43-101 Preliminary Economic
Assessment (PEA) for the Bolivar Mine, Mexico ” dated effective October 31, 2017 (the “ Bolivar PEA ”) in the AIF and any amendments thereto, and the
incorporation of this report in the AIF, (ii) incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's Registration Statement,
including the prospectus contained therein, as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments thereto, into the
Prospectus Supplement and (iv) being named in, and the use of the Cusi PEA and the Bolivar PEA, or portions thereof prepared, reviewed and/or approved by me,
in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein derived from
the Cusi PEA or the Bolivar PEA, or within my knowledge as a result of the services I performed in connection with the Cusi PEA or the Bolivar PEA.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Giovanny J. Ortiz
Giovanny J. Ortiz, BSc Geology, FAusIMM
2
Exhibit 23.5
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re:
Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018, incorporated by reference into the Company’s Prospectus
Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and the Annual
Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the “Registration
Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the Annual Information Form
of the Company for the year ended December 31, 2018 (the “ AIF ”), and its incorporation by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit
to and incorporated by reference into the Form 40-F.
I hereby consent to the: (i) inclusion of the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA) for the Yauricocha Mine,
Peru ” dated effective July 31, 2017 (the “ Yauricocha PEA ”), the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA)
for the Cusi Mine, Chihuahua State, Mexico ” dated effective August 31, 2017 (the “ Cusi PEA ”), and the summary section of the report entitled “ NI 43-101
Preliminary Economic Assessment (PEA) for the Bolivar Mine, Mexico ” dated effective October 31, 2017 (the “ Bolivar PEA ”) in the AIF and any amendments
thereto, and the incorporation of this report in the AIF, (ii) incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's
Registration Statement, including the prospectus contained therein, as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments
thereto, into the Prospectus Supplement and (iv) being named in, and the use of the Yauricocha PEA, the Cusi PEA and the Bolivar PEA, or portions thereof
prepared, reviewed and/or approved by me, in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein derived from
the Yauricocha PEA, the Cusi PEA or the Bolivar PEA, or within my knowledge as a result of the services I performed in connection with the Yauricocha PEA, the
Cusi PEA or the Bolivar PEA.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Enrique Rubio
Enrique Rubio, Ph. D.
2
Exhibit 23.6
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re:
Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018, incorporated by reference into the Company’s Prospectus
Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and the Annual
Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the “Registration
Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the Annual Information Form
of the Company for the year ended December 31, 2018 (the “ AIF ”), and its incorporation by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit
to and incorporated by reference into the Form 40-F.
I hereby consent to the: (i) inclusion of the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA) for the Yauricocha Mine,
Peru ” dated effective July 31, 2017 (the “ Yauricocha PEA ”), the summary section of the report entitled “ NI 43-101 Preliminary Economic Assessment (PEA)
for the Cusi Mine, Chihuahua State, Mexico ” dated effective August 31, 2017 (the “ Cusi PEA ”), and the summary section of the report entitled “ NI 43-101
Preliminary Economic Assessment (PEA) for the Bolivar Mine, Mexico ” dated effective October 31, 2017 (the “ Bolivar PEA ”) in the AIF and any amendments
thereto, and the incorporation of this report in the AIF, (ii) incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's
Registration Statement, including the prospectus contained therein, as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments
thereto, into the Prospectus Supplement and (iv) being named in, and the use of the Yauricocha PEA, the Cusi PEA and the Bolivar PEA, or portions thereof
prepared, reviewed and/or approved by me, in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein derived from
the Yauricocha PEA, the Cusi PEA or the Bolivar PEA, or within my knowledge as a result of the services I performed in connection with the Yauricocha PEA, the
Cusi PEA or the Bolivar PEA.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Augusto Chung
Augusto Chung, FAusIMM CP
2
Exhibit 23.7
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re: Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018 (the “AIF”), incorporated by reference into the Company’s
Prospectus Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and
the Annual Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the
“Registration Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the AIF and its incorporation
by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit to and incorporated by reference into the Form 40-F.
I hereby consent to: (i) the inclusion of the information under the heading "Updated Mineral Resource and Mineral Reserve Information," consisting of the mineral
resource and reserve estimates as of December 31, 2018 for the Yauricocha Mine (the “ Yauricocha Mineral Resource and Reserve Estimate ”), the mineral
resource and reserve estimates as of December 31, 2018 for the Bolivar Mine (the “ Bolivar Mineral Resource and Reserve Estimate ”), and the mineral
resource estimate as of December 31, 2018 for the Cusi Mine (the “ Cusi Mineral Resource Estimate ” and, together with the Yauricocha Mineral Resource and
Reserve Estimate and the Bolivar Mineral Resource and Reserve Estimate, the “ Updated Mineral Estimates ”), in the AIF and any amendments thereto, and the
incorporation of such estimates in the AIF, (ii) incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's Registration
Statement, including the prospectus contained therein, as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments thereto, into
the Prospectus Supplement and (iv) being named in, and the use of the Updated Mineral Estimates or portions thereof prepared, reviewed and/or approved by me,
in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein that are
derived from the Updated Mineral Estimates or within my knowledge as a result of the services I performed in connection with the Updated Mineral Estimates.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Gordon Babcock
Gordon Babcock, P. Eng.
2
Exhibit 23.8
VIA SEDAR / EDGAR
Ontario Securities Commission, as Principal Regulator
British Columbia Securities Commission
Alberta Securities Commission
Autorité des marchés financiers
United States Securities and Exchange Commission
Dear Sirs/Mesdames:
Re:
Sierra Metals Inc. (the “Company”)
Annual Information Form for the Company’s fiscal year ended December 31, 2018 (the “AIF”), incorporated by reference into the Company’s
Prospectus Supplement dated October 10, 2017 to the Short Form Base Shelf Prospectus dated June 29, 2017 (the “Prospectus Supplement”) and
the Annual Report incorporated by reference into the Company’s registration statement on Form F-10 (Registration No. 333-218076) (the
“Registration Statement”)
Consent of Qualified Person
Reference is made to the Annual Report on Form 40-F for the fiscal year ended December 31, 2018 of the Company (the “ Form 40-F ”), filed with the United
States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Reference is also made to the AIF and its incorporation
by reference: (i) into the Prospectus Supplement, and (ii) as an exhibit to and incorporated by reference into the Form 40-F.
I hereby consent to: (i) the inclusion of the information under the heading "Updated Mineral Resource and Mineral Reserve Information," consisting of the mineral
resource and reserve estimates as of December 31, 2018 for the Yauricocha Mine (the “ Yauricocha Mineral Resource and Reserve Estimate ”), the mineral
resource and reserve estimates as of December 31, 2018 for the Bolivar Mine (the “ Bolivar Mineral Resource and Reserve Estimate ”), and the mineral
resource estimate as of December 31, 2018 for the Cusi Mine (the “ Cusi Mineral Resource Estimate ” and, together with the Yauricocha Mineral Resource and
Reserve Estimate and the Bolivar Mineral Resource and Reserve Estimate, the “ Updated Mineral Estimates ”), in the AIF and any amendments thereto, and the
incorporation of such estimates in the AIF, (ii) incorporation of the AIF in the Form 40-F and any amendments thereto, and in the Company's Registration
Statement, including the prospectus contained therein, as amended or supplemented, (iii) incorporation by reference of the AIF and any amendments thereto, into
the Prospectus Supplement and (iv) being named in, and the use of the Updated Mineral Estimates or portions thereof prepared, reviewed and/or approved by me,
in the AIF and Form 40-F.
I also hereby confirm that I have read the AIF and have no reason to believe that there are any misrepresentations in the information contained therein that are
derived from the Updated Mineral Estimates or within my knowledge as a result of the services I performed in connection with the Updated Mineral Estimates.
[ Signature page follows ]
1
Dated: March 28, 2019
/s/ Americo Zuzunaga
Americo Zuzunaga, MAusIMM CP
2
CERTIFICATION
PURSUANT TO SECTION 302
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Igor Gonzalez, certify that:
I have reviewed this annual report on Form 40-F of Sierra Metals Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and
have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: March 28, 2019
/s/ Igor Gonzalez
Name: Igor Gonzalez
Title:
President and Chief Executive Officer
CERTIFICATION
PURSUANT TO SECTION 302
THE SARBANES-OXLEY ACT OF 2002
I, Ed Guimaraes, certify that:
I have reviewed this annual report on Form 40-F of Sierra Metals Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and
have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: March 28, 2019
/s/ Ed Guimaraes
Name: Ed Guimaraes
Title: Chief Financial Officer
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act 2002
Exhibit 31.2
In connection with the Annual Report on Form 40-F of Sierra Metals Inc. (the “Company”) for the yearly period ended December 31, 2018, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Igor Gonzalez, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Igor Gonzalez
Name: Igor Gonzalez
Title:
Date: March 28, 2019
President and Chief Executive Officer
The foregoing certificate is solely for the purposes of compliance with the aforementioned Section 906 of the Sarbanes-Oxley Act 2002 and is not
intended to be used or relied upon for any other purposes.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished
to the SEC or its staff upon request.
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act 2002
In connection with the Annual Report on Form 40-F of Sierra Metals Inc. (the “Company”) for the yearly period ended December 31, 2018, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Ed Guimaraes, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Ed Guimaraes
Name: Ed Guimaraes
Title: Chief Financial Officer
Date: March 28, 2019
The foregoing certificate is solely for the purposes of compliance with the aforementioned Section 906 of the Sarbanes-Oxley Act 2002 and is not
intended to be used or relied upon for any other purposes.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished
to the SEC or its staff upon request.
Exhibit 99.1
SIERRA METALS INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED DECEMBER 31, 2018
DATED: MARCH 28, 2019
Corporate
Office:
161
Bay
Street,
Suite
4260
Toronto,
Ontario
M5J
2S1
TABLE OF CONTENTS
Preliminary Notes
Corporate Structure
General Development of the Business
Description of the Business
Material Mineral Properties
Updated Mineral Resource and Mineral Reserve Information
Risk Factors
Dividends and Distributions
Description of Capital Structure
Market for Securities
Escrowed Securities
Directors and Officers
Audit Committee Information
Legal Proceedings and Regulatory Actions
Interest of Management and Others in Material Transactions
Transfer Agent and Registrar
Material Contracts
Interest of Experts
Additional Information
1
4
5
11
18
32
35
46
46
46
47
47
51
53
54
54
54
54
55
ANNUAL INFORMATION FORM DATED MARCH 28, 2019
SIERRA METALS INC. (“Sierra”, “Sierra Metals” or the “Company”)
PRELIMINARY NOTES
Effective Date of Information
The date of this Annual Information Form (the “ AIF ”) is March 28, 2019. Except as otherwise indicated, the information contained herein is as at December 31,
2018.
Documents Incorporated by Reference
The information provided in this AIF is supplemented by disclosure contained in the documents listed below which are incorporated by reference into this AIF.
These documents must be read together with the AIF in order to provide full, true and plain disclosure of all material facts relating to Sierra Metals. The documents
listed below are not contained within or attached to this document. The documents may be accessed on SEDAR at www.sedar.com under the Company’s profile.
Document
NI 43-101 Preliminary Economic
Assessment (PEA) for the Yauricocha Mine,
Peru (the “ Yauricocha Technical Report ”).
NI 43-101 Preliminary Economic Assessment (PEA) for the
Bolivar Mine, Mexico (the “ Bolivar Technical Report ”)
NI 43-101 Preliminary Economic
Assessment (PEA) for the Cusi Mine, Chihuahua State, Mexico
(the “ Cusi Technical Report ”)
Cautionary Statement – Forward Looking Information
Effective Date/
Period Ended
Date Filed on
SEDAR website
Document
Category on the
SEDAR Website
July 31, 2017
August 10, 2018
Technical Report
October 31, 2017
August 23, 2018
Technical Report
August 31, 2017
August 2, 2018
Technical Report
This AIF contains “forward looking information” within the meaning of Canadian securities laws related to the Company and its operations, and in particular, the
anticipated developments in the Company’s operations in future periods, the Company’s planned exploration activities, the adequacy of the Company’s financial
resources and other events or conditions that may occur in the future. Statements concerning mineral reserve and resource estimates may also be considered to
constitute forward-looking statements to the extent that they involve estimates of the mineralization that will be encountered if and when the properties are
developed or further developed. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet
determinable and assumptions of management.
These forward-looking statements include, but are not limited to: future production of silver, gold, lead, copper and zinc (collectively, the “metals”); future cash
costs per ounce or pound of the metals; the price of the metals; the effects of domestic and foreign laws, regulations and government policies and actions affecting
the Company’s operations or potential future operations; future successful development of the Yauricocha mine in Yauyos Province, Peru (the “ Yauricocha Mine
”), the Bolivar mine in Chihuahua, Mexico (the “ Bolivar Mine ”) and the Cusihuiriachic property in Chihuahua, Mexico (the “ Cusi Mine ”) and other
exploration and development projects; the sufficiency of the Company’s current working capital, anticipated operating cash flow or the Company’s ability to raise
necessary funds; estimated production rates for the metals produced by the Company; timing of production; the estimated cost of sustaining capital; ongoing or
future development plans and capital replacement, improvement or remediation programs; the estimates of expected or anticipated economic returns from the
Company’s mining projects; future sales of the metals, concentrates or other future products produced by the Company; and the Company’s plans and expectations
for its properties and operations.
Forward-looking information is subject to a variety of risks and uncertainties, which could cause actual events or results to differ from those reflected in the
forward-looking information, including, without limitation, risks inherent in the mining industry including environmental hazards, industrial accidents, unusual or
unexpected geological formations, floods, labour disruptions, explosions, cave-ins, weather conditions and criminal activity; commodity price fluctuations; higher
operating and/or capital costs; lack of available infrastructure; the possibility that future exploration, development or mining results will not be consistent with the
Company’s expectations; risks associated with the estimation of mineral resources and the geology, grade and continuity of mineral deposits and the inability to
replace reserves; fluctuations in the price of commodities used in the Company’s operations; risks related to foreign operations; changes in laws or policies, foreign
taxation, delays or the inability to obtain necessary governmental permits; risks relating to outstanding borrowings; issues regarding title to the Company’s
properties; risks related to environmental regulation; litigation risks; risks related to uninsured hazards; the impact of competition; volatility in the price of the
Company’s securities; global financial risks; inability to attract or retain qualified employees; potential conflicts of interest; risks related to a controlling group of
shareholders; dependence on third parties; differences in U.S. and Canadian reporting of mineral reserves and resources; claims under U.S. securities laws;
potential dilutive transactions; foreign currency risks; risks related to business cycles; liquidity risks; reliance on internal control systems; and credit risks.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or
performance (often, but not always, using words or phrases such as “expects”, “anticipates”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”,
“goals”, “objectives”, “potential” or variations thereof, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur
or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking information.
Forward-looking information is subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ
from those expressed or implied by the forward-looking information, including, without limitation: uncertainty of production and cost estimates for the Yauricocha
Mine, the Bolivar Mine and the Cusi Mine; uncertainty of production at the Company’s exploration and development properties; risks and uncertainties associated
with developing and exploring new mines including start-up delays; risks and hazards associated with the business of mineral exploration, development and mining
(including operating in foreign jurisdictions, environmental hazards, industrial accidents, unusual or unexpected geological or structure formations, pressures,
cave-ins and flooding); risks and uncertainties relating to the interpretation of drill results and the geology, grade and continuity of the Company’s mineral
deposits; risks related to the Company’s ability to obtain adequate financing for the Company’s planned development activities and to complete further exploration
programs; fluctuations in spot and forward markets for the metals and certain other commodities; risks related to general economic conditions, including recent
market and world events and conditions; inadequate insurance, or inability to obtain insurance, to cover these risks and hazards; relationships with and claims by
local communities and indigenous populations; diminishing quantities or grades of mineral reserves as properties are mined; challenges to, or difficulty
maintaining, the Company’s title to properties and continued ownership thereof; risks related to the Company’s covenants with respect to the Corporate Facility (as
hereinafter defined); changes in national and local legislation, taxation, controls or regulations and political or economic developments or changes in Canada,
Mexico, Peru or other countries where they may carry on business; risks related to the delay in obtaining or failure to obtain required permits, or non-compliance
with permits the Company has obtained; increased costs and restrictions on operations due to compliance with environmental laws and regulations; regulations and
pending legislation governing issues involving climate change, as well as the physical impacts of climate change; risks related to reclamation activities on the
Company’s properties; uncertainties related to title to the Company’s mineral properties and the surface rights thereon, including the Company’s ability to acquire,
or economically acquire, the surface rights to certain of the Company’s exploration and development projects; the Company’s ability to successfully acquire
additional commercially mineable mineral rights; risks related to currency fluctuations (such as the Canadian dollar, the United States dollar, the Peruvian sol and
the Mexican peso); increased costs affecting the mining industry, including occasional high rates of inflation; increased competition in the mining industry for
properties, qualified personnel and management; risks related to some of the Company’s directors’ and officers’ involvement with other natural resource
companies; the Company’s ability to attract and retain qualified personnel and management to grow the Company’s business; risks related to estimates of deferred
tax assets and liabilities; risks related to claims and legal proceedings and the Company’s ability to maintain adequate internal control over financial reporting.
- 2 -
This list is not exhaustive of the factors that may affect any of the Company’s forward-looking information. Forward looking information includes statements
about the future and are inherently uncertain, and the Company’s actual achievements or other future events or conditions may differ materially from those
reflected in the forward-looking information due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in this AIF
under the heading “Risk Factors”. The Company’s statements containing forward-looking information are based on the beliefs, expectations and opinions of
management on the date the statements are made, and the Company does not assume any obligation to update forward-looking information if circumstances or
management’s beliefs, expectations or opinions should change, other than as required by applicable law. For the reasons set forth above, one should not place
undue reliance on forward-looking information.
Classification of Mineral Reserves and Resources
In this AIF, the definitions of proven and probable mineral reserves, and measured, indicated and inferred mineral resources are those used by the Canadian
provincial securities regulatory authorities and conform to the definitions utilized by the Canadian Institute of Mining, Metallurgy and Petroleum, as the CIM
Definition Standards on Mineral Resources and Mineral Reserves adopted by the CIM Council, as amended.
Cautionary Note to U.S. Investors concerning Estimates of Mineral Reserves and Measured, Indicated and Inferred Mineral Resources
This AIF has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States
securities laws. The terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with
the Canadian Securities Administrators’ National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“ NI 43-101 ”) and the Canadian Institute of
Mining, Metallurgy and Petroleum as the CIM Definition Standards on Mineral Resources and Mineral Reserves adopted by the CIM Council, as amended. These
definitions differ from the definitions in SEC Industry Guide 7 under the United States Securities Act of 1933, as amended. Under SEC Industry Guide 7 standards,
a “final” or “bankable” feasibility study is required to report reserves, the three-year historical average price is used in any reserve or cash flow analysis to
designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.
- 3 -
In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required
to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and
registration statements filed with the United States Securities and Exchange Commission (the “ SEC ”). Investors are cautioned not to assume that any part or all of
mineral deposits in these categories will ever be converted into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and
great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a
higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.
Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of “contained
ounces” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not
constitute “reserves” by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures.
Accordingly, information contained in this AIF contain descriptions of our mineral deposits that may not be comparable to similar information made public by U.S.
companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.
Currency Information
All currency references in this AIF are in United States dollars unless otherwise indicated. References to “Canadian dollars” or the use of the symbol “C$” refers to
Canadian dollars.
CORPORATE STRUCTURE
Name, Address and Incorporation
The Company was incorporated under the Canada Business Corporations Act (the “ CBCA ”) on April 11, 1996 under the corporate name “Line Islands
Exploration Inc.”. The articles were amended by a certificate of amendment dated December 9, 1999 changing the corporate name to “Dia Bras Exploration Inc.”
The Company changed its name to “Sierra Metals Inc.” by a certificate of amendment dated December 5, 2012. On June 19, 2014, the Company’s articles were
further amended to provide that meetings of shareholders may be held in (i) Canada, (ii) the United States of America or (iii) any city, municipality or other
country in which the Company is doing business.
The registered principal office of Sierra Metals is located at 161 Bay Street, Suite 4260, Toronto, Ontario, Canada M5J 2S1. The head office of the Company’s
Mexican subsidiaries is located at Calle Blas Cano de los Rios No 500, Colonia San Felipe, C.P 31203, Chihuahua, Chihuahua, Mexico. The head office of the
Company’s Peruvian subsidiaries is located at Av. Pedro de Osma, 450 Barranco, Lima, Peru.
- 4 -
Intercorporate Relationships
The Company carries on a significant portion of its business through a number of direct and indirect subsidiaries, as follows:
GENERAL DEVELOPMENT OF THE BUSINESS
Three-Year History and Recent Developments
2016
Peru
On January 28, 2016, the Company announced the discovery of a new high-grade sulfide zone, referred to as the “Esperanza” zone, located 400 meters north of the
Central Mine area, along strike from current mining activities. The Esperanza zone returned the thickest sulfide intercepts in the 60-year mining history at
Yauricocha.
The Company announced the results of its continuing drill program at Esperanza which revealed that the zone is open on strike to the North, and at depth, and
comes as part of an ongoing drill program at this high priority target at the Yauricocha Mine.
- 5 -
On August 4, 2016, the Company reported that exploration development and test stope programs from the Esperanza zone had provided material which began to be
processed at the Chumpe plant.
Recent exploration development and test stope programs from the Esperanza zone provided 54,000 tonnes of material in 2016 which was processed at the Chumpe
plant, located in the Lima District, Peru.
On August 11, 2016, the Company announced the completion of an updated Mineral Reserve and Resource Estimate for the Yauricocha Mine which included a
maiden Reserve and Resource Estimate for the recently discovered Esperanza Zone. See “Material Mineral Properties - Yauricocha Mine, Peru ”.
On November 17, 2016, the Company announced the discovery of a new high-grade sulfide zone referred to as the “Cuye – Mascota” zone, located 200 meters
north of the central mine area along strike and adjacent to its current mining activities. The discovery resulted from ongoing diamond drill brownfield exploration
programs testing priority targets at the Yauricocha Mine.
The Company successfully transitioned from the previously operating surface hoist to a new Hepburn double drum 1100 HP production hoist currently installed on
the 720 level, where it will service the Mascota Shaft and increase skipping capacity by 30,000 MT per month.
Mexico
Mine development at Bolívar during Q4 2016 totaled 1,112 m. Most of these meters (746) were developed to prepare stopes for mine production. The remainder of
the meters (366) were related to the deepening of ramps and developing service ramps to be used for ventilation and pumping.
During Q4 2016, at the Cusi property, mine development of the mineralized structures at Promontorio and Santa Eduwiges Mine totaled 1,304 meters, and 4,750
meters of infill drilling was carried out inside the Mine.
On February 12, 2016, the Company reported a positive outcome in the legal dispute between Polo & Ron Minerals and Dia Bras Exploration Inc. (the Company’s
previous name) and Dia Bras Mexicana, a subsidiary of the Company that holds its Bolivar and Cusi properties in Mexico. The Second Federal Collegiate Court on
Civil and Labor Matters of the Seventeenth circuit in the State of Chihuahua (the “ Federal Court ”) issued a new judgment that the Eighth Civil Court of the
Judicial District of Morelos in Chihuahua and the Fifth Civil Hall of the Superior Court of Justice of the State of Chihuahua (the “ State Courts ”) lacked
jurisdiction to rule on issues concerning mining title and that no previous rulings by the State Courts against the Company would stand. They ordered the
cancellation of the previous adverse resolution by the state Court. The Company continues to believe that the original claim is without merit and will continue to
vigorously defend this claim.
- 6 -
2017
Peru
On May 1, 2017, the Company announced the discovery of a new high-grade oxide zone, referred to as the Esperanza North zone, which is located between the
Esperanza zone and Cachi-Cachi Mine at the Yauricocha Mine. The Company also announced drilling results demonstrating the extension of the high-grade sulfide
zone, referred to as the Cuye-Mascota zone, discovered in November 2016;
On October 26, 2017, the Company provided an updated Mineral Reserve Estimate for the Yauricocha Mine showing estimated Mineral Reserves of 8,917,000
tonnes averaging 48.3 g/t silver, 1.2% copper, 0.8% lead, 2.4% zinc and 0.5 g/t gold representing a 134% increase over the previous reserve estimate.
On December 19, 2017, the Company announced drilling results demonstrating new limestone replacement mineralization at the Cuye Zone extension located
within the Central Mine at Yauricocha.
Mexico
On February 27, 2017, the Company announced the discovery of new high-grade silver intercepts occurring in the Santa Rosa de Lima complex located within the
current Cusi Mine operational area. The discovery came as part of a reinterpretation of the Hydrothermal model and a drilling campaign consisting of 15,000
meters which began in December 2016.
On March 6, 2017, the Company announced the results of the initial drill program on the Bolivar property in Chihuahua State, Mexico and continues to define high
grade silver-gold and polymetallic mineralization within the La Sidra vein. The mineralized zone currently extends to over 500 meters in length and to 300 meters
in depth and is still open along strike and down dip.
Drilling programs also continued at Bolivar West with future plans to drill Bolivar North West (skarn ore deposit area) to define high grade copper with coincident
strong chargeability and within resistivity zones detected during a recent 400 Hectare Titan 24 Induced Polarization (IP) survey conducted by Quantec Geosciences
of Toronto, Ontario.
On April 19, 2017, the Company filed an updated NI 43-101 compliant reserve and resource estimate on the Bolivar Mine in Mexico. The report provided support
for total indicated mineral resources of 9,335,000 tonnes averaging 18.1 g/t silver, 0.90% copper and 0.30 g/t gold, 1.23% CuEq and total inferred mineral
resources of 9,055,000 tonnes averaging 17.9 g/t silver, 0.86% copper and 0.33 g/t gold, 1.20% CuEq, and total probable mineral reserves of 4,327,000 tonnes
averaging 17.5 g/t silver, 0.85% copper and 0.31g/t gold, 1.18% Cu Eq.
On September 5, 2017, the Company announced assay results from a definition drilling program at the Bolivar West zone, which is adjacent to the current
operations at the Bolivar Mine. The exploration programs have identified skarn ore deposits in the form of mantos in the area extending for eight kilometers. The
brownfield drilling program was designed with a target of increasing the grades being mined at the Bolivar Mine and defining further mineral resources.
On October 4, 2017, the Company announced the initial results of a drilling program designed to test the anomalies of the Titan 24 Geophysical Survey on the
Bolivar Property. The Titan 24 survey was completed to follow up on geophysical, geological and geochemical anomalies identified. The Titan 24 Geophysical
survey was carried out to assist in mapping the extent of the mantos and structures containing copper and copper/zinc skarn mineralization for drill targeting in the
immediate vicinity of the mine.
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On December 29, 2017 the Company provided an updated Mineral Resource Estimate for the Cusi Mine. The updated Mineral Resource Estimate was the result of
drilling programs completed between January 2014 and August 2017. The updated Mineral Resource Estimate disclosed the following:
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·
Total Measured and Indicated Resources increased 129% to 4,557,000 tonnes from 1,990,000 tonnes previously reported; and Total Inferred Resources
increased 36% to 1,633,000 tonnes from 1,200,000 tonnes previously reported;
Total Measured Mineral Resources of 362,000 tonnes averaging 225g/t silver, 0.55% lead, 0.68% zinc, 0.13 g/t gold for a total 268 g/t Ag Eq;
Total Indicated Mineral Resources of 4,195,000 tonnes averaging 217 g/t silver, 0.64% lead, 0.66% zinc, 0.21 g/t gold and 267 g/t AgEq; and
Total Inferred Mineral Resources of 1,633,000 tonnes averaging 158 g/t silver, 0.54% lead, 0.84% zinc, 0.16 g/t gold and 207 g/t AgEq.
Financing and Corporate Activities
Spin-Off of Cautivo Mining Inc.
On August 8, 2017, the Company completed the distribution of all of the common shares (“ Cautivo Shares ”) of its wholly-owned subsidiary, Cautivo Mining
Inc. (“ Cautivo ”) and listing of the Cautivo Shares on the Canadian Securities Exchange. The Cautivo Shares were distributed to holders of the Company’s
common shares of record as of 4:59 p.m. (Toronto time) on July 26, 2017 as a return of capital, reducing the Company’s shareholdings in Cautivo from 100% to
nil.
Management Changes
On March 29, 2017, the Company announced that Mark Brennan tendered his resignation as President and Chief Executive Officer of the Company and on April 6,
2017, the Company announced the appointment of Mr. Igor Gonzales as President and Chief Executive Officer, effective May 1, 2017.
U.S. Listing and ATM Offering
On May 18, 2017, the Company announced that it filed a preliminary short form base shelf prospectus with the securities regulatory authorities in each of the
provinces of British Columbia, Alberta and Ontario, and a corresponding registration statement on Form F-10 (Registration No. 333-218076, the “ Registration
Statement ”) with the SEC in accordance with the Multijurisdictional Disclosure System established between Canada and the United States.
The Registration Statement was declared effective by the SEC on July 7, 2017. Also on that date, the Company’s common shares were approved for listing on the
NYSE American Stock Exchange (the “ NYSE American ”). The final shelf prospectus (the “ Shelf Prospectus ”) provides for offerings of up to C$75 million of
common shares, warrants, units and subscription receipts or a combination thereof of the Company from time to time, separately or together, in amounts, at prices
and on terms to be determined based on market conditions at the time of the offering and as set out in a prospectus supplement.
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On October 10, 2017, the Company announced that it entered into an Open Market Sale Agreement SM (the “ Sales Agreement”) with Jefferies LLC, H.C.
Wainwright & Co., LLC, Scotia Capital (USA) Inc. and Noble Capital Markets, Inc. (collectively, the “ Agents ”), pursuant to which the Company may, at its
discretion and from time to time during the term of the Sales Agreement, sell, through the Agents, acting as agent and/or principal, such number of Common
Shares as would result in aggregate gross proceeds to the Company of up to US$55 million. Sales of Common Shares through the Agents, acting as agent, will be
made through “at the market” issuances on the NYSE American at the market price prevailing at the time of each sale, and, as a result, sale prices may vary. On
October 10, 2017, the Company also filed a prospectus supplement to the Shelf Prospectus for its at the market offering pursuant to the Sales Agreement. No
Common Shares under such offering will be offered or sold in Canada.
As at the date of this AIF, the Company has not issued and sold any Common Shares pursuant to the Sales Agreement.
2018
Peru
The Company reported the results of a Preliminary Economic Assessment (“ PEA ”) for the Yauricocha Mine (press release dated June 27, 2018) yielding a 486%
return on investment and after-tax NPV of US$393 million at an 8% discount rate. The PEA was compiled under NI 43-101 standards by Mining Plus Peru SAC.
On October 1, 2018, the Company confirmed the discovery of a new style of mineralization (copper - molybdenum porphyry). The results were from testing of the
geophysical anomalies, in the quartz monzonite intrusive, in the eastern part of the mineralized area. This area is known as the Central Mine which is located
between the Cuye and Esperanza zones. Prior evidence of copper-molybdenum porphyry mineralization had been observed on surface within the monzonite
intrusive and had previously been sampled by Rio Tinto Zinc. Subsequently, drill core was sampled at 10-meter intervals over the entire hole length and the
Company obtained 122 samples. A hole was drilled from the Klepetko Tunnel to test the priority anomaly located in the monzonite intrusive as this zone had high
conductivity within the Intrusive. A copper-molybdenum mineralized porphyry was discovered.
The Company reported that its subsidiary Sociedad Minera Corona S.A. received approval for its Environmental Impact Assessment Study for the expansion of its
tailings deposition facility at the Yauricocha Mine.
Mexico
On May 22, 2018, the Company provided an update to its Mineral Reserve and Resource Estimate for the Bolivar Mine. Total Probable Mineral Reserves for
Bolivar are 7,925,000 tonnes averaging 19 g/t silver, 0.86% copper and 0.25 g/t gold, 1.14% CuEq** representing an 83% increase to the previous Probable
Mineral Reserve Estimate. Total Indicated Mineral Resources for Bolivar are 13,267,000 tonnes averaging 22.5 g/t silver, 1.04% copper and 0.29 g/t gold, 1.37%
CuEq** representing a 42% increase to the previous Indicated Mineral Resource estimate. Total Inferred Mineral Resources for Bolivar are 8,012,000 tonnes
averaging 22 g/t silver, 0.96% copper and 0.30 g/t gold, 1.35% CuEq** representing an 11.5% decrease to the previous Inferred Mineral Resource Estimate.
The Company reported the results of a PEA for the Bolivar Mine (press release dated July 9, 2018) yielding a 550% return on investment and after-tax net present
value of US$214 million at an 8% discount rate. The PEA was compiled under NI 43-101 standards by Mining Plus Peru SAC, and was filed on the SEDAR
website on August 23, 2018.
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On June 6, 2018, the Company announced results of an infill drilling program evaluating the continuity and characteristics of geophysical anomalies that were
previously tested as part of a recent Titan 24 Geophysical Survey and deemed high value targets at the Bolivar Property. Drilling has identified and defined a new
zone named Cieneguita which is an extension of the Bolivar Northwest structure and is situated in close proximity to the Bolivar Northwest zone with similar
characteristics. The Company has completed a successful infill drilling program on those previously tested areas, which resulted in a new structure being defined
which demonstrates the continuity of the previously defined wide high-grade copper structures. The potential for further extensions to the North of the Cieneguita
zone remain open and there is strong evidence of further high priority geological and geophysical anomalies.
The Company reported the results of a PEA for the Cusi Mine (press release dated June 18, 2018) yielding a 75% internal rate of return and after-tax NPV of
US$92 million at an 8% discount rate. The PEA was compiled under NI 43-101 standards by Mining Plus Peru SAC.
On June 29, 2018, the Company announced that the development program at the Cusi Mine has confirmed a wide, high-grade silver stockwork zone located within
the Santa Rosa de Lima vein complex. This mineralized zone extends to over 100 meters in length, 40 meters in width and 70 meters in height. The increased
potential resources defined will allow the Company to utilize the highly productive exploitation method of sublevel caving and help achieve its economic
objectives at the Cusi Mine.
Financing and Corporate Activities
Closing of New Senior Secured US$100 Million Corporate Credit Facility
On March 11, 2019, the Company entered into a new six-year senior secured corporate credit facility (“ Corporate Facility ”) with Banco de Credito del Peru that
provides funding of up to US$100 million effective March 8, 2019. The Corporate Facility provides the Company with additional liquidity and will provide the
financial flexibility to fund future capital projects in Mexico as well as corporate working capital requirements. The Company will also use the proceeds of the
Corporate Facility to repay existing debt balances in the near term.
The most significant terms of the Corporate Facility are as follows:
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Term: 6-year term maturing March 2025
Principal Repayment Grace Period: 2 years
Principal Repayment Period: 4 years
Interest Rate: 3.15% + LIBOR 3M
The Corporate Facility is subject to customary covenants, including consolidated net leverage and interest coverage ratios and customary events of default.
Initiation of Normal Course Issuer Bid with 1.5 Million Share Target
On December 11, 2018, the Company approved a share repurchase program in the form of a normal course issuer bid (the “ NCIB ”) in the open market through
the facilities of the Toronto Stock Exchange (the “ TSX ”) and other Canadian marketplaces / alternative trading systems. Pursuant to the NCIB, the Company
proposes to repurchase for cancellation up to 1,500,000 Common Shares, which represented approximately 0.92% of the issued and outstanding Common Shares
as at December 11, 2018.
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In connection with its implementation of the NCIB, Sierra Metals obtained TSX approval of its notice of intention to make a normal course issuer bid (the “ Notice
”). The Notice provided that the Company may purchase up to 1,500,000 Common Shares through the facilities of the TSX and other Canadian marketplaces /
alternative trading systems during the 12-month period commencing on December 17, 2018 and ending on or before December 16, 2019. Any Common Share
purchases made pursuant to the NCIB will be at the prevailing market price at the time of the transaction, purchased in accordance with the policies of the TSX and
conducted by CIBC Capital Markets. In accordance with TSX rules, any daily purchases made under the NCIB are limited to a maximum of 4,214 Common
Shares, which represents 25% of the average daily trading volume of 16,858 Common Shares on the TSX for the six months ended November 30, 2018. However,
the Company may make one block purchase per calendar week which exceeds the daily repurchase restriction, up to and including the maximum annual aggregate
limit of 1,500,000 Common Shares. Once the block purchase exception has been relied on, the Company may not make any further purchases under the NCIB for
the remainder of that calendar day. As of December 31, 2018, the Company had not purchased any Common Shares under the NCIB; however, in January 2019,
the Company purchased a total of 40,112 Common Shares under the NCIB.
Repayment of FIFOMI Loan in Mexico
During February 2019, the Company repaid the remaining US$1,657 owed on Dia Bras Mexicana’s loan from FIFOMI. This repayment prior to the loan’s maturity
date did not result in any financial penalties and was within the terms of the agreement.
DESCRIPTION OF THE BUSINESS
General
Summary
Sierra Metals is a Canadian and Peruvian listed mining company focused on the production, exploration and development of precious and base metals in Peru and
Mexico. The Company’s strategic focus is to continue being a profitable, low-cost, mid-tier precious and base metals producer. The Company plans to continue
growing its production base through exploration investments within its properties. The Company has high returns on invested capital and strong cash flow
generation as key priorities.
The Company has mining properties at several stages of development and manages its business on the basis of the geographical location of its mining projects. The
Peruvian operation (Peru) includes the Yauricocha Mine and its near-mine concessions. The Mexican Operation (Mexico) includes the Bolivar and Cusi mines
both located in the Chihuahua State, Mexico, their near-mine concessions and the Mexican exploration and early stage properties.
Sierra Metals is fully committed to disciplined and responsible growth and has Safety and Health and Environmental Policies in place to support this commitment.
The Company’s corporate responsibility objectives are to prevent pollution, minimize the impact operations may cause to the environment and practice progressive
rehabilitation of areas impacted by its activities. The Company aims to operate in a socially responsible and sustainable manner, and to follow international
guidelines in Mexico and Peru. The Company plans to focus on social programs with the local communities in Mexico and Peru on an ongoing basis.
The Company produces lead, copper and zinc concentrates from its polymetallic circuit; copper and lead oxide concentrates from the lead oxide circuit at its
Yauricocha Mine in Peru; copper concentrates at its Bolivar Mine in Mexico; and a silver-lead concentrate at its Cusi Mine in Mexico. These concentrates are sold
to international metal traders who in turn sell and deliver these products to different clients around the world.
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The breakdown of revenue from metals payable by product for 2016, 2017 and 2018 is as follows:
By Revenue (%)
Silver
Copper
Lead
Zinc
Gold
Peru – Yauricocha Mine
2016
2017
2018
27%
28%
18%
22%
5%
15%
31%
14%
38%
2%
16%
37%
11%
35%
1%
Mining at Yauricocha is completed by various extraction methods, principally sublevel caving and overhand cut and fill stoping. Ore is transported via
underground rail to the on-site Chumpe mill for processing. The Chumpe mill processes ores produced by Yauricocha using crushing, grinding and flotation. Three
types of ore are processed: polymetallic, copper and lead oxide. These ore types are processed in two separate milling circuits; the polymetallic circuit treats
polymetallic and copper ores and the lead oxide circuit treats the lead oxide ores.
Mexico – Bolivar Mine
At the Bolivar Mine, mining is done by room-and-pillar and sublevel stoping methods. Extracted ore is trucked 5 kilometers to the Company’s Piedras Verdes mill,
which is a conventional flotation processing plant.
Mexico – Cusi Mine
Mining at the Company’s Cusi Mine is completed by cut and fill method. Mined development rock is trucked 37 km via flat, paved roads to the Company’s
Malpaso mill, which is a conventional flotation processing plant. The plant has two circuits: 1) the Triunfo circuit rated at 500-600 tpd depending on the work
index of the rock being processed; and 2) the Malpaso circuit rated at 250-350 tpd, again depending on the work index.
Exploration Properties
Of the several exploration properties in Mexico held by the Company, two have had work done by the Company and are considered properties of merit: Bacerac
and Batopilas. The others, such as Arechuyvo and Maguarchic, have not had work performed on them because they are considered to be of lower priority for
allocation of resources such as personnel and funds.
Specialized Skill and Knowledge
Most aspects of the Company’s business require specialized skills and knowledge. Such skills and knowledge include the areas of geology, mining, metallurgy,
engineering, environmental issues, permitting, social issues, and accounting. The Company has adequate employees with experience in these specialized areas to
meet its current needs.
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Competitive Conditions
The mining and exploration industry is competitive in all aspects. The Company competes with other mining companies, many of whom have greater financial
resources, operational experience or technical capabilities than Sierra, in connection with the acquisition of properties producing, or capable of producing, precious
metals. In addition, the Company also competes for the recruitment and retention of qualified employees and consultants.
Changes to Contracts
The Company does not anticipate that its business will be materially affected in the current financial year by the renegotiation or termination of any contracts or
sub-contracts.
Metal Price Volatility
The profitability of the Company’s operations may be significantly affected by changes in the market price of the precious and base metals that it produces. The
economics of producing precious and base metals are affected by many factors, including the cost of operations, variations in the grade of ore mined and the price
of the precious and base metals. Depending on the price of precious and base metals that it produces, the Company may determine that it is impractical to
commence or continue commercial production. The price of precious and base metals fluctuates widely and is affected by numerous industry factors beyond the
Company’s control, such as the demand for precious and base metals, forward selling by producers and central bank sales and purchases of precious and base
metals. The price of gold and silver is also affected by macro-economic factors, such as expectations for inflation, interest rates, the world supply of mineral
commodities, the stability of currency exchange rates and global or regional political and economic situations. Such external economic factors are in turn
influenced by changes in international investment patterns, monetary systems and political systems and developments. The price of precious and base metals has
fluctuated widely in recent years, and future serious price declines could cause commercial production to be uneconomic.
Any significant drop in the price of precious and base metals adversely impacts the Company’s revenues, profitability and cash flows. In addition, sustained low
gold price may:
o
o
o
o
o
reduce production revenues as a result of cutbacks caused by the cessation of mining operations involving deposits or portions of
deposits that have become uneconomic at prevailing prices;
cause the cessation or deferral of new mining projects;
decrease the amount of capital available for exploration activities;
reduce existing reserves by removing ore from reserves that cannot be economically mined at prevailing prices; or
cause the write-off of an asset whose value is impaired by low metal prices.
There can be no assurance that the price of precious and base metals will remain stable or that such prices will be at a level that will prove feasible to begin
development of its properties, or commence or continue commercial production, as applicable.
Environmental Protection
The Company is currently in material compliance with all applicable environmental regulations applicable to its exploration, development, construction and
operating activities. The financial and operational effects of environmental protection requirements on capital expenditures, earnings and expenditures during the
fiscal year ended December 31, 2018 were not material.
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Employees
As at December 31, 2018, the Company and its subsidiaries had 742 employees in Peru, 696 employees in Mexico, and 7 employees in Canada.
Social or Environmental Policies
The Company has built strong relationships with the communities in which it operates and is committed to complying in all material respects with all
environmental laws and regulations applicable to its activities.
Foreign Operations
Doing Business in Peru
Peru is a democratic republic governed by an elected government which is headed by a president who serves for a five-year term.
In Peru, the General Mining Law allows mining companies to obtain clear and secure title to mining concessions. The surface land rights are distinct from the
mining concessions. The government retains ownership of mineral resources, but the titleholder of the concessions retains ownership of extracted mineral
resources. Peruvian law requires that all operators of mines in Peru have an agreement with the owners of the land surface above the mining rights or to establish
an easement upon such surface for mining purposes. Mining concessions allow for both exploration and for exploitation.
Mining rights in Peru can be transferred by their private holders with no restrictions or requirements other than to register the transaction with the Public Mining
Register and the Ministry of Energy and Mines. The only exception to this rule is that foreigners cannot acquire or possess mining concessions within 50
kilometers of the border, unless an exception based on public necessity or national interest is granted by the President of Peru by means of a Supreme Decree.
The sale of mineral products is also unrestricted, so there is no obligation to satisfy the internal market before exporting products. Pursuant to environmental laws
applicable to the mining sector, holders of mining activities are required to file and obtain approval for an Environmental Impact Assessment, which incorporates
technical, environmental and social matters, before being authorized to commence operations.
The Environmental Evaluation and Oversight Agency (“ OEFA ”) monitors environmental compliance. OEFA has the authority to carry out audits and levy fines
on companies if they fail to comply with prescribed environmental standards. The following main permits are generally needed for a project: Start-Up
Authorization; Certificate for the Inexistence of Archaeological Remains (CIRA); Environmental Impact Assessment (EIA); Mine Closure Plan; Beneficiation
Concession; Water Usage Permits and Rights over surface lands.
Companies incorporated in Peru are subject to income tax on their worldwide taxable income, while foreign companies that are located in Peru and non-resident
entities are taxed on income from Peruvian sources only. The current corporate income tax rate is 29.5%.
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In general terms, mining companies in Peru are subject to the general corporate income tax regime. If the taxpayer has elected to sign a Stability Agreement, an
additional 2% premium is applied on the regular corporate income tax rate. The Company has not signed a Stability Agreement. Also, 50% of income tax paid by a
mine to the Central Government is remitted as “Canon” by the Central Government back to the regional and local authorities of the area where the mine is located.
In Peru, the current dividend tax rate of 5% is imposed on distributions of profits to non-residents and domiciled individuals by resident companies and by
branches, permanent establishments and agencies of foreign companies.
As of 2004, holders of mining concessions are required to pay the government a Mining Royalty as consideration for the exploitation of metallic and non-metallic
minerals. Payment of mining royalties shall be completed on a quarterly basis and is calculated based on the greater of either: (a) an amount determined in
accordance with a statutory scale of tax rates based on a company’s operating profit margin and applied to the company’s operating profit; and (b) 1% of the
company’s net sales, in each case during the applicable quarter. The royalty rate applicable to the company’s profit is based on its operating profit margin
according to a statutory scale of rates that range between 1% and 12%. Mining royalty payments are deductible as expenses for income tax purposes in the fiscal
year in which such payments are made.
The Special Mining Tax (“SMT”) is a tax imposed in parallel with the Mining Royalty described above. The SMT is applied on operating margin profit based on a
sliding scale, with progressive marginal rates ranging from 2.0% to 8.4%. The tax liability arises and becomes payable on a quarterly basis. The SMT applies on
the operating margin profit derived from sales of metallic mineral resources, regardless of whether the mineral producer owns or leases the mining concession.
SMT payments are deductible as expenses for income tax purposes in the fiscal year in which such payments are made.
Doing Business in Mexico
Mexico is a federal presidential representative democratic republic, where the President is both head of state and head of government. The current government of
Mexico is guided by the 1917 constitution. The President is the head of the executive branch, the commander-in-chief of the armed forces and also the head of
state. The President of Mexico is elected by an absolute majority of the federal entities. Mexico’s President is elected for six years and cannot be re-elected. The
President is mandated to appoint and dismiss cabinet ministers and nearly all other officials of the executive.
The mining industry in Mexico is controlled by the Secretaría de Economía – Dirección General de Minas which is located and administered from Mexico City. In
Mexico, mining activities include extraction activities independent from petroleum, natural gas and radioactive minerals, and certain non-metallic minerals such as
construction and ornament materials, some of which are not subject to the mining legislation. In addition to the extraction activities, mining, smelting and refining
activities are also considered as part of the mining industry, which are jointly known as mining-metallurgic activities. Mining concessions in Mexico may only be
obtained by Mexican nationals or Mexican companies incorporated under Mexican law (which could be wholly owned by foreign investors). The construction of
processing plants requires further governmental approvals (e.g. local and municipal permits).
In Mexico, surface land rights are distinct from the mining concessions. The holder of a mining concession is granted the exclusive right to explore and develop a
designated area. Mining concessions are granted for 50 years from the date of their registration with the Public Registry of Mining to the concession holder as a
matter of law, if all regulations have been complied with. During the final five years of this period, the concession holder may apply for one additional 50-year
period, which shall be granted provided all other concession terms have been complied with. Mining rights in Mexico can be transferred by their private holders
with no restrictions or requirements other than to register the transaction with the Public Registry of Mining and that the assignee is qualified to hold a concession
(i.e. a Mexican national or a Mexican company incorporated under Mexican law having mining activities as its main corporate purpose). Securities can be imposed
to mining concessions. The instrument formalizing the corresponding security shall be also registered before the Mining Public Registry.
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Concessionaires must perform work each year that begins within ninety days of the concession being granted. Concessionaires must file proof of the work
performed each May. Non-compliance with these requirements is cause for cancellation only after the authority communicates in writing to the concessionaire any
such default, granting the concessionaire a specified time frame in which to remedy the default.
In Mexico, there are no limitations on the total amount of mining concessions or on the amount of land that may be held by an individual or a company. Excessive
accumulation of concessions is regulated indirectly through the duties levied on the property and the production and exploration requirements as outlined below.
Three different fees or royalties applicable to the mining activity in Mexico exist as per the Federal Fees Law (LFD). Such fees are as follows:
o
Special mining fee
This fee shall be calculated at a 7.5% rate over the positive difference resulting from subtracting the deductions allowed in the Mexican Income Tax Law (MITL)
from the income resulting from the revenue of the mining activity.
However, for the purposes of calculating the basis of this fee, the LFD does not allow to take into account several expenses that may be incurred by the mining
taxpayers. Such expenses involve investments not related to mining prospecting and exploration, as well as tax losses not yet amortized and incurred in previous
fiscal years.
Mining concessionaires and assignees shall be exempted from the payment of this fee exclusively for the use, enjoyment, or exploitation of coal gas deposits.
This fee shall be incurred based on the maximum rate of the mining fee set forth in Article 263 of the LFD per concession’s hectare. Usually, this fee is nominal.
o Additional mining fee
This fee shall be calculated at a 0.5% rate over the income resulting from the sale of gold, silver, and platinum, without any deduction.
o
Extraordinary mining fee
Control over Subsidiaries
Corporate Governance
The Company has implemented a system of corporate governance, internal controls over financial reporting, and disclosure controls and procedures that apply at
all levels of the Company and its subsidiaries. These systems are overseen by the Board of Directors of the Company (the “ Board ”) and implemented by the
Company’s senior management. The relevant features of these systems are set forth below.
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The Company’s corporate structure has been designed to ensure that the Company controls, or has a measure of direct oversight over, the operations of its
subsidiaries. The Company, as the ultimate shareholder, has internal policies and systems in place which provide it with visibility into the operations of its
subsidiaries, including its subsidiaries operating in emerging markets, and the Company’s management team is responsible for monitoring the activities of the
subsidiaries.
The Company, directly or indirectly, controls the appointments of all of the directors and senior officers of its subsidiaries. The directors of the Company’s
subsidiaries are ultimately accountable to the Company as the shareholder appointing him or her, and the Board and senior management of the Company. As well,
the annual budget, capital investment and exploration program in respect of the Company’s mineral properties are established by the Company.
Further, signing officers for subsidiary foreign bank accounts are either employees of the Company or employees of the subsidiaries. In accordance with the
Company’s internal policies, all subsidiaries must notify the Company’s corporate treasury department of any changes in their local bank accounts including
requests for changes to authority over the subsidiaries’ foreign bank accounts. Monetary limits are established internally by the Company as well as with the
respective banking institution. Annually, authorizations over bank accounts are reviewed and revised as necessary. Changes are communicated to the banking
institution by the Company and the applicable subsidiary to ensure appropriate individuals are identified as having authority over the bank accounts.
Strategic Direction
While the mining operations of each of the Company’s subsidiaries are managed locally, the Board is responsible for the overall stewardship of the Company and,
as such, supervises the management of the business and affairs of the Company. More specifically, the Board is responsible for reviewing the strategic business
plans and corporate objectives, and approving acquisitions, dispositions, investments, capital expenditures and other transactions and matters that are material to
the Company including those of its material subsidiaries.
Internal Control Over Financial Reporting
The Company prepares its consolidated financial statements on an annual basis in accordance with IFRS as issued by the International Accounting Standards Board
and on a quarterly basis in accordance with IFRS as applicable to interim financial reports including International Accounting Standard 34, Interim Financial
Reporting . This requires financial information and disclosures from its subsidiaries. The Company implements internal controls over the preparation of its
financial statements and other financial disclosures to provide reasonable assurance that its financial reporting is reliable and that the quarterly and annual financial
statements are being prepared in accordance with the relevant reporting framework and securities laws.
The responsibilities of the of the Board include oversight of the Company’s internal control systems including those systems to identify, monitor and mitigate
business risks as well as compliance with legal, ethical and regulatory requirements.
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Regional Experience
The directors and executive officers of the Company have significant experience conducting business in Peru and/or Mexico, including (i) international corporate
finance and mergers and acquisitions experience in Peru and/or Mexico, (ii) planning, supervising and managing experience with mining operations in Peru and/or
Mexico, (iii) executive officers and/or directors with experience with other publicly-listed mining companies with operations in Peru and/or Mexico, and (iv)
visiting the Company’s projects in Peru and Mexico on a regular basis. Further, Alberto Arias (Director), Dionisio Romero (Director), Jose Vizquerra Benavides
(Director), Igor Gonzales (Chief Executive Officer), Gordon Babcock (Chief Operating Officer), Ed Guimaraes (Chief Financial Officer), Alonso Lujan (Vice
President, Exploration) and Andrew Dunlop (Corporate Controller) are all either fluent or proficient in Spanish.
MATERIAL MINERAL PROPERTIES
The Company has three material projects described below. To satisfy the reporting requirements of National Instrument 51-102F2 with respect to the Company’s
material mineral projects, the Company has opted, as permitted by the Instrument, to reproduce the summaries from the technical reports on the respective material
properties and to incorporate by reference each such technical report into this AIF.
Yauricocha Mine, Peru
The Company owns 81.84% of Corona, which in turn owns 100% of the Yauricocha Mine.
Yauricocha Technical Report
The following is the summary section of the Yauricocha Technical Report, prepared by Mining Plus Peru SAC, and reviewed by Qualified Persons Enrique Rubio,
Ph.D. (of Redco Mining Consultants (“ Redco ”)), Matthew Hastings, MSc Geology, MAusIMM CP (of SRK Consulting (U.S.), Inc. (“ SRK ”)) and Augusto
Chung, FAusIMM CP (of the Company). The full text of the Yauricocha Technical Report is available for viewing on SEDAR at www.sedar.com and is
incorporated by reference in this AIF. Defined terms and abbreviations used herein and not otherwise defined shall have the meanings ascribed to such terms in the
Yauricocha Technical Report.
“ Executive Summary
Sierra Metals Inc., (Sierra) formerly known as Día Bras Exploration Inc., engaged various specialist groups to evaluate how, on a conceptual level, mining, mineral
processing, and tailings management could be adapted at the Yauricocha mine and Chumpe plant to achieve a sustainable and staged increase in mine production
and mill throughput.
Sierra’s Yauricocha Mine and Chumpe plant (combined to form the Property) in the Junín region of Peru has been producing and processing polymetallic mineral
for more than 50 years, production from the mine is processed at the company’s Chumpe Plant.
Mineralization at the Property is genetically and spatially related to the Yauricocha stock; 6 skarn bodies host mineral resources around the margins of the stock.
Near surface mineral is exhausted but significant mineral resources are reported at depth, over 13Mt of measured and indicated resources and a further 6.5Mt of
inferred resources were reported in the SRK resource - Effective date - July 31st, 2017 (Table 1-1).
- 18 -
Table 1-1: Summary of resource reported by SRK, November 19, 2017
Category
Measured
Indicated
Measured +
Indicated
Inferred
Tonnes(kt)
Ag (g/t)
Au (g/t)
Cu (%)
Pb (%)
Zn (%)
Density
3,094
10,111
13,205
6,632
69.97
59.91
62.26
43.05
0.79
0.60
0.65
0.55
1.72
1.46
1.52
1.19
1.23
0.83
0.92
0.47
3.20
2.67
2.79
2.16
3.74
3.80
3.79
3.71
(1)
(2)
Mineral Resources that are not mineral reserves do not have demonstrated economic viability. All figures are rounded to reflect the relative accuracy of
the estimates. Gold, silver, copper lead and zinc assays were capped where appropriate.
Mineral Resources are reported at cut-off values based on metal price assumptions*, variable metallurgical recovery assumptions (variable metallurgical
recoveries** as a function of grade and relative metal distribution in individual concentrates), generalized mining/processing costs***).
* Metal price assumptions considered for the calculation of unit values are: Gold (US$1,255/oz), Silver (US$17.80/oz), Copper (US$2.60/lb),
Lead (US$1.01/lb), and Zinc (US$1.25/lb).
** Metallurgical recovery assumptions for the Yauricocha Mine are variable and dependent on mineralization style and orebody type.*** The
cut-off value for the Yauricocha Mine are variable and dependent on mining method and process/recovery costs, which vary between US$41/t
and US$48/t. These values include static processing US$7.40/t and G&A US$3.90/t costs.
(3)
SRK and Sociedad Minera Corona (SMCSA) utilized either Ordinary Kriging (OK) or Inverse Distance Weighting (IDW) to interpolate grade in all
resource areas.
The geometry and grade of mineralization at Yauricocha lends itself to sub-level caving mining and accounted for more than 98% of total current mineral
production (3,000 tpd). Mineral and waste is hoisted to the 720 level and is carried by electric locomotive to the Chumpe plant for processing. Yauricocha has three
hoisting shafts with a combined capacity of 4,500 tpd at the current waste to mineral ratio of 0.5:1.
Sierra commissioned Redco to evaluate, on a conceptual level, how production at Yauricocha could be increased. Redco determined that with the introduction of
mineralized bodies that are part of the resource, production could be increased to 5,500 tpd using the same sublevel caving mining method configuration.
Production increases will require a significant amount of advanced development and expansion of infrastructure. The existing hoisting system does not have the
capacity to maintain current production and accommodate additional waste associated with the advanced development.
Sierra is constructing a fourth shaft with a hoisting capacity of 5,900 tpd. When this shaft is completed (expected mid-2020), the combined hoisting capacity will
be 10,400 tpd. Advanced development ahead of increased production will increase the waste to mineral ratio.
As part of their evaluation, Redco assumed that:
o
o Operating costs per tonne would reduce to US$ 40.00/t when production rates reached 5,500 tpd.
o
Established operating costs of US$ 55.95/t would be used in the mine plan
Factors that could negatively impact production as the mine extends to depth are increased dewatering challenges and increased
potential for mud-rush.
- 19 -
Redco determined that:
o With the completion of the Yauricocha shaft, production rates could be increased
o
Conceptual economic analysis indicates that 5,500 tpd mineral production is the optimal mine output, which represents a production
increase of 66% on current output
Based on the current resource and proposed 5,500 tpd optimal mine output, the Life of Mine (LoM) is 9 years
Throughout the LoM 125 km of waste development and 29 km of development in mineral will be required
The processing capacity of the Chumpe plant will need expanding from 3,000 tpd if it is to process increased mine output
Tailings capacity will need expanding to handle tails from the Chumpe Plant.
LoM capital requirements (Mine, Plant, Closure) to realise the proposed mine plan (5,500 tpd) are estimated at US$ 238 M.
Risks to the proposed mine plan are limited as Yauricocha is an established operation with proven mining methodology, mineral
processing and metallurgical recovery, however, some risks are highlighted:
o
o
o
o
o
o
o
o
o
o
The proposed mine plan is dependent on permitting, timings of permit approval process are not considered in the proposed
mine plan
The proposed mine plan considers hoisting of material beyond the capacity of the current hoisting system during 2018 and
2019
Subsidence related to sub-level caving is recorded around the Central and Mascota shafts. These shafts are critical for the
ingress and egress of material, if continued subsidence impacts the hoisting capacity of these shafts the proposed mine plan
would be significantly impacted. Contingency planning in case of a failed shaft is not considered in the proposed mine plan
The proposed mine plan considers inferred resources which are low confidence and are not suitable for the application of
economic factors. Further drilling will improve confidence in these resources and better determine their potential economic
viability
o Dewatering and ventilation demands will increase with depth and properly engineered solutions are needed if the mine plan is
to be implemented
o Mud-rush is a known issue at Yauricocha and potential for mud-rush is likely to increase at depth. Mitigating this risk is
essential to the proposed mine plan
The Chumpe processing plant will need to be expanded to handle increased throughput
Tailings storage capacity will need to be expanded to handle increased waste from the processing plant.
o
o
Economic Analysis
Mineral resources that are not mineral reserves do not have demonstrated economic viability. The economic analysis includes inferred mineral resources. This PEA
is preliminary in nature and there is no certainty that the PEA will be realized.
The PEA calculates (Table 1-2) a Base Case after – tax Net Present Value (NPV) of US$ 393 M with an after-tax Return of Investment (ROI) of 486% using a
discount rate of 8%. The total life of mine capital cost of the project is estimated to total US$ 238 M. The payback period for the Life of Mine (LoM) capital is
estimated at 4.1 years. Operating costs of the LoM total US$ 593 M, equating to an operating cost of US$ 43.86 per tonne milled. Based on this economic analysis,
the proposed mine plan should be investigated further and better refined.
- 20 -
Table 1-2: Plan considered in the PEA
PEA Highlights
Base case of US$1,323/oz Gold, US$18.68/oz Silver,
US$0.98/lb Lead, US$1.19/lb Zinc, US$3.15/lb Copper.
Net Present Value (After Tax 8% Discount Rate)
Return On Investment (ROI)
Mill Feed
Mining Production Rate
LOM Project Operating Period
Total Capital Costs
Net After – Tax Cashflow
Total Operating Unit Cost
LOM Gold Production (Payable)
LOM Silver Production (Payable)
LOM Lead Production (Payable)
LOM Zinc Production (Payable)
LOM Copper Production (Payable)
Additional Disclosure from the Yauricocha Technical Report
Unit
US$ M
ROI%
Tonnes (Millions)
t/year
years
US$ M
US$ M
US$/t
oz
oz
t
t
t
Value
393
486
13.5
1,800,000
9
238
532
43.86
17,621
11,408,281
87,881
281,746
102,821
In addition to the summary from the Yauricocha Technical Report reproduced above, certain additional information from the Yauricocha Technical Report is
summarized below:
Property Location
The Yauricocha Mine is located in the Alis district, Yauyos province, department of Lima approximately 12 km west of the Continental Divide and 60 km south of
the Pachacayo railway station. The active mining area within the mineral concessions is located at coordinates 421,500 m east by 8,638,300 m north on UTM Zone
18L on the South American 1969 Datum, or latitude and longitude of 12.3105 ⁰ S and 75.7219 ⁰ W. It is geographically in the high zone of the eastern Andean
Cordillera, and within one of the major sources of the River Cañete, which discharges into the Pacific Ocean. The mine is at an average altitude of 4,600 masl.
Geology and Mineralization
Mineralization at the Yauricocha Mine is represented by variably oxidized portions of a multiple-phase polymetallic system with at least two stages of
mineralization, demonstrated by sulfide veins cutting brecciated polymetallic sulfide mineralized bodies. The mineralized bodies and quartz-sulfide veins appear to
be intimately related and form a very important structural/mineralogical assemblage in the Yauricocha mineral deposit.
- 21 -
All parts of the property with historic exploration or current production activity are in the current area of operations. This area is nearly centred within the
concession boundary and there is both space and potential to expand the resources and the operation both directions along the strike of the Yauricocha Fault.
Minera Corona has developed local classifications describing milling and metallurgical characteristics of mineralization at Yauricocha: polymetallic, oxide, and
copper. Polymetallic mineralization is represented by Lead-Zinc sulfides, often with significant Silver values, oxide refers to mineralization that predominantly
comprises oxidized sulfides and resulting supergene oxides, hydroxides and/or carbonates (often with anomalous Gold), and the copper classification is represented
by high values of Cu with little attendant Lead-Zinc.
Status of Exploration, Development and Operations
The Yauricocha mining district contains multiple polymetallic deposits represented by skarn and replacement bodies and intrusion-hosted veins related to
Miocene-era magmatism. Mineralization is strongly structurally-controlled with the dominant features being the Yauricocha Fault and the contact between the
Jumasha limestones and the Celendín Formation (especially the France Chert). Exploration is being conducted to expand the mineralized zones currently being
exploited as well as on prospects in the vicinity of the operations.
Exploration in or close to the mining operations is of higher priority since it is performed under existing governmental and community permits. Any exploration
success can be quickly incorporated into defined resources and reserves and thus the business plan.
Recommendations
The results of the PEA support the continued advancement of investigations to increase mine production and processing plant throughput at the Yauricocha Mine.
Further definitive studies are required to better define the economic potential of the Yauricocha Mine to support increased production, include:
o Undertake detailed engineering to determine the operational risk and how to control the impact of subsidence around the Central and
Mascota shafts.
Conduct infill-drilling of inferred resources considered in the PEA.
o Detailed engineering to confirm mine infrastructure requirements (i.e. ventilation, compressed air, electrical and dewatering).
o
o Determine the requirements and timelines to acquire new permits or updated existing permits as required to operate at 5,000 tpd.
o
o
o Any changes to the production rate of Yauricocha should be reflected in an updated waste management plan.
o
Investigate, in detail, factors such as the cost of power, pumping, tailings and waste rock management, ventilation.
Refine cut-off values based on the outcome of the studies and investigations recommended above.
Investigation in to legal and permitting requirements to action mine plan changes
Bolivar Mine, Mexico
The Company owns 100% of the Bolivar Mine.
- 22 -
Bolivar Technical Report
The following is the summary section of the Bolivar Technical Report, prepared by Mining Plus Peru SAC, and reviewed by Qualified Persons Enrique Rubio,
Ph.D. (of Redco), Giovanny Ortiz, BSc Geology, FAusIMM CP (of SRK) and Augusto Chung, FAusIMM CP (of the Company). The full text of the Bolivar
Technical Report is available for viewing on SEDAR at www.sedar.com and is incorporated by reference in this AIF. Defined terms and abbreviations used herein
and not otherwise defined shall have the meanings ascribed to such terms in the Bolivar Technical Report.
“ Executive Summary
Introduction
Sierra Metals Inc. own and operate the Bolivar Mine and Piedras Verdes processing plant (combined to form the Property) located in the Piedras Verdes District of
Chihuahua State, Mexico, approximately 250 kilometres southwest of the city of Chihuahua. The Property consists of 14 mineral concessions totaling 6,800
hectares.
Sierra Metals Inc., formerly known as Día Bras Exploration Inc., engaged various specialist groups to evaluate how, on a conceptual level; mining, mineral
processing, and tailings management could be adapted at the Property to achieve a sustainable and staged increase in mine production and mill throughput. This
Technical Report is a Preliminary Economic Assessment (PEA) prepared and filed in accordance with National Instrument 43-101 and Form 43-101F1.
Geology
The Bolivar Mine exploits Cu-Zn skarn mineralization and is one of many precious and base metal deposits of the north-northwest trending Sierra Madre belt in
the states of Chihuahua, Durango and Sonora in north western Mexico. Stratigraphy exerts a strong control on mineralization, calcic beds host predominantly host
zinc mineralization and underlying dolomitic beds host copper dominant mineralization. Highest grades develop in areas of structurally controlled brecciation
around the margins of intrusions.
Resource
This PEA considers indicated and inferred resources reported by SRK on June 28th, 2018 with an effective date as of October 31, 2017. By definition resources
have not had modifying economic factors applied to them and they are not demonstrated to be economically viable.
Table 1-1: Resource Summary
Class
Indicated
Inferred
Tonnes(000’s)
Ag (g/t)
Au (g/t)
Cu (%)
Ag (koz)
Au (koz)
Cu (t)
13,267
8,012
22.5
22.4
0.29
0.42
1.04
0.96
9,616
5,779
124
109
137,537
76,774
(1) Mineral resources that are not mineral reserves do not have demonstrated economic viability. All figures rounded to reflect the relative accuracy of the
estimates. Copper, gold and silver assays were capped where appropriate.
(2) Mineral resources are reported at cut-off values based on metal price assumptions*, metallurgical recovery assumptions**, mining/transport costs
(US$17.59/t), processing costs (US$ 8.33/t), and general and administrative costs (US$2.41/t).
- 23 -
(3) The metal value COG for the Bolivar Mine is US$ 29.00 /t. No mineral resources are reported for the remaining pillars.
* Metal price assumptions considered for the calculation of metal value are: Copper (Cu): US$/lb 3.00, Silver (Ag): US$/oz 18.25, and Gold (Au):
US$/oz 1,291.00.
**Metallurgical recovery assumptions are 83% Cu, 78% Ag, and 64% Au.
(4) The resources were estimated by David Keller of SRK consulting (Canada) using Ordinary Kriging (OK), and reviewed and validated by Giovanny Ortiz,
B.Sc., PGeo, FAusIMM #304612 of SRK, a Qualified Person.
(5) Note: Mining has continued since the publication of this resource and resources have not been subsequently depleted.
Mining
A sustainable mine production of 3000 tpd is achieved at the Bolivar Mine using a combination of room and pillar and longhole stoping mining. Redco Mining
Consultants (Redco) were commissioned by Sierra Metals to determine how mine production could be increased sustainably and also to define the optimal
economic rate of mine production. Redco determined that the optimal rate of production is 5000 tpd and that a three-year period of advanced development would
be required to achieve this production increase. Redco deemed that a capital investment of $62 M was needed to fund mine development and the acquisition of
mine fleet.
Proposed production increases are based on the phasing out of room and pillar mining and the deployment of longhole stoping throughout the mine. Compared to
room and pillar mining, longhole stoping offers the advantages of increased productivity and increased mine recoveries.
Longhole stoping in areas of shallower dipping mineralized bodies will increase total dilution compared to room and pillar mining, shallower dipping bodes are
diluted up to 53% compared to more vertical bodies where total anticipated dilution can be much less at 17%.
Mineral Processing
The Piedras Verdes processing plant, located 8.2 kilometres from the Bolivar Mine, uses a conventional crushing-milling-flotation circuit to recover mineral and to
produce commercial quality copper concentrates with silver and gold by-product credits.
The Piedras Verdes processing plant currently processes 3000 tpd and achieves recoveries of Cu 83%, Au 64% and Ag 78% all deported to a copper concentrate.
Piedras Verdes previously recovered zinc, equipment related to the zinc recovery circuit is idle at the plant. Sierra metals determined that throughput at the plant
could be increased to 5000 tpd, this increase requires a capital expenditure of $9.7 M over a three-year period. Throughput increases are dependent on:
- 24 -
o Overhauling and repurposing of idle equipment installed at the plant
o Overhauling and or replacement of active equipment, which will require a temporary shutdown of processing operations
o
Purchase of mobile jaw and cone crushers for the crushing circuit; Sierra Metals determined that compared to fixed equipment, mobile
equipment has a similar cost but offers more flexibility and does not require civil works and engineering ahead of installation
Increase in tailings storage capacity.
o
Transmin have identified various areas for potential efficiency gains and processing improvements at the Piedras Verdes Plant, these areas of improvement are not
considered in the mine plan are being investigated by Sierra Metals:
o Magnetic separation
o
o
o
o Union of milling outflow distribution to a single cluster of 10 hydro cyclones
Removal of fines ahead of primary crushing
Conversion of an idle conditioning tank to a flash flotation tank
Introduction of a secondary milling circuit
Tailings Management
The current conventional tailings storage facility has capacity to store tailings until year end 2019 at a production rate of 3000 tpd. Anddes were commissioned by
Sierra Metals to develop preliminary designs for a tailings storage facility with capacity to store 14Mt of tailings, is estimated to cost $4M and will be constructed
in stages. Construction of a starter dam for a new filtered/dry-stack tailings storage facility has begun.
The 14 Mt storage capacity of the new facility is 4.6 Mt less than that required to store all the tailings associated with the proposed mine plan; additional tailings
storage is required if the proposed mine plan is to be realised.
Economic Analysis
Redco undertook an Economic Analysis of their proposed mine plan combined with other factors including modifications to the Piedras Verdes processing plant
and tailings storage facilities.
The PEA estimates a base case after – tax Net Present Value (NPV) of US$214 million, with an after-tax return on investment of 550% using a discount rate of
8%. The total life of mine capital cost of the project is estimated to total US$ 96 M. The payback period for the Life of Mine (LoM) capital is estimated at 3.4
years. Operating costs of the life of mine total US$ 359 M, equating to an operating cost of US$ 21.18 per tonne milled.
Copper ores from Gallo Inferior, El Salto, Bolivar West and Bolivar North West in flotation laboratory tests float readily in the first 2 to 4 minutes with finer
grinding (55 to 60% minus 200 mesh) achieving rougher recovery between 85% to 90%. It is recommended to use 85% Cu recovery since the installation of the
third ball mill is currently in progress and planned to be on line Q1-2019. Therefore, the metallurgical recoveries used in the evaluation are 85% Cu, 78% Ag and
64% Au.
- 25 -
Table 1-2: Economic Analysis Summary
PEA Highlights
Base case of $1,291/oz Gold, $18.25/oz Silver, $3.00/lb. Copper
Net Present Value (After Tax 8% Discount Rate)
Return on Investment
Mill Feed
Peak Mining Production Rate
LOM Project Operating Period
Total Life of Mine (LoM) Capital Costs
Net After – Tax Cashflow
Total Operating Unit Costs
LOM Gold Production (Payable)
LOM Silver Production (Payable)
LOM Copper Production (Payable)
Critical Risks
Recommendations
o Heavy reliance on inferred resources as the basis of the mine plan
o Mid to long term availability of tailings storage capacity
Unit
US$ M
ROI (%)
Tonnes (Mt)
t/year
Years
US$ M
US$ M
US$/t
oz
oz
t
Value
214
550
16.9
1,800,000
11
96
303
21.18
86,472
7,013,157
114,537
PEA’s are based on resources that are not demonstrated to be economically viable. Based on the Economic Analysis of the proposed mine plan presented in this
PEA, more definitive, studies are recommended.
Advancement of the proposed mine plan should consider the following:
o Geotechnical investigation should be extended to areas of the mine that are not currently in production but are considered in the mine
plan
o
o Ventilation in the Bolivar mine is currently based on natural air flow which is influenced by atmospheric conditions on surface.
Proposed production increases and associated machinery movement are likely to have a negative impact on air quality, to ensure safety
in the mine, ventilation modelling is recommended based on which a ventilation plan should be defined
The resources considered in the proposed mine plan are classed as either inferred or indicated. Further exploration drilling and
exploration mine development should be undertaken to increase confidence in the resources used in the mine plan. The proposed mine
plan should be refined when additional information is available
The classification of mining blocks based on NSR value and proximity to other blocks could exclude potential mine feed from the
proposed mine plan, subsequent revisions of the mine plan should consider blocks above the NSR marginal cut-off that are not
necessarily immediately adjacent to other mine blocks above the economic NSR cut off. A ratio of development meters required for
access compared to potential tonnages could be used to determine potential economics
Longhole stoping is considered in areas where bodies dip up to 70 degrees, this introduces significant dilution, other mining methods
should be considered in such areas as they could reduce dilution.”
o
o
- 26 -
Additional Disclosure from the Bolivar Technical Report
In addition to the summary from the Bolivar Technical Report reproduced above, certain additional information from the Bolivar Technical Report is summarized
below:
Property Location
The Bolivar property is located in Chihuahua, Mexico, in the municipality of Urique. The property is situated in the rugged, mountainous terrain of the Sierra
Madre Occidental, approximately 250 km southwest of the city of Chihuahua and approximately 1,250 km northwest of Mexico City. The geographic centre of the
property is 27°05’N Latitude and 107°59’W Longitude. It is roughly bounded to the northeast by the Copper Canyon mine (50 km from the Bolivar mine), to the
south by the El Fuerte river (18 km), to the north by the village of Piedras Verdes (5 km), and to the northwest by the town of Cieneguita (12.5 km).
Mineral Titles
Día Bras wholly holds mineral concession titles allowing exploration and mining within 14 concessions (6,800 ha) that make up the project area. Production from
the Bolivar Mine is not subject to any royalties; however, the concessions are subject to a federal tax that varies by concession.
Mineralization
Mineralization at the Bolivar property is hosted by skarn alteration in carbonate rocks adjacent to the Piedras Verdes granodiorite. Orientations of the skarn vary
dramatically, although the majority are gently-dipping. Thicknesses vary from 2 m to over 20 m. Skarn mineralization is strongly zoned, with proximal Cu-rich
garnet skarn in the South Bolivar area, close to igneous contacts, and more distal Zn-rich garnet+pyroxene skarn in the northern Bolivar and southern skarn zones
near El Val. The presence of chalcopyrite+bornite dominant skarn (lacking sphalerite) in the South Bolivar area, along with K-silicate veins in the adjacent
granodiorite suggests that this zone is close to a centre of hydrothermal fluid activity. In contrast, the main Bolivar mine is characterized by Zn>Cu and more distal
skarn mineralogy such as pyroxene>garnet and pale green and brown garnets.
Mineralization exhibits strong stratigraphic control and two stratigraphic horizons host the majority: an upper calcic horizon, which predominantly hosts Zn-rich
mineralization, and a lower dolomitic horizon, which predominantly hosts Cu-rich mineralization.
Cusi Mine, Mexico
The Company owns 100% of the Cusi Mine.
Cusi Preliminary Economic Assessment
The following is the summary section of the Cusi Technical Report, prepared by Mining Plus Peru SAC, and reviewed by Qualified Persons Enrique Rubio, Ph.D.
(of Redco), Giovanny Ortiz, BSc Geology, FAusIMM CP (of SRK), Daniel H. Sepulveda, BSc Extractive Metallurgy Engineer, SME-RM (of SRK) and Augusto
Chung, FAusIMM CP (of the Company). The full text of the Cusi Technical Report is available for viewing on SEDAR at www.sedar.com and is incorporated by
reference in this AIF. Defined terms and abbreviations used herein and not otherwise defined shall have the meanings ascribed to such terms in the Cusi Technical
Report.
- 27 -
“Executive Summary
Sierra Metals operate the Cusi mine and Mal Paso plant, combined to form “the Property”. The Property currently operates at 650 tpd with an average head grade
of 201 g/t Ag and produces commercial grade Pb/Ag and Zn concentrates. Production rates of 650 tpd are achieved at the Property using the conventional cut and
fill method supported by minor longhole sub-level stoping. Sales of silver recovered in the Pb/Ag concentrate is the main revenue stream at Cusi.
The Property is in the Cusihuarachi District of Chihuahua State, Mexico, approximately 135 km southwest of Chihuahua City. Epithermal mineralization has been
mined in the area since its discovery in the early 1800’s. Mineralization is bound between regionally significant northwest trending faults; 8 mineralized zones are
recognized at the Property, mineralized zones are up to 10 m across and include; silicified faults, veins and breccias. Seven epithermal veins are recognized at the
property, veins typically; range between 0.5 and 2 m wide, dip steeply, extend 100 to 200 m along strike and, extend up to 400 m depth. Vein orientations range
between northeast and northwest.
This Preliminary Economic Assessment (PEA) considers depleted measured, indicated and inferred resources reported on February 12th, 2018 by SRK and
effective as of August 31st, 2017. These resources are not demonstrated to be economically viable. The results of this PEA are indicative of conceptual potential
and are not definitive.
- 28 -
Table 1-1: Summary of resource reported by SRK, February 12th, 2018 (Effective August 31st, 2017)
Class
Measured
Total Measured
Indicated
Indicated
Indicated
Indicated
Indicated
Indicated
Indicated
Indicated
Total Indicated
Total Measured +
Indicated
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Total Inferred
Area
Santa Rosa de
Lima (SRL)
Promontorio
Eduwiges
SRL
San Nicolas
San Juan
Minerva
Candelaria
Durana
Promontorio
Eduwiges
SRL
San Nicolas
San Juan
Minerva
Candelaria
Durana
AgEq
(g/t)
Ag (g/t)
Au (g/t)
Pb (%)
Zn (%)
Tonnes (000’s)
268
268
241
293
296
195
208
222
386
224
267
267
218
229
216
181
200
149
185
124
207
225
225
213
198
242
176
189
198
366
219
217
217
185
115
158
161
186
143
125
115
158
0.13
0.13
0.08
0.26
0.32
0.13
0.13
0.4
0.14
0.06
0.21
0.21
0.1
0.09
0.22
0.14
0.04
0.05
0.16
0.01
0.16
0.55
0.55
0.37
1.35
0.62
0.21
0.2
0.09
0.17
0.05
0.64
0.63
0.35
1.78
0.55
0.21
0.15
0.08
0.62
0.17
0.54
0.68
0.68
0.44
1.32
0.64
0.22
0.21
0.05
0.28
0.02
0.66
0.66
0.62
1.79
1.04
0.23
0.27
0.06
1.17
0.09
0.84
362
362
1097
928
1435
414
121
57
46
97
4195
4557
308
147
658
340
44
5
128
3
1633
Note: Mining has continued since the publication of this resource and resources have not been subsequently depleted.
Sierra Metals commissioned various specialist groups (Table 1-2) to evaluate how, on a conceptual level, mining, mineral processing, and tailings management
could be adapted at the Property to achieve a sustainable and staged increase in mine production and mill throughput from 650 tpd to 1200 tpd by Q1 2019 and
2700 tpd by mid-2021.
- 29 -
Table 1-2: Groups involved in development for conceptual plan considered in the PEA
Group
SRK Consulting (U.S.), Inc.
Redco Mining Consultants
Sierra Metals (SM)
Ingenieria Carillo (IC)
Kappes Cassiday and Associates (KCA)
Anddes Consulting (AC)
Flopac
Mining Methodology
Concept
Report
Resource Estimation
Increase mine output to 2700 tpd
Increase Mal Paso Plant Capacity to 1200 tpd
Engineering associated with increased Mal Paso plant capacity
Preliminary design of 1500 tpd plant at Cusihuariachi
Expansion of tailings storage capacity
Tailings Storage up to Q1-2020
SRK, 2017
Redco, 2018
Sierra, 2018
KCA, 2018
Anddes, 2018
Flopac, 2017
To determine how mine output could be increased, Sierra Metals commissioned Redco Mining Consultants (Redco) to undertake a scoping study, considering;
existing development and infrastructure, geotechnical characteristics, geological controls and mineralization style. The study (Redco, 2018) determined that
mechanized Avoca mining could be used to achieve a sustainable production of 2700 tpd. Improved productivity would be associated with improved safety as the
requirement for man time spent in stopes is significantly reduced.
Head-grades are expected to reduce from the current 201 g/t Ag to 180 g/t Ag @ 1200 tpd and 170 g/t Ag @ (2700 tpd). Redco estimate that $95.11M capital
investment is required to mechanise the Cusi Mine and achieve 2700 tpd production.
As part of their scoping study, Redco considered plans for ventilation and dewatering on a very general scale. Sierra Metals recognize that further and more
detailed ventilation and dewatering plans are required to support the overall conceptual mine design.
Mineral Processing
The Mal Paso Plant, located 44 km from the Cusi Mine, uses a conventional crushing-milling-flotation circuit to recover mineral and to produce commercial
quality Pb/Ag and Zn concentrates. Mineral is delivered from the mine to the plant in 20t trucks.
Mineral processing and the recovery of mineral is demonstrated, and silver recoveries are established at 86%.
The Mal Paso Plant increased throughput from 450 tpd at the beginning of 2018 to 650 tpd currently. In line with proposed increases in mine output, processing
capacity at Mal Paso will increase to 1200 tpd in 2019, a new plant with a capacity of 1500 tpd is proposed at Cusihuariachi, to come online mid-2021.
Sierra Metals (Sierra, 2018) undertook an internal review to determine how the Mal Paso plant could be adjusted to increase throughput to 1200 tpd. This study
identified bottlenecks in the existing plant, to overcome bottlenecks and achieve the desired throughput at Mal Paso. Sierra Metals have begun to purchase the
pieces of equipment and project that the remaining pieces of equipment will be purchased and installed before Q1 2019.
- 30 -
An independent processing plant, operating complimentary to Mal Paso, will be required to process the proposed 2700 tpd mine output. Sierra Metals
commissioned Kappes Cassiday and Associates (KCA) to produce a conceptual design for a modular plant to process 1500 tpd at Cusihuariachi from mid-2021.
The modular plant is designed to be easily scalable in 1500 tpd increments.
The proposed plant at Cusihuariachi is significantly closer to the Cusi Mine than the Mal Paso Plant, KCA estimate that this would translate to an operational
saving of USD $4/t. A further saving of USD $1/t, related to mineral processing, is envisaged by KCA. This combined USD $5/t operational saving, the equivalent
of USD $2.7M/yr. (i.e. 1500 tpd x 360 days x USD $5/t) would be offset against projected Capital requirements of USD $30M.
Tailings Capacity
Tailings produced at Mal Paso are currently stored in two conventional tailings storage facilities. As of February 2018, planned and permitted raises to existing
tailings facilities would provide 520k m3 of storage capacity, the equivalent of 1 year and 7 months storage at a production rate of 1200 tpd.
Sierra Metals recognize that increasing tailings storage capacity is critical to achieving and sustaining increased rates of production.
Anddes Consulting (AC) evaluated the merits of 9 new potential tailings storage facilities identified by Sierra Metals, based on preliminary work 4 sites are
undergoing more detailed evaluation ahead of final selection and detailed engineering. The 4 sites offer varying storage capacities between 600k m3 and 2.5M m3.
The proposed plant at Cusihuariachi would require the development of a new tailings facility separate from those used at Mal Paso. A potential site for a dry-stack
(>75% solids) tailings storage facility has been identified and is undergoing preliminary investigations. Conceptually, the identified site would provide storage for
5.4Mt of tailings, the equivalent of 11 years capacity operating at 1500 tpd.
Economic Analysis
The PEA calculates a Base Case after – tax NPV of USD $92.18 M with an after – tax IRR of 75% using a discount rate of 8%. The total life of mine capital cost
of the project is estimated to total $104.46 M. The payback period for the LOM capital is estimated at 4.60 years. Operating costs of the life of mine total $259.32
M, equating to an operating cost of $41.36 per tonne milled.
- 31 -
Table 1-3: Plan considered in the PEA
PEA Highlights
Base case of $1,283/oz Gold, $18.30/oz Silver, $0.93/lb. Lead,
$1.15/lb. Zinc
Net Present Value (After Tax 8% Discount Rate)
Internal Rate of Return
Mill Feed
Peak Mining Production Rate
LOM Project Operating Period
Total Life of Mine (LoM) Capital Costs
Net After – Tax Cashflow
Total Operating Unit Costs
LOM Gold Production (Payable)
LOM Silver Production (Payable)
LOM Lead Production (Payable)
LOM Zinc Production (Payable)
Unit
US$ M
IRR
Tonnes (Mt)
t/year
Years
US$ M
US$ M
US$/t
Oz
MOz
t
t
Value
92.2
75%
6.27
972,000
9
104.5
150.6
41.36
19,706
30
28,256
19,160
UPDATED MINERAL RESOURCE AND MINERAL RESERVE INFORMATION
Yauricocha Mine
The Company prepared an updated mineral resource estimate for the Yauricocha Mine (on a consolidated basis) as at December 31, 2018 which is set out in the
chart below:
Yauricocha Mine Consolidated Mineral Resource Estimate as of December 31, 2018
Measured
Indicated
Measured +
Indicated
Inferred
TMS
2,284,428
9,482,739
Ag/g-t Au/g-t % Cu %Pb %Zn Ag (Koz) Au (Koz)
Cu (t)
Pb (t)
Zn (t)
66.76
60.26
0.59
0.59
1.64
1.47
1.10
0.82
2.88 4,903.10
2.61 18,372.92
43.55 37,537.29 25,043.43 65,721.53
180.48 139,307.93 77,719.93 247,813.56
11,767,167
61.52
0.59
1.50
0.87
2.66 23,276.02
224.03 176,845.22 102,763.36 313,535.09
TMS
6,632,000
Ag/g-t Au/g-t % Cu %Pb %Zn Ag (Koz) Au (Koz) Cu (t)
Pb (t)
Zn (t)
43.03
0.58
1.19
0.47
2.16 9,174.81
122.91 79,175.30 31,165.20 143,121.90
(1)
(2)
(3)
Mineral Resources are reported inclusive of ore reserves. Mineral Resources are not ore reserves and do not have demonstrated economic viability. All
figures are rounded to reflect the relative accuracy of the estimates. Gold, silver, copper lead and zinc assays were capped where appropriate.
Mineral Resources are reported at unit value cut-off grades (CoG) based on metal price assumptions*, variable metallurgical recovery assumptions
(variable metallurgical recoveries** as a function of grade and relative metal distribution in individual concentrates), generalized mining/processing
costs).
* Metal price assumptions considered for the calculation of unit values are: Gold (US$1,255/oz), Silver (US$17.80/oz), Copper (US$2.60/lb),
Lead (US$1.01/lb), and Zinc (US$1.25/lb).
** Metallurgical recovery assumptions for the Yauricocha Mine are variable and dependent on mineralization style and orebody type.
The unit value CoG’s for the Yauricocha Mine are variable and dependent on mining method and process/recovery costs, which vary between US$41 and
US$48.
- 32 -
The Company prepared an updated mineral reserve estimate for the Yauricocha Mine (on a consolidated basis) as at December 31, 2018 which is set out in the
chart below:
Yauricocha Mine Consolidated Mineral Reserve Estimate as of December 31, 2018
Proven
Probable
Proven +
Probable
TMS
1,070,220
6,412,166
Ag/g-t Au/g-t % Cu %Pb %Zn Ag (Koz) Au (Koz) Cu (t)
Pb (t)
Zn (t)
45.21
48.12
0.60
0.47
1.03
1.25
0.82
0.72
1.92 1,555.45
2.26 9,921.07
20.65 11,074.81 8,725.25 20,539.51
97.59 79,868.67 46,168.04 145,226.85
7,482,386
47.71
0.49
1.22
0.73
2.22 11,476.52
118.24 90,943.48 54,893.28 165,766.36
(1)
(2)
All figures rounded to reflect the relative accuracy of the estimates. Totals may not sum due to rounding.
Ore reserves are reported at NSR cutoffs (CoG) that range from $56/t to $63/t based on metal price assumptions*, grade adjustments made to the resource
model**, metallurgical recovery assumptions***, mining costs, processing costs, general and administrative (G&A) costs, and treatment and refining
charges.
* Metal price assumptions considered for the calculation of NSR are: Gold (US$/oz 1,255.00), Silver (US$/oz 17.80), Copper (US$/lb 2.60), Lead
(US$/lb 1.01), and Zinc (US$/lb 1.25).
** Grade adjustments (reductions) are based on historical mine to mill reconciliation and vary by mineralization style.
*** Metallurgical recovery assumptions for the Yauricocha Mine are variable by mineralization style and degree of oxidation.
The above mineral reserve and resource estimate has been prepared by Americo Zuzunaga FAusIMM CP (Mining Engineer), Vice-President Planning of the
Company, a Qualified Person and chartered professional qualifying as a Competent Person under the Joint Ore Reserves Committee (JORC) Australasian Code for
Reporting of Exploration Results, Mineral Resources, and Ore Reserves. The resource and reserve estimate has been reviewed by Gordon Babcock P.Eng., Chief
Operating Officer of the Company, a qualified person for purposes of NI 43-101.
The resource and reserve estimate is based on the Yauricocha Mine consolidated mineral resource and reserve estimate with an effective date of July 31, 2017, as
contained in the Yauricocha Technical Report (as defined herein). In preparing the above estimate, Mr. Zuzunaga has taken account of changes to the mineral
reserves and resources due to mining depletion as of the effective date of the report to December 31, 2018. The changes to the resource and reserve report reflect
mine depletion due to mining activities; no other adjustments to the estimate have been made to the mineral resource and reserve estimate as set out in the
Yauricocha Technical report.
All economic parameters are based on the Yauricocha Technical Report. All risks associated with the Yauricocha mine are defined in the risks section of the
report. Disclosure follows assumptions and parameters used in the Yauricocha Technical Report.
Bolivar Mine
The Company prepared an updated mineral resource estimate for the Bolivar Mine (on a consolidated basis) as at December 31, 2018 which is set out in the chart
below:
Bolivar Mine Consolidated Mineral Resource Estimate as of December 31, 2018
Resources
Measured
Indicated
Inferred
Tonnes (000´s)
Ag (g/t)
Au (g/t)
Cu (%)
Ag (Koz)
0
12,085
8,012
0.0
23.0
22.4
0.00
0.30
0.42
0.00
1.05
0.96
- 33 -
Au (Koz)
0
8,934
5,771
0
117
108
Cu (t)
0
126,698
76,915
(1)
(2)
Mineral resources are reported inclusive of ore reserves. Mineral resources are not ore reserves and do not have demonstrated economic viability. All
figures rounded to reflect the relative accuracy of the estimates. Copper, gold, and silver, assays were capped where appropriate.
Mineral resources are reported at a single value cut-off (CoG) of US$29 based on metal price assumptions*, metallurgical recovery assumptions**,
mining/transport costs (US$17.95/t), processing costs (US$8.33/t), and general and administrative costs (US$2.41/t).
* Metal price assumptions considered for the calculation of metal value are: Copper (Cu): US$/lb 3.00, Silver (Ag): US$/oz 18.25, and Gold
(Au): US$/oz 1,291.00.
** Metallurgical recovery assumptions are 83% Cu, 78% Ag, and 64% Au.
The Company prepared an updated mineral reserve estimate for the Bolivar Mine (on a consolidated basis) as at December 31, 2018 which is set out in the chart
below:
Bolivar Mine Consolidated Mineral Reserve Estimate as of December 31, 2018
Reserve
Proven
Probable
P+P
Tonnes (000´s)
Ag (g/t)
Au (g/t)
Cu (%)
Ag (Koz)
Au (Koz)
Cu (t)
0
6,743
6,743
0.0
19.1
19.1
0.00
0.26
0.26
0.00
0.84
0.84
0
4,151
4,151
0
57
57
0
56,877
56,877
Source: SRK, 2018
(1)
(2)
All figures rounded to reflect the relative accuracy of the estimates. Totals may not sum due to rounding.
Ore reserves are reported at unit value cut-offs based on metal price assumptions*, metallurgical recovery assumptions**, mining costs, processing costs,
general and administrative (G&A) costs, and treatment and refining charges.
* Metal price assumptions considered are: US$3/lb Cu, US$18.25/oz Ag, and US$1,291/oz Au.
** Metallurgical recovery assumptions are 83% Cu, 78% Ag, and 64% Au.
(3)
(4)
The mining costs are based on historical actual costs.
The NSR cut-off values are variable by mining method:
The economic NSR cut-off value is:
·
o US$30.80 = Room and Pillar.
o US$33.10 = Longhole Stoping.
·
The marginal NSR cut-off value is:
o US$26.50 = Room and Pillar.
o US$28.70 = Longhole Stoping.
(5)
Mining recovery and dilution have been applied and are variable by mining area and proposed mining method.
The above mineral reserve and resource estimate has been prepared by Americo Zuzunaga FAusIMM CP (Mining Engineer), Vice-President Planning of the
Company, a Qualified Person and chartered professional qualifying as a Competent Person under the Joint Ore Reserves Committee (JORC) Australasian Code for
Reporting of Exploration Results, Mineral Resources, and Ore Reserves. The resource and reserve estimate has been reviewed by Gordon Babcock P.Eng., Chief
Operating Officer of the Company, a qualified person for purposes of NI 43-101.
The resource and reserve estimate is based on the Bolivar Mine consolidated mineral resource and reserve estimate with an effective date of October 31, 2017, as
contained in the Bolivar Technical Report (as defined herein). In preparing the above estimate, Mr. Zuzunaga has taken account of changes to the mineral reserves
and resources due to mining depletion as of the effective date of the report to December 31, 2018. The changes to the resource and reserve report reflect mine
depletion due to mining activities; no other adjustments to the estimate have been made to the mineral resource and reserve estimate as set out in the Bolivar
Technical report.
All economic parameters are based on the Bolivar Technical Report. All risks associated with the Bolivar Mine are defined in the risks section of the report.
Disclosure follows assumptions and parameters used in the Bolivar Technical Report.
- 34 -
Cusi Mine
The Company prepared an updated mineral resource estimate for the Cusi Mine (on a consolidated basis) as at December 31, 2018 which is set out in the chart
below:
Cusi Mine Consolidated Mineral Resource Estimate as of December 31, 2018
CLASS
TMS
Ag/g-t
Au/g-t
%Pb
%Zn
Ag (Koz)
Au (Koz)
Pb (t)
Zn (t)
Measured
Indicated
362,000
3,967,111
225
220
0.13
0.22
0.55
0.65
0.68
0.67
2615.07
28005.39
1.51
27.65
1991.00 2461.60
25838.42 26562.75
Measured +
Indicated
4,329,111
220
0.21
0.64
0.67
30620.46
29.16
27829.42 29024.35
Inferred
1,633,000
158
0.16
0.54
0.84
8285.02
8.33
8898.25 13790.44
(1)
(2)
Mineral resources are reported inclusive of ore reserves. Mineral resources are not ore reserves and do not have zinc assays were capped where
appropriate.
Mineral resources are reported at a single cut-off grade of 105 g/t AgEq based on metal price assumptions*, metallurgical recovery assumptions, mining
costs (US$29.41/t), processing costs (US$18.3/t), and general and administrative costs (US$3.74/t).
* Metal price assumptions considered for the calculation of the cut-off grade and equivalency are: Silver (Ag): US$/oz 18.30, Lead (US$/lb 0.93),
Zinc (US$/lb 1.15) and Gold (US$/oz 1,283.00).
* Based on the historical production information of Cusi, the metallurgical recovery assumptions are: 84% Ag, 57% Au, 86% Pb, 51% Zn.
The above mineral resource estimate has been prepared by Americo Zuzunaga FAusIMM CP (Mining Engineer), Vice-President Planning of the Company, a
Qualified Person and chartered professional qualifying as a Competent Person under the Joint Ore Reserves Committee (JORC) Australasian Code for Reporting of
Exploration Results, Mineral Resources, and Ore Reserves. The resource estimate has been reviewed by Gordon Babcock P.Eng., Chief Operating Officer of the
Company, a qualified person for purposes of NI 43-101.
The resource estimate is based on the Cusi Mine consolidated mineral resource estimate with an effective date of August 31, 2017, as contained in the Cusi
Technical Report (as defined herein). In preparing the above estimate, Mr. Zuzunaga has taken account of changes to the mineral resources due to mining depletion
as of the effective date of the report to December 31, 2018. The changes to the resource report reflect mine depletion due to mining activities; no other adjustments
to the estimate have been made to the mineral resource estimate as set out in the Cusi Technical report.
All economic parameters are based on the Cusi Technical Report. All risks associated with the Cusi Mine are defined in the risks section of the report. Disclosure
follows assumptions and parameters used in the Cusi Technical Report.
RISK FACTORS
The Company’s ability to generate revenues and profits from its mineral properties, or any other mineral property it may acquire, is dependent upon a number of
factors. The risks and uncertainties described below as well as the other information contained in this AIF should be carefully considered. These risks and
uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that the Company currently
considers immaterial may also impair its business operations. If any of these events actually occur, Sierra’s business, prospects, financial condition, cash flows and
operating results could be materially harmed.
- 35 -
Operating hazards and risks
Mining operations generally involve a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to
overcome. These risks include, but are not limited to, the following: environmental hazards, industrial accidents, third party accidents, unusual or unexpected
geological structures or formations, fires, power outages, labour disruptions, floods, explosions, cave-ins, land-slides, acts of God, periodic interruptions due to
inclement or hazardous weather conditions, earthquakes, war, rebellion, revolution, criminal activity, delays in transportation, inaccessibility to property,
restrictions of courts and/or government authorities, other restrictive matters beyond the reasonable control of the Company, and the inability to obtain suitable or
adequate machinery, equipment or labour and other risks involved in the operation of mines.
Operations in which the Company has a direct or indirect interest will be subject to all the hazards and risks normally incidental to exploration, development and
production of precious and base metals, any of which could result in work stoppages, delayed production and resultant losses, increased production costs, asset
write downs, damage to or destruction of mines and other producing facilities, damage to life and property, environmental damage and possible legal liability for
any or all damages. The Company may become subject to liability for pollution, cave-ins or hazards against which it cannot insure or against which it may elect not
to insure. Any compensation for such liabilities may have a material, adverse effect on the Company’s financial position.
The Company’s property, business interruption and liability insurance may not provide sufficient coverage for losses related to these or other hazards. Insurance
against certain risks, including certain liabilities for environmental pollution, may not be available to the Company or to other companies within the industry at
reasonable terms or at all. In addition, the Company’s insurance coverage may not continue to be available at economically feasible premiums, or at all. Any such
event could have a material adverse effect on Sierra’s business.
Precious and base metal price fluctuations
The value and price of the Company’s securities, its financial results, and its exploration, development and mining activities may be significantly adversely
affected by declines in the price of precious and base metals. Such prices may fluctuate widely and are affected by numerous factors beyond the Company’s control
such as interest rates, exchange rates, inflation or deflation, fluctuation in the value of the U.S. dollar and foreign currencies, global and regional supply and
demand, and the political and economic conditions of precious and base metal producing countries throughout the world. The exact effect of these factors cannot
be accurately predicted, but the combination of these factors may result in the Company not receiving adequate returns on invested capital or the investments
retaining their respective values. Declining market prices for these metals could materially adversely affect the Company’s operations and profitability.
Mineralized material calculations and life-of-mine plans using significantly lower precious and base metal prices could result in material write-downs of the
Company’s investments in mining properties and increased amortization, reclamation and closure charges.
- 36 -
Mining operations
The capital costs required by the Company’s projects may be significantly higher than anticipated. Capital and operating costs, production and economic returns,
and other estimates contained in the Company’s current technical reports, may differ significantly from those provided for in future studies and estimates and from
management guidance, and there can be no assurance that the Company’s actual capital and operating costs will not be higher than currently anticipated. In
addition, delays to construction and exploration schedules may negatively impact the net present value and internal rates of return of the Company’s mineral
properties as set forth in the applicable technical report. Similarly, there can be no assurance that historical rates of production, grades of ore processed, rates of
recoveries or mining cash costs will not experience fluctuations or differ significantly from current levels over the course of the mining operations conducted by
the Company.
In addition, there can be no assurance that the Company will be able to continue to extend the production from its current operations through exploration and
drilling programs.
Infrastructure
Mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges, power sources
and water supply are important determinants, which affect capital and operating costs. The lack of availability on acceptable terms or the delay in the availability of
any one or more of these items could prevent or delay exploitation or development of the Company’s projects. If adequate infrastructure is not available in a timely
manner, there can be no assurance that the exploitation or development of the Company’s projects will be commenced or completed on a timely basis, if at all; the
resulting operations will achieve the anticipated production volume, or the construction costs and ongoing operating costs associated with the exploitation and/or
development of the Company’s advanced projects will not be higher than anticipated. In addition, unusual or infrequent weather phenomena, sabotage, government
or other interference in the maintenance or provision of such infrastructure could adversely affect the Company’s operations and profitability.
Exploration and development
There is no assurance given by the Company that its exploration and development programs and properties will result in the discovery, development or production
of a commercially viable ore body or yield new reserves to replace or expand current reserves.
The business of exploration for minerals and mining involves a high degree of risk. Few properties that are explored are ultimately developed into producing
mines. At this time, other than the mineral reserves on the Company’s Yauricocha Mine and Bolivar Mine, none of the Company’s properties have any ore-bodies
with proven or probable reserves.
The economics of developing precious and base metal properties are affected by many factors including capital and operating costs, variations of the tonnage and
grade of ore mined, fluctuating mineral markets, and such other factors as government regulations, including regulations relating to royalties, allowable production,
importing and exporting of minerals and environmental protection. Depending on the prices of silver, gold or other minerals produced, the Company may
determine that it is impractical to commence or continue commercial production.
Substantial expenditures are required to discover an ore-body, to establish reserves, to identify the appropriate metallurgical processes to extract metal from ore,
and to develop the mining and processing facilities and infrastructure. The marketability of any minerals acquired or discovered may be affected by numerous
factors which are beyond the Company’s control and which cannot be accurately foreseen or predicted, such as market fluctuations, conditions for precious and
base metals, the proximity and capacity of milling and smelting facilities, and such other factors as government regulations, including regulations relating to
royalties, allowable production, importing and exporting minerals and environmental protection. In order to commence exploitation of certain properties presently
held under exploration concessions, it is necessary for the Company to apply for an exploitation concession. There can be no guarantee that such a concession will
be granted. Unsuccessful exploration or development programs could have a material adverse impact on the Company’s operations and profitability.
- 37 -
Calculation of reserves and resources and metal recoveries
Although the Company’s reported mineral reserves and resources have been prepared by Qualified Persons, these amounts are estimates only by independent
geologists, and the Company cannot be certain that any specified level of recovery of mineral will in fact be realized or that any identified mineral deposit will ever
qualify as a commercially mineable (or viable) ore body that can be economically exploited. Mineralized materials, which are not mineral reserves, do not have
demonstrated economic viability. Any material change in the quantity of mineralization, grade or stripping ratio, or the metal price may affect the economic
viability of the Company’s properties. In addition, the Company cannot be certain that metal recoveries in small-scale laboratory tests will be duplicated in larger
scale tests under on-site conditions or during production.
The mineral resource and reserve figures included in the AIF and the documents incorporated by reference are estimates, which are, in part, based on forward-
looking information, and no assurance can be given that the indicated level of precious or base metals will be produced. Although resource estimates require a high
degree of assurance in the underlying data when the estimates are made, unforeseen events and uncontrollable factors can have significant adverse or positive
impacts on the estimates. Factors such as inherent sample variability, metal price fluctuations, variations in mining and processing parameters, increased
production costs, reduced recovery rates and adverse changes in environmental or mining laws and regulations may render the present proven and probable
reserves unprofitable to develop at a particular site or sites for periods of time and/or may require a reassessment of the commercial feasibility of a particular
project. Such a reassessment may be the result of a management decision related to a particular project. Even if the project is ultimately determined to be
economically viable, the need to conduct such a reassessment may cause substantial delays in development or may interrupt operations, if any, until the
reassessment can be completed.
Until reserves or resources are actually mined and processed, the quantities of mineralization and metal grades must be considered as estimates only. Any material
change in the quantity of mineral reserves, mineral resources, grades and recoveries may affect the economic viability of the Company’s properties.
Replacement of reserves and resources
The Yauricocha Mine, Bolivar Mine and Cusi Mine are the Company’s only current sources of mineral production. Current life-of-mine plans provide for a
defined production life for mining at the Company’s mines. If the Company’s mineral reserves and resources are not replaced either by the development or
discovery of additional reserves and/or extension of the life-of-mine at its current operating mines or through the acquisition or development of an additional
producing mine, this could have an adverse impact on the Company’s future cash flows, earnings, financial performance and financial condition, including as a
result of requirements to expend funds for reclamation and decommissioning.
Fluctuations in the price of consumed commodities
Prices and availability of commodities consumed or used in connection with exploration, development and mining, such as natural gas, diesel, oil, electricity,
cyanide and other re-agents fluctuate and affect the costs of production at the Company’s operations. These fluctuations can be unpredictable, can occur over short
periods of time and may have a materially adverse impact on our operating costs or the timing and costs of various projects. The Company’s general policy is not
to hedge its exposure to changes in prices of the commodities used in its business.
- 38 -
No defined mineral reserves at the Cusi Mine
Although commercial production at the Cusi Mine was declared in January 2013, the decision to put the Cusi Mine into production was not made based on a
feasibility study or defined mineral reserves. In addition, the Cusi Mine is still considered to be in the development stage as the majority of its production comes
from development rock. The development of a mining operation typically involves large capital expenditures and a high degree of risk and uncertainty. To reduce
this risk and uncertainty, issuers typically make a production decision based on a comprehensive feasibility study of established mineral reserves. Historically,
projects put into production without a comprehensive feasibility study of established mineral reserves have a much higher risk of economic or technical failure. As
the decision to put the Cusi Mine into production was not based on a feasibility study of mineral reserves demonstrating economic and technical viability, the
project involves an increased level of uncertainty and an increased risk of economic and/or technical failure. No assurance can be given that the operation of the
Cusi Mine will continue to be economic or profitable.
Foreign operations
The Company’s operations are currently conducted through subsidiaries principally in Peru and Mexico and, as such, its operations are exposed to various levels of
political, economic and other risks and uncertainties which could result in work stoppages, blockades of the Company’s mining operations and appropriation of
assets. In addition, some of the Company’s operations are located in areas where Mexican drug cartels operate. These risks and uncertainties vary from region to
region and include, but are not limited to, terrorism; hostage taking; local drug gang activities; military repression; expropriation; extreme fluctuations in currency
exchange rates; high rates of inflation; labour unrest; the risks of war or civil unrest; renegotiation or nullification of existing concessions, licenses, permits and
contracts; illegal mining; changes in taxation policies; restrictions on foreign exchange and repatriation of earnings or capital, changing political conditions,
currency controls and governmental regulations that favour or require the awarding of contracts to local contractors or require foreign contractors to employ
citizens of, or purchase supplies from, a particular jurisdiction.
Local opposition to mine development projects could arise in Peru and/or Mexico, and such opposition could be violent. There can be no assurance that such local
opposition will not arise with respect to the Company’s foreign operations. If the Company were to experience resistance or unrest in connection with its foreign
operations, it could have a material adverse effect on its operations and profitability. To the extent the Company acquires mineral properties in jurisdictions other
than Peru and Mexico, it may be subject to similar and additional risks with respect to its operations in those jurisdictions.
Government regulation and permitting
The Company’s operations, exploration and development activities are subject to extensive foreign federal, state and local laws and regulations governing such
matters as environmental protection, management and use of toxic substances and explosives, management of natural resources, health, exploration and
development of mines, production and post-closure reclamation, safety and labour, mining law reform, price controls import and export laws, taxation,
maintenance of claims, tenure, government royalties and expropriation of property. There is no assurance that future changes in such regulations, if any, will not
adversely affect the Company’s operations.
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The costs associated with compliance with these laws and regulations are substantial and possible future laws and regulations, changes to existing laws and
regulations and more stringent enforcement of current laws and regulations by governmental authorities, could cause additional expenses, capital expenditures,
restrictions on or suspensions of the Company’s operations and delays in the development of its properties. Moreover, these laws and regulations may allow
governmental authorities and private parties to bring lawsuits based upon damages to property and injury to persons resulting from the environmental, health and
safety practices of the Company’s past and current operations, or possibly even those actions of parties from whom the Company acquired its mines or properties,
and could lead to the imposition of substantial fines, penalties or other civil or criminal sanctions. The Company retains competent and well-trained individuals and
consultants in jurisdictions in which it does business, however, even with the application of considerable skill the Company may inadvertently fail to comply with
certain laws. Such events can lead to financial restatements, fines, penalties, and other material negative impacts on the Company.
In the ordinary course of business, the Company will be required to obtain and renew governmental permits and licenses for the operation and expansion of
existing operations or for the commencement of new operations. Obtaining or renewing the necessary governmental permits is a complex and time-consuming
process. The duration and success of the Company’s efforts to obtain and renew permits and licenses are contingent upon many variables not within its control
including the interpretation of applicable requirements implemented by the permitting or licensing authority. The Company may not be able to obtain or renew
permits and licenses that are necessary to continue its operations or the cost to obtain or renew permits and licenses may exceed what the Company expects. Any
unexpected delays or costs associated with the permitting and licensing process could delay the development or impede operations, which may adversely affect the
Company’s revenues and future growth.
Risks relating to outstanding borrowings
The Company’s ability to repay its outstanding borrowings depends on its future cash flows, profitability, results of operations and financial condition. The
Company has prepared budgets based on estimates of commodity prices, future production, operating costs and capital costs, however the Company cannot assure
that such revenues, production plans, costs or other estimates will be achieved. Actual revenues and production costs may vary from the estimates depending on a
variety of factors including those discussed herein, many of which are not within the Company’s control. Failure to achieve revenue, production or cost estimates
or material increases in costs or material decreases in commodity prices could have a material adverse impact on the Company's future cash flows, profitability,
results of operations and financial condition.
If there is any event of default under any of the Company’s loan facilities, the principal amount of such loans, plus accrued and unpaid interest, if any, may be
declared immediately due and payable. If such an event occurs, this would place additional strain on the Company’s cash resources, which could inhibit its ability
to further its operating and/or exploration activities.
Title to assets
Although the Company believes that it has exercised commercially reasonable diligence with respect to determining title to properties that it owns, controls or has
rights in, there is no guarantee that title to such properties will not be challenged or impugned. The Company’s properties may be subject to prior unrecorded
agreements or transfers or native land claims and title may be affected by undetected defects. There may be valid challenges to the title of the Company’s
properties which could impair development and/or operations of the Company. If title to the Company’s properties is disputed it may result in the Company
paying substantial costs to settle the dispute or clear title and could result in the loss of the property, which events may affect the economic viability of the
Company.
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Environmental factors
All phases of the Company’s operations are subject to federal, state and local environmental regulation. These regulations mandate, among other things, the
maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid
and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for
non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers,
directors and employees. The Company cannot be certain that future changes in environmental regulations, if any, will not adversely affect its operations.
Environmental hazards may exist on properties held by the Company that are unknown to it and that have been caused by previous or existing owners or operators
of the Company’s properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by
regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of
additional equipment, or remedial actions. Parties engaged in mining operations or in the exploration or development of mineral properties may be required to
compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable
laws or regulations.
Litigation risks
All industries, including the mining industry, are subject to legal claims, with and without merit. Although the Company is not currently aware of any threatened or
pending legal proceedings other than as disclosed in the Company’s financial statements, there is no guarantee that the Company will not become subject to
additional proceedings in the future. There can be no guarantee of the outcome of any such claim. In addition, defense and settlement costs for any legal
proceeding can be substantial, even with respect to claims that have no merit. Due to the inherent uncertainty of the litigation process, there can be no assurance
that the resolution of any particular legal proceeding will not have a material effect on the Company’s financial position or results of operations.
Insurance risks
The Company’s insurance will not cover all the potential risks associated with a mining company’s operations. The Company may also be unable to maintain
insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any
resulting liability. Moreover, the Company expects that insurance against risks such as environmental pollution or other hazards as a result of exploration and
production may be prohibitively expensive to obtain for a company of Sierra’s size and financial means. The Company may also become subject to liability for
pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons.
Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon the Company’s financial condition and
results of operations.
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Competitive risks
The mining industry is competitive in all of its phases. The Company faces strong competition from other mining companies in connection with the acquisition of
properties producing, or capable of producing, base and precious metals. Many of these companies have greater financial resources, operational experience and
technical capabilities than the Company does. As a result of this competition, the Company may be unable to maintain or acquire attractive mining properties on
terms acceptable to the Company or at all. Consequently, the Company’s revenues, operations and financial condition could be materially adversely affected.
Volatility in the price of the common shares
Securities of mineral resource and mining companies have experienced substantial volatility in the past, often based on factors unrelated to the financial
performance or prospects of the companies involved. In addition, because of the nature of the Company’s business, certain factors such as public announcements
and the public’s reaction, the Company’s operating performance and the performance of competitors and other similar companies, fluctuations in the market prices
of precious and base metals, government regulations, changes in earnings estimates or recommendations by research analysts who track Sierra’s securities or
securities of other companies in the resource sector, general market conditions, announcements relating to litigation, the arrival or departure of key personnel and
the risk factors described in this AIF can have an adverse impact on the market price of the Common Shares.
Any negative change in the public’s perception of the Company’s prospects could cause the price of its securities, including the price of the Common Shares, to
decrease dramatically. Furthermore, any negative change in the public’s perception of the prospects of mining companies in general could depress the price of
Sierra’s securities, including the price of the Common Shares, regardless of the Company’s results. Securities class-action litigation often has been brought against
companies following periods of volatility in the market price of their securities. The Company may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and damages and divert management’s attention and resources.
Global financial risks
Financial markets globally have been subject to increased volatility. Access to financing has been negatively impacted by liquidity crises throughout the world.
These factors may impact the Company’s ability to obtain loans and other credit facilities in the future and, if obtained, on terms favorable to Sierra. The levels of
volatility and market turmoil are on the rise, and the Company may not be able to secure appropriate debt or equity financing, any of which could affect the trading
price of the Company’s securities in an adverse manner.
Employee Recruitment and Retention
Recruiting and retaining qualified personnel is critical to the Company’s success. The Company is dependent on the services of key executives including the
Company’s President and Chief Executive Officer and other highly skilled and experienced executives and personnel focused on managing the Company’s
interests. The number of persons skilled in acquisition, exploration, development and operation of mining properties are limited and competition for such persons is
intense. As the Company’s business activity grows, the Company will require additional key financial, administrative and mining personnel as well as additional
operations staff. The Company could experience increases in its recruiting and training costs and decreases in its operating efficiency, productivity and profit
margins. If the Company is not able to attract, hire and retain qualified personnel, the efficiency of its operations could be impaired, which could have an adverse
impact on the Company’s future cash flows, earnings, financial performance and financial condition.
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Reliance on Key Personnel and Labour Relations
The Company’s operations are dependent on the abilities, experience and efforts of key personnel. If any of these individuals were to be unable or unwilling to
continue to provide their services to the Company, there may be a material adverse effect on the Company’s operations. The Company’s success is dependent upon
its ability to attract and retain qualified employees and personnel to meet its needs from time to time. The Company may be negatively impacted by the availability
and potential increased costs that may be associated with experienced key personnel and general labour. Sierra’s ability to achieve its future goals and objectives is
dependent, in part, on maintaining good relations with its employees and minimizing employee turnover. Work stoppages or other industrial relations events at any
of Sierra’s operations could lead to delayed revenues, increased costs and delayed operation cash flows. As a result, prolonged labor disruptions at any of Sierra’s
operations could have a material adverse impact on its operations as a whole.
Potential conflicts of interest
Certain of the Company’s directors and officers serve, or may serve in the future, as officers and directors for other companies engaged in natural resource
exploration, development and/or production. Consequently, there is a possibility that the Company’s directors and/or officers may be in a position of conflict in the
future.
To the extent that such other companies may participate in ventures in which the Company is also participating, such directors and officers of the Company may
have a conflict of interest in negotiating and reaching an agreement with respect to the extent of each company’s participation. The CBCA requires the directors
and officers to act honestly, in good faith, and in the best interests of the Company and its shareholders. However, in conflict of interest situations, directors and
officers of the Company may owe the same duty to another company and will need to balance the competing obligations and liabilities of their actions.
Controlling group of shareholders
Arias Resource Capital Fund L.P., Arias Resource Capital Fund II L.P., Arias Resource Capital Fund II (Mexico) L.P. (collectively, the “ ARC Funds ”) and Arias
Resource Capital Management LP (the “ Manager ”) collectively own a significant number of Common Shares. This significant concentration of ownership may
adversely affect the trading price for the Common Shares because investors often perceive disadvantages in owning shares in companies with controlling
shareholders. In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors
and approval of corporate transactions, such as a merger or other sale of the Company or its assets. This concentration of ownership could limit investors’ ability to
influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation, or other business combination
involving the Company, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control
would benefit the Company's other shareholders.
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Third Party Reliance
The Company’s rights to acquire interests in certain mineral properties have been granted by third parties who themselves may hold only an option to acquire such
properties. As a result, the Company may have no direct contractual relationship with the underlying property holder.
Differences in U.S. and Canadian reporting of mineral reserves and resources
The Company’s mineral reserve and resource estimates are not directly comparable to those made in filings subject to SEC reporting and disclosure requirements
as the Company generally reports mineral reserves and resources in accordance with Canadian practices. These practices are different from those used to report
mineral reserve and resource estimates in reports and other materials filed with the SEC. It is Canadian practice to report measured, indicated and inferred
resources, which are not permitted in disclosure filed with the SEC by United States issuers. Under SEC rules, mineralization may not be classified as a “reserve”
unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is
made. United States investors are cautioned not to assume that all or any part of measured or indicated resources will ever be converted into reserves.
Further, “inferred mineral resources” have a great amount of uncertainty as to their existence and as to whether they can be mined legally or economically.
Disclosure of “contained ounces” is permitted disclosure under Canadian regulations; however, the SEC only permits issuers to report mineralization that does not
constitute “reserves” by SEC Industry Guide 7 standards “as in-place tonnage and grade” without reference to unit of metal measures.
Accordingly, information concerning descriptions of mineralization, reserves and resources contained in this AIF, or in the documents incorporated herein by
reference, may not be comparable to information made public by United States companies subject to the reporting and disclosure requirements of the SEC.
Claims Under U.S. Securities Laws
The enforcement by investors of civil liabilities under the federal securities laws of the United States may be affected adversely by the fact that the Company is
incorporated under the federal laws of Canada, that the independent registered chartered accountants who have audited the Company’s financial statements and
some or all of the Company’s directors and officers may be residents of Canada or elsewhere, and that all or a substantial portion of the Company’s assets and said
persons are located outside the United States. As a result, it may be difficult for holders of the Company’s Common Shares to effect service of process within the
United States upon people who are not residents of the United States or to realize in the United States upon judgments of courts of the United States predicated
upon civil liabilities under the federal securities laws of the United States.
Potential dilution of present and prospective shareholdings
The exercise of stock options and restricted share units issued by the Company and the issuance of other additional equity securities in the future could result in
dilution in the value of the Company’s Common Shares and the voting power represented by such shares. Furthermore, to the extent holders of the Company’s
stock options or other securities exercise their securities and then sell the Common Shares they receive, the trading price of the Common Shares may decrease due
to the additional number of Common Shares available in the market.
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Currency Risks
The Company's operations in Mexico and Peru are subject to foreign currency exchange fluctuations. The Company may suffer losses due to adverse foreign
currency fluctuations.
The Company and its subsidiaries’ financial instruments are exposed to currency risk where those instruments are denominated in currencies that are not the same
as their functional currency; exchange gains and losses in these situations impact net income or loss. The Company raises its funds through equity issuances which
are priced in Canadian dollars, and the majority of the exploration and operating costs of the Company are denominated in United States dollars, Peruvian Nuevo
Soles, and Mexican pesos. In addition, the Company’s sales of silver, copper, lead, zinc and gold are denominated in United States dollars. The United States dollar
is the functional currency of the Peruvian entities and the Mexican entities. The Canadian dollar is the functional currency of all other entities. The Company also
holds cash and cash equivalents, trade and other receivables, accounts payable that are subject to currency risk. As a result, the Company’s financial performance
may be significantly impacted by changes in foreign exchange rates.
Risks relating to cyclical business
The Company's financial performance is dependent on many external factors. The Company expects that any revenues it may earn from its operations in the future
will be from the sale of metals and minerals. Both prices and markets for metals and minerals are cyclical, difficult to predict, volatile, subject to government price
fixing and controls and respond to changes in domestic and international political, social and economic environments. In addition, the availability and cost of funds
for exploration, development and production costs are difficult to predict. These changes and events could materially affect the financial performance of the
Company.
Liquidity risks
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has in place a planning, budgeting and
forecasting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and its expansion and
development plans. The Company’s budgets and forecasts are based on estimates of commodity prices, future production, operating costs and capital costs. The
Company cannot assure that such revenues, production plans, costs or other estimates will be achieved. Actual revenues and production costs may vary from the
estimates depending on a variety of factors, many of which are not within the Company’s control. Failure to achieve revenue, production or cost estimates or
material increases in costs or material decreases in commodity prices could have a material adverse impact on the Company's ability to meet its financial
obligations as they come due.
The Company ensures that it has sufficient committed credit facilities to meet its short-term operating needs. There can be no guarantee that the Company will be
successful in obtaining these credit facilities on acceptable terms, or at all. If additional financing is not available, the Company may have to postpone its capital
expenditures and exploration programs, which could materially impact the long-term financial performance of the Company.
Financial Reporting Standards
The Company prepares its financial reports in accordance with IFRS applicable to publicly accountable enterprises. In preparation of financial reports,
management may need to rely upon assumptions, make estimates or use their best judgment in determining the financial condition of the Company. Significant
accounting policies are described in more detail in the Company’s audited financial statements. In order to have a reasonable level of assurance that financial
transactions are properly authorized, assets are safeguarded against unauthorized or improper use, transactions are properly recorded and reported, the Company
has implemented and continues to analyze its internal control systems for financial reporting. Although the Company believes its financial reporting and financial
statements are prepared with reasonable safeguards to ensure reliability, the Company cannot provide absolute assurance.
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Credit risks
Credit risk is the risk that the counterparty to a financial instrument might fail to discharge its obligations under the terms of a financial contract. Credit risk is
primarily associated with trade receivables; however, it also arises on cash and cash equivalents, other receivables and financial assets.
The Company is subject to credit risk through its significant Mexican value-added-tax (“ VAT ”) receivable that is collectible from the government of Mexico. The
VAT receivable balance as at December 31, 2018 was $5.8 million (December 31, 2017 - $5.7 million).
DIVIDENDS AND DISTRIBUTIONS
There have been no cash dividends or distributions declared on any of Sierra’s securities for each of the three most recently completed financial years of the
Company.
The amount of future dividends to be declared in the future, if any, shall be considered by the Board on a quarterly basis and will depend on the Company's overall
cash and operating position at the relevant time.
DESCRIPTION OF CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of Common Shares without par value. As of the date hereof, the Company has 163,512,023 issued and
outstanding Common Shares.
Each Common Share carries one vote at all meetings of shareholders, is entitled to receive dividends as and when declared by the Board and is entitled to
participation in in the remaining property and assets of the Company upon dissolution or winding-up. The Common Shares do not carry any pre-emptive,
subscription, redemption or conversion rights.
MARKET FOR SECURITIES
The Company’s Common Shares are currently listed for trading on the TSX and the Lima Stock Exchange under the symbol SMT. The Common Shares have been
listed for trading on the NYSE American since July 7, 2017, under the symbol SMTS.
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Trading Prices and Volumes
The following table provides a summary of the high and low prices and volumes for the Common Shares as traded on the TSX for the twelve-month period ending
December 31, 2018.
Period
January 2018
February 2018
March 2018
April 2018
May 2018
June 2018
July 2018
August 2018
September 2018
October 2018
November 2018
December 2018
Prior Sales
High (C$)
Low (C$)
Volume
3.31
3.23
3.40
3.50
3.76
3.64
3.55
3.66
3.40
3.47
3.35
3.10
2.97
2.97
2.90
3.22
3.27
3.31
3.33
2.95
3.23
2.96
3.03
2.28
429,845
86,321
407,818
289,940
226,202
116,495
67,252
350,705
215,173
1,218,110
173,273
574,403
During the fiscal year ended December 31, 2018, the Company issued the following securities that are not listed or quoted on a marketplace:
Date of Issue
March 31, 2018
April 10, 2018
ESCROWED SECURITIES
Type of Security Issued
Restricted Share Units
Restricted Share Units
Number of
Securities Issued
501,039
178,588
To the Company’s knowledge, as at December 31, 2018, no securities of the Company were held in escrow or were subject to contractual restriction on transfer.
DIRECTORS AND OFFICERS
As of the date of this AIF, Sierra Metals has a board consisting of seven directors. Each director will hold office until the next annual general meeting of the
Company or until his successor is elected or appointed, unless his office is earlier vacated in accordance with the consenting documents of the Company or the
provisions of the CBCA.
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The following table sets forth the names, residency and office of each director and executive officers of the Company as at the date hereof:
Name, Position with the
Company, Province or State
and Country of Residence
IGOR GONZALES (4)(6)
President, Chief Executive Officer and
Director
Lima, Peru
J. ALBERTO ARIAS (2)(4)(5)(6)
Chairman of the Board and Director
New York, USA
PHILIP RENAUD (1)(2)(3)(5)
Director
London, United Kingdom
DOUGLAS F. CATER (1)(3)(4)
Director
Ontario, Canada
STEVEN G. DEAN (2)(3)(5)
Director
British Columbia, Canada
DIONISIO ROMERO PAOLETTI
Director
Lima, Peru
JOSE VIZQUERRA BENAVIDES (1)(6)
Director
Ontario, Canada
ED GUIMARAES
Chief Financial Officer
Ontario, Canada
GORDON BABCOCK
Chief Operating Officer
Lima, Peru
ALONSO LUJAN
Vice President, Exploration
Chihuahua, Mexico
Principal Occupation for the past five years
Director/Officer of the
Company since
-May 2017 to present: President and CEO of the Company
-November 2014 to May 2017: COO at CIA Minas Buenaventura (a
mining company)
-President & CEO since May 1,
2017
-Director since September 19, 2013
President and CEO, Arias Resource Capital Management LP (a private
fund manager)
November 26, 2008
Managing Director, LB Advisors (an investment advisory firm)
October 1, 2003
-January 2019 to present: Independent Consultant
-January 2016 to January 2019: VP Exploration (Canada), Kirkland Lake
Gold Inc. (a mining company)
-June 2012 to January 2016: VP Exploration, St. Andrew Goldfields Inc.
(a mining company)
June 10, 2009
Independent Businessman
October 4, 2011
Corporate Director and Chairman of various public companies
November 16, 2015
-June 2016 to present: Executive VP of Strategic Development at Osisko
Mining Inc. (a mining company)
-July 2015 to June 2016: COO and Senior VP Corporate Development at
Osisko Mining Inc.
-April 2014 to July 2015: President and CEO of Oban Mining Corporation
(a mining company)
November 9, 2017
-November 2014 to present: CFO of the Company
-2012 to November 2014: Independent Advisor/Business Consultant in the
Mining Industry, and Corporate Director of various public companies
November 17, 2014
-July 2015 to present: COO of the Company
-January 2013 to June 2014: COO of Jaguar Mining Inc. (a mining
company)
July 13, 2015
-September 2016 to present: VP Exploration of the Company
-January 2016 to September 2016: Independent Consultant
-September 2011 to December 2015: General Manager, Trafigura Mining
Group (MATSA) (a mining operations manager)
September 14, 2016
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MICHAEL MCALLISTER
Vice President, Corporate Development
Ontario, Canada
ANDREW DUNLOP
Corporate Controller
Ontario, Canada
JILL NEFF
Corporate Secretary
British Columbia, Canada
-July 2016 to present: VP Corporate Development of the Company
-April 2015 to July 2016: Director Corporate Development of the
Company
-Jan 2015 to April 2015: Senior Account Executive, TMX Equicom (an
investor relations consulting firm)
-June 2010 to Jan 2015: Manager, Investor Relations for various
companies within Forbes and Manhattan Merchant Bank
July 15, 2016
-January 2015 to present: Corporate Controller of the Company
-May 2011 to January 2015: Corporate Controller, Scorpio Mining (a
mining company)
January 19, 2015
-April 2013 to present: Corporate Secretary of the Company
April 25, 2013
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Corporate Governance Committee
(4) Member of the Nomination Committee
(5) Member of the Corporate Strategy Committee
(6) Member of the Health, Safety, Environment & Community Relations Committee
As at December 31, 2018, the directors and executive officers of the Company as a group beneficially owned, directly and indirectly, or exercised control over, an
aggregate of 90,079,518 Common Shares of the Company representing approximately 55.1% of the outstanding shares of the Company as at December 31, 2018.
This includes an aggregate of 84,960,358 Common Shares owned by the ARC Funds and the Manager. The ARC Funds are managed by the Manager. The
respective general partner of each of the ARC Funds retains the power to make investment and voting decisions in respect of the Common Shares beneficially
owned by the ARC Funds. J. Alberto Arias is the sole director of each of the general partners of the ARC Funds and indirectly controls the Manager. As such, Mr.
Arias may be deemed to share voting and dispositive power with respect to the Common Shares beneficially owned by the ARC Funds and the Manager, but he
disclaims any beneficial ownership of any such securities, except to the extent of his pecuniary interest therein.
Board Adviser
Mr. Alberto Beeck serves as an adviser to the Board. Pursuant to an adviser agreement dated December 20, 2017 (the “ Adviser Agreement ”), Mr. Beeck was
appointed as an adviser to the Board to provide such advice and direction requested by the Board in the performance of its duties and as may be within the
expertise of Mr. Beeck. Under the Adviser Agreement, Mr. Beeck has the right to attend all meetings the Board strictly in a non-voting, advisory capacity but is not
to take an active role in any Board meeting such as by moving any motion, voting on any matter or actively seeking to influence the actions of the Board.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Except as disclosed herein, no director, officer or executive officer of the Company is, as of the date of this AIF, or was within ten years before the date of this
AIF, a director, chief executive officer or chief financial officer of any company (including the Company), that:
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(a)
(b)
was the subject of a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under
securities legislation, that was in effect for a period of more than 30 consecutive days, (an “ order ”) that was issued while the director or executive
officer was acting in the capacity as director, chief executive officer or chief financial officer; or
was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and
which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.
Philip Renaud was a director of Diagem Inc. (“ Diagem ”) which is subject to a cease trading order resulting from Diagem’s failure to meet regulatory
requirements as a result of insolvency. In May 2009 and in May 2011, a Management Cease Trade Order applicable to the directors and officers of the Company
and related companies was issued for late filing of the financial statements.
Except as disclosed herein, no director or executive officer of the Company, or a shareholder holding a sufficient number of securities of the Company to affect
materially the control of the Company:
(a)
(b)
is, as of the date of this AIF, or has been within the ten years before the date of this AIF, a director or executive officer of any company (including the
company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or;
has, within ten years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or become
subject to or instituted any proceedings, arrangement, or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the
assets of the director, executive officer or shareholder.
From March 28, 2013 until January 21, 2014, J. Alberto Arias served as a director on the board of Colossus Minerals Inc. (“ Colossus ”). On January 14, 2014,
Colossus filed a notice of intention to make a proposal under the Canadian Bankruptcy and Insolvency Act.
No director or executive officer of the Company, or a shareholder holding a sufficient number of securities of the Corporation to affect materially the control of the
Company has been subject to:
(a )
(b)
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement
agreement with a securities regulatory authority; or
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an
investment decision.
Conflicts of Interest
The Company confirms that there are currently no existing material conflicts of interest between Sierra or a subsidiary of Sierra and any director or officer of
Sierra or of a subsidiary of Sierra. Other than with respect to (i) the involvement of certain directors of the Company in other mining companies, and (ii) the
significant holding of the ARC Funds and the Manager in the Company for which J. Alberto Arias may be deemed to share voting and dispositive power with
respect to the Company securities beneficially owned by the ARC Funds and the Manager, there are no potential material conflicts of interest between Sierra or a
subsidiary of Sierra and any director or officer of Sierra or of a subsidiary of Sierra.
- 50 -
AUDIT COMMITTEE INFORMATION
The Board has established an audit committee (the “ Audit Committee ”) comprised of Douglas F. Cater, Philip Renaud and Jose Vizquerra Benavides. All of the
members of the Audit Committee are independent, non-executive directors of the Company. All members of the Audit Committee meet the independence and
financial literacy requirements of National Instrument 52-110 - Audit Committees (“ NI 52-110 ”).
The Board has adopted a written charter for the Audit Committee, which sets out the Audit Committee’s responsibility in overseeing the accounting and financial
reporting processes of the Company, audits of the financial statements of the Company, and the appointment, compensation, and oversight of the work of any
registered external auditor employed by the Company for the purpose of preparing or issuing an audit report or related work. This charter is reviewed and assessed
at least annually or otherwise, deemed appropriate, by the Board with the assistance of the Corporate Governance, Nominating and Audit Committees. A copy of
this charter is attached hereto as Appendix “A”.
Douglas F. Cater
Douglas Cater is a graduate of the University of Waterloo and is a Professional Geologist with 30 years of experience in the exploration and mining of precious
metals including the analysis of budgets and project management of mining projects. Mr. Cater recently retired from his position as Vice-President Exploration of
Kirkland Lake Gold Inc. (2016 – 2019), and prior to that he was Vice President Exploration of St. Andrews Goldfields Ltd. (2012 – 2015). Since June of 2009, he
has also been the Project Manager for Sabina Gold & Silver Corporation, a mineral exploration and development corporation. He was the Exploration Manager for
Dundee Precious Metals Inc., a Toronto-based mining and exploration Company, from August 2005 to June 2009. Mr. Cater’s experience in the mining industry
has provided him with the knowledge required to understand accounting principles and financial statements.
Philip Renaud
Mr. Renaud is the Managing Director of LB Advisors, a European investment advisory firm involved in private financings. Mr. Renaud graduated from Franklin
College of Switzerland with a Bachelor of Arts in international financial management. Prior to his involvement with LB Advisors, Mr. Renaud was a founding
partner of Change Capital Partners, a European private equity fund. He is also Chairman of Diagnos Inc. and Kane Biotech Inc., both Canadian, publicly-traded
companies.
Jose Vizquerra Benavides
Mr. Vizquerra Benavides is the Executive Vice President of Strategic Development and a Director at Osisko Mining Inc. Previously, Mr. Vizquerra Benavides
served as the President & CEO of Oban Mining Corp. (“ Oban ”), where he led the successful change of business strategy that resulted in Oban's acquisition of
Corona Gold, Eagle Hill Exploration Corp. and Ryan Gold to form what is now Osisko Mining. Mr. Vizquerra Benavides previously worked as Head of Business
Development for Compania de Minas Buenaventura, prior to which he worked as a production and exploration geologist at the Red Lake gold mine. He is
currently a board member of Alio Gold Inc. Mr. Vizquerra Benavides holds a M.Sc. from Queens University in MINEX, and is a Qualified Person (AIGP). Mr.
Vizquerra Benavides’ experience in the mining industry has provided him with the knowledge required to understand accounting principles and financial
statements.
- 51 -
Audit Committee Oversight
At no time since January 1, 2018 has a recommendation of the Audit Committee to nominate or compensate an external auditor not been adopted by the Board.
Pre-Approval Policies and Procedures
The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services, including the requirement that all non-audit services
to be performed by the external auditor must be pre-approved and monitored by the audit committee. Subject to NI 52-110, the engagement of non-audit services is
considered by the Board, and where applicable the Audit Committee, on a case-by-case basis.
External Auditor Fees
PricewaterhouseCoopers LLP (“ PWC ” ) was appointed as auditors of the Company on July 11, 2012. For the fiscal years ended December 31, 2018 and
December 31, 2017, the fees billed by PWC are summarized below for each category:
Service
Audit Fees
Audit-Related Fees (1)
Tax Fees
All Other Fees
Total Fees Paid
Fees Incurred 2018 Fees Incurred 2017
395,668
$
208,712
$
nil
$
$
nil
604,390
$
336,080 $
55,184 $
nil $
nil $
391,264 $
(1) For the year ended December 31, 2018, the $55,184 in “Audit-Related Fees” relates to PWC’s quarterly reviews.
(2) For the year ended December 31, 2017, “Audit-Related Fees” noted above included $127,320, $57,589 and $23,803 for services related to: (i) the
Company’s prospectus, audit and review of Cautivo Mining Inc., (ii) the ATM Financing, and (iii) the US listing prospectus, respectively.
The fees set forth in the table above cover the following services provided to us by PWC:
“Audit Fees” include fees necessary to perform the audit of the Company’s consolidated financial statements. Audit Fees include quarterly reviews, fees for review
of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by
legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.
“Audit-Related Fees” include services that are traditionally performed by the auditor. These audit-related services include due diligence assistance, accounting
consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.
“Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax
planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests
for rulings or technical advice from tax authorities.
- 52 -
“All Other Fees” include fees relating to the aggregate fees billed in each of the last two fiscal years for products and services provided by the Company’s external
auditor, other than the services reported in the preceding paragraphs.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Legal Proceedings
The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the normal course of business. Each of these matters
is subject to various uncertainties and it is possible that some of these matters may be resolved unfavorably to the Company. The Company carries liability
insurance coverage and will establish accruals and provisions for matters that are probable and can be reasonably estimated. In addition, the Company may be
involved in disputes with other parties in the future. These may result in a significant impact on the Company’s financial condition, cash flow and results of
operations.
The claims associated with the Company’s Mexican operations are discussed in detail below:
In October 2009, Polo y Ron Minerals, S.A. de C.V. (“ P&R ”) sued the Company and one of its subsidiaries, Dia Bras Mexicana S.A. de C.V. (“ DBM ”). P&R
claimed damages for the cancelation of an option agreement (the “ Option Agreement ”) regarding the San Jose properties in Chihuahua, Mexico (the “ San Jose
Properties ”). The San Jose Properties are not located in any areas where DBM currently operates, nor are these properties included in any resource estimates of
the Company. The Company believes that it has complied with all of its obligations pertaining to the Option Agreement. In October 2011, the 8th Civil Court of
the Judicial District of Morelos in Chihuahua issued a resolution that absolved the Company from the claims brought against it by P&R on the basis that P&R did
not provide evidence to support any of its claims. P&R appealed this resolution to the State Court, which overruled the previous resolution and ordered the
Company to: (i) transfer to P&R 17 mining concessions from the Company’s Bolivar project, including the mining concessions where both mine operations and
mineral reserves are located; and (ii) pay $423 to P&R; the Company was not appropriately notified of this resolution. In February 2013, a Federal Court in the
State of Chihuahua granted the Company a temporary suspension of the adverse resolution issued by the State Court of Chihuahua, Mexico. In July 2014, a Federal
Court in the State of Chihuahua ordered that the Company was entitled to receive proper notice of the adverse resolution previously issued by the State Court of
Chihuahua. This allows the Company to proceed with its appeal (writ of “ amparo ”) of the State Court’s previous resolution. The adverse resolution has been
temporarily suspended since March 2013, which suspension will remain in place pending the writ of amparo. The amparo is being heard in Federal Court and will
challenge the State Court’s ruling. The Federal Court’s verdict in the amparo will be final and non-appealable. On February 12, 2016, the Federal Court issued a
new judgment ruling that the State Court lacked jurisdiction to rule on issues concerning mining titles, and that no previous rulings by the State Court against the
Company shall stand. They ordered the cancellation of the previous adverse resolution by the state Court. The Company continues to believe that the original claim
is without merit and will continue to vigorously defend this claim.
In 2009, a personal action was filed in Mexico against DBM by an individual, Ambrosio Bencomo Muñoz as administrator of the intestate succession of Ambrosio
Bencomo Casavantes y Jesus Jose Bencomo Muñoz, claiming the annulment and revocation of the purchase agreement of two mining concessions, Bolívar III and
IV between Minera Senda de Plata S.A. de C.V. and Ambrosio Bencomo Casavantes, and with this, the nullity of purchase agreement between DBM and Minera
Senda de Plata S.A. de C.V. In June 2011, the Sixth Civil Court of Chihuahua, Mexico, ruled that the claim was unfounded and dismissed the case, the plaintiff
appealed to the State Court. The process is in the appealing court. The Company will continue to vigorously defend this action and is confident that the claim is of
no merit.
- 53 -
The Company is not aware of any other legal proceedings known to be contemplated.
Regulatory Actions
During the financial year ended December 31, 2018, there were no: (a) penalties or sanctions imposed against the Company by a court relating to securities
legislation or by a securities regulatory authority; (b) other penalties or sanctions imposed by a court or regulatory body against the Company that would likely be
considered important to a reasonable investor in making an investment decision; and (c) settlement agreements the Company entered into before a court relating to
securities legislation or with a securities regulatory authority.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Management of the Company is not aware of any material interest, direct or indirect, of any of the following persons or companies in any transaction within the
three most recently completed financial years or during the current financial year that has materially affected or is reasonably expected to materially affect the
Company:
(a)
(b)
(c)
a director or executive officer of the Company;
a person or company that beneficially owns, or controls or directs, directly or indirectly, more than 10% of any class or series of the Company’s
outstanding voting securities; and
an associate or affiliate of any of the persons or companies referred to in paragraphs (a) or (b).
TRANSFER AGENT AND REGISTRAR
The Company’s registrar and transfer agent is Computershare Investor Service Inc. located at 1500 University Street, Suite 700, Montreal, Quebec H3A 3S8.
MATERIAL CONTRACTS
There are no contracts, other than those disclosed in this AIF and other than those entered into in the ordinary course of the Company’s business, that are material
to the Company and that were entered into during the most recently completed year ended December 31, 2018 or before the most recently completed financial
year, that are still in effect as of the date of this AIF.
INTEREST OF EXPERTS
The Qualified Persons responsible for reviewing the Yauricocha Technical Report are Enrique Rubio, Ph.D. (of Redco), Matthew Hastings, MSc Geology,
MAusIMM CP (of SRK) and Augusto Chung, FAusIMM CP (of the Company).
- 54 -
The Qualified Persons responsible for reviewing the Bolivar Technical Report are Enrique Rubio, Ph.D. (of Redco), Giovanny Ortiz, BSc Geology, FAusIMM CP
(of SRK) and Augusto Chung, FAusIMM CP (of the Company).
The Qualified Persons responsible for reviewing the Cusi Technical Report are Enrique Rubio, Ph.D. (of Redco), Giovanny Ortiz, BSc Geology, FAusIMM CP (of
SRK), Daniel H. Sepulveda, BSc Extractive Metallurgy Engineer, SME-RM (of SRK) and Augusto Chung, FAusIMM CP (of the Company).
To the knowledge of the Company, each of the Qualified Persons listed above hold less than 1% of the outstanding Common Shares of the Company, at the time of
the preparation of the reports and/or at the time of the preparation of the technical information contained in this AIF and either did not receive any or received less
than a 1% direct or indirect interest in any securities of the Company or of any associate or affiliate of the Company in connection with the preparation of such
reports or data.
Americo Zuzunaga MAusIMM CP (Mining Engineer), the Vice-President Planning of the Company, is named in this AIF as having prepared the Yauricocha Mine
consolidated mineral reserve and resource estimate as at December 31, 2018, the Bolivar Mine consolidated mineral reserve and resource estimate as at December
31, 2018, and the Cusi Mine consolidated mineral resource estimate as at December 31, 2018, under the heading “Updated Mineral Resource and Mineral Reserve
Information”. As of the date hereof, Americo Zuzunaga does not hold any securities of the Company.
Gordon Babcock (P. Eng.), the Chief Operating Officer of the Company, is named in this AIF as having reviewed the Yauricocha Mine consolidated mineral
reserve and resource estimate as at December 31, 2018, the Bolivar Mine consolidated mineral reserve and resource estimate as at December 31, 2018, and the
Cusi Mine mineral resource estimate as at December 31, 2018, under the heading “Updated Mineral Resource and Mineral Reserve Information”. As of the date
hereof, Gordon Babcock holds 161,083 Common Shares and 254,349 restricted share units of the Company.
PWC are the auditors of the Company who have prepared the auditors’ report in respect of the annual financial statement for the fiscal year ended December 31,
2018. PWC has confirmed that it is independent with respect to the Company within the meaning of the Chartered Professional Accountants of Ontario CPA Code
of Professional Conduct.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found on SEDAR at www.sedar.com and on the Company’s website at www.sierrametals.com.
Information regarding directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities, and securities authorized for issuance
under equity compensation plans, if any, is contained in the Company’s Management Information Circular for its most recent annual meeting of shareholders that
involved the election of directors. Additional financial information is provided in the Company’s comparative Financial Statements and Management Discussion &
Analysis for its most recently completed financial year.
- 55 -
APPENDIX “A”
SIERRA METALS INC.
AUDIT COMMITTEE CHARTER
I
PURPOSE
The Audit Committee (the “Committee”) is a committee of the board of directors (the “Board”) of Sierra Metals Inc. (the “Corporation”). The primary function of
the Committee is to assist the Board in fulfilling its financial reporting and controls responsibilities to the shareholders of the Corporation and the investment
community. The external auditors will report directly to the Committee. The Committee’s primary duties and responsibilities are:
•
•
•
overseeing the integrity of the Corporation’s financial statements and reviewing the financial reports and other financial information provided by
the Corporation to any governmental body or to the public;
recommending the appointment and reviewing and appraising the audit efforts of the Corporation’s external auditors, overseeing the external
auditors’ qualifications and independence and providing an open avenue of communication among the external auditors, the Corporation’s
financial and senior management and the Board; and
monitoring the Corporation’s financial reporting process and internal controls, its management of business and financial risk, and its compliance
with legal, ethical and regulatory requirements.
II
COMPOSITION
The Committee will be comprised of members of the Board, the number of which will be determined from time to time by resolution of the Board. The
composition of the Committee will be determined by the Board such that the membership and independence requirements set out in the rules and regulations, in
effect from time to time, of any securities commissions (including, but not limited to, the British Columbia Securities Commission) and any exchanges upon which
the Corporation's securities are listed (including, but not limited to, the Toronto Stock Exchange) are satisfied.
The members of the Committee shall be elected by the Board at the annual organizational meeting of the Board and shall remain on the Committee until the next
annual organizational meeting of the Board or until their successors have been duly elected or appointed. The Board may remove a member of the Committee at
any time in its sole discretion by resolution of the Board.
III
1.
DUTIES AND RESPONSIBILITIES
The Committee shall:
(a)
review and recommend to the Board for approval the annual audited consolidated financial statements of the Corporation;
(b)
(c)
(d)
review with financial management and external auditors the Corporation’s financial statements, MD&A and earnings releases prior to filing the
same with regulatory bodies such as securities commissions and/or prior to their release;
review document referencing, containing or incorporating by reference the annual audited consolidated financial statements or non-audited
interim financial statements (e.g. prospectuses and/or press releases containing financial results) prior to their release; and
make changes or additions to security policies of the Corporation and report, from time to time, to the Board on the appropriateness of the policy
guidelines in place to administer the Corporation’s security programs.
2.
The Committee, in fulfilling its mandate, shall:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
ensure to its satisfaction that adequate internal controls and procedures are in place to allow the Chief Executive Officer and the Chief Financial
Officer of the Corporation to certify financial statements and other disclosure documents as required under securities laws;
ensure to its satisfaction that adequate procedures are in place for the review of the Corporation’s public disclosure of financial information
extracted or derived from the Corporation’s financial statements, MD&A and annual and interim earnings press releases, and periodically assess
the adequacy of those procedures;
recommend to the Board the selection of the external auditors, consider their independence and effectiveness, and approve the fees and other
compensation to be paid to the external auditors;
monitor the relationship between management and the external auditors, including reviewing any management letters or other reports of the
external auditors, and discussing and resolving any material differences of opinion or disagreements between management and the external
auditors;
review the performance of the external auditors and approve any proposed discharge and replacement of the external auditors when
circumstances warrant. Consider, with management, the rationale for employing accounting/auditing firms other than the principal external
auditors;
periodically consult with the external auditors out of the presence of management about significant risks or exposures, internal controls and other
steps that management has taken to control such risks, and the fullness and accuracy of the Corporation’s financial statements. Particular
emphasis should be given to the adequacy of internal controls to expose any payments, transactions, or procedures that might be deemed illegal
or otherwise improper;
arrange for the external auditors to be available to the Committee and the Board as needed. Ensure that the external auditors report directly to the
Committee and are made accountable to the Board and the Committee, as representatives of the shareholders to whom the auditors are ultimately
responsible;
- 2 -
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
review and approve the Corporation’s hiring policies regarding employees or former employees of the current and former external auditors;
review the scope of the external audit, including the fees involved;
review the external auditors’ report on the annual audited consolidated financial statements;
review problems found in performing the audit, such as limitations or restrictions imposed by management or situations where management
seeks a second opinion on a significant accounting issue;
review major positive and negative observations of the external auditors during the course of the audit;
review with management and the external auditors the Corporation’s major accounting policies, including the impact of alternative accounting
policies and key management estimates and judgments that can materially affect the financial results;
review emerging accounting issues and their potential impact on the Corporation’s financial reporting;
review and approve requests for any management consulting engagement to be performed by the external auditors and be advised of any other
study undertaken at the request of management that is beyond the scope of the audit engagement letter and related fees;
review with management, the external auditors and legal counsel, any litigation, claims or other contingency, including tax assessments, which
could have a material impact upon the financial position or operating results of the Corporation, and whether these matters have been
appropriately disclosed in the financial statements;
review the conclusions reached in the evaluation of management’s internal control systems by the external auditors, and management’s
responses to any identified weaknesses;
review with management their approach to controlling and securing corporate assets (including intellectual property) and information systems,
the adequacy of staffing of key functions and their plans for improvements;
review with management their approach with respect to business ethics and corporate conduct;
review annually the legal and regulatory requirements that, if breached, could have a significant impact on the Corporation’s published financial
reports or reputation;
receive periodic reports on the nature and extent of compliance with security policies. The nature and extent of non-compliance together with the
reasons therefore, with the plan and timetable to correct such non-compliance will be reported to the Board, if material;
- 3 -
(v)
(w)
(x)
(y)
(z)
review with management the accuracy and timeliness of filing with regulatory authorities;
review periodically the business continuity plans for the Corporation;
review annually general insurance coverage of the Corporation to ensure adequate protection of major corporate assets including, but not limited
to, D&O (Directors and Officers) and “Key Person” coverage;
perform such other duties as required by the Corporation’s incorporating statute and applicable securities legislation and policies; and
establish procedures for:
(i)
(ii)
the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal controls, or auditing
matters; and
the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or audit
matters.
The Committee may engage and communicate directly and independently with outside legal and other advisors for the Committee as required and set and
pay the compensation of such advisors.
On an annual basis, the Committee will review the Audit Committee Charter and, where appropriate, recommend changes to the Board.
SECRETARY
3.
4.
IV
The Secretary of the Committee will be appointed by the Chair of the Committee.
V
1.
2.
3.
4.
5.
6.
MEETINGS
The Committee shall meet at such times and places as the Committee may determine, but no less than four times per year. At least annually, the
Committee shall meet separately with management and with the external auditors.
Meetings may be conducted with members present in person, by telephone or by video conference.
A resolution in writing signed by all the members of the Committee is valid as if it had been passed at a meeting of the Committee.
Notice must be given to each Committee member not less than 48 hours before the time when a meeting is to be held. The notice period may be waived by
a quorum of the Committee.
The external auditors or any member of the Committee may also call a meeting of the Committee. The external auditors of the Corporation will receive
notice of every meeting of the Committee.
The Board shall be kept informed of the Committee’s activities by a report, including copies of minutes, at the next Board meeting following each
Committee meeting.
- 4 -
VI
QUORUM
Quorum for the transaction of business at any meeting of the Committee shall be a majority of the number of members of the Committee.
- 5 -
Exhibit 99.2
SIERRA METALS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2018
Corporate
Office
Suite 4260, 161 Bay Street
Toronto, ON, Canada M5J 2S1
TSX: SMT
NYSE AMERICAN: SMTS
BVL: SMT
www.sierrametals.com
TABLE OF CONTENTS
INTRODUCTION
COMPANY OVERVIEW
2018 OPERATING AND FINANCIAL HIGHLIGHTS
OUTLOOK
RESULTS OF OPERATIONS
SUMMARIZED FINANCIAL RESULTS
QUARTERLY FINANCIAL REVIEW
LIQUIDITY AND CAPITAL RESOURCES
SAFETY, HEALTH AND ENVIRONMENT
FINANCIAL INSTRUMENTS AND RELATED RISKS
OTHER RISKS AND UNCERTAINTIES
NON-IFRS PERFORMANCE MEASURES
RELATED PARTY TRANSACTIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
OFF BALANCE SHEET ARRANGEMENTS
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
3
3
4
10
19
30
35
39
40
40
43
48
54
55
57
57
58
1.
INTRODUCTION
This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with Sierra Metals Inc.’s (the “Company” or “Sierra” or “Sierra Metals”)
consolidated financial statements for the year ended December 31, 2018 and related notes thereto (the “Financial Statements”), which have been prepared in
accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). References herein to
"$" are to the United States dollar and “C$” are to the Canadian dollar and all tabular amounts are expressed in thousands of $ unless otherwise stated. All
information contained in this MD&A is current as of March 27, 2019 unless otherwise noted. The Company’s common shares (the “Common Shares”) are listed
and traded on the Toronto Stock Exchange (the “TSX”), the New York Stock Exchange (the “NYSE AMERICAN”), and the Peruvian Bolsa de Valores de Lima
(“BVL” or the “Lima Stock Exchange”) under the symbol “SMT”, and “SMTS” on the NYSE AMERICAN. Additional information relating to the Company,
including the Company’s Annual Information Form (“AIF”), is available on SEDAR at www.sedar.com and on the Company’s website at www.sierrametals.com .
A cautionary note regarding forward-looking information follows this MD&A.
QUALIFIED PERSONS
Gordon Babcock B.Sc., P. ENG., Chief Operating Officer, Sierra Metals, is the qualified person as defined in National Instrument 43-101 (“NI 43-101”) relating to
operational scientific and technical information of Sierra Metals which have been included in this MD&A.
Americo Zuzunaga, MAusIMM CP(Mining Engineer) and Vice President of Corporate Planning is a Qualified Person and chartered professional qualifying as a
Competent Person under the Joint Ore Reserves Committee (JORC) Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves.
Augusto Chung, FAusIMM CP(Metallurgist) and Consultant to Sierra Metals is a Qualified Person and chartered professional qualifying as a competent person on
metallurgical processes.
2. COMPANY OVERVIEW
Sierra Metals is a Canadian, American, and Peruvian listed mining company focused on the production, exploration and development of precious and base metals
in Peru and Mexico. The Company plans to continue growing its production base through brownfield exploration investments within its properties. The Company’s
key priorities are to provide high returns on invested capital, to generate strong cash flows and to maximize shareholder value. The Company has three producing
mining properties and manages its business on the basis of the geographical location of its mining projects. The Peruvian Operation (“Peru”) is comprised of the
Yauricocha mine (“Yauricocha” or the “Yauricocha Mine”), located in the province of Yauyos, its near-mine concessions, and exploration and early stage
properties. The Mexican Operation (“Mexico”) includes the Bolivar (“Bolivar’ or the “Bolivar Mine”) and Cusi (“Cusi” or the “Cusi Mine”) mines, both located in
Chihuahua State, Mexico, their near-mine concessions, and exploration and early stage properties. The Company’s strategic focus is currently on its operations,
improving efficiencies, as well as pursuing growth opportunities at, and surrounding, its operating projects. The Company is also considering other opportunities to
add value and expand through external growth. Exploration remains a key aspect of the improvement programs being implemented at all three of the Company’s
mines and there is optimism that these brownfield exploration programs will continue to add increased economic tonnage going forward. Examples of this can be
seen at Yauricocha with the Esperanza, Cuye-Mascota zones, at Bolivar, with the Bolivar West and Northwest zones, as well as at Cusi, with the Santa Rosa de
Lima Zone. These results provide potential to further grow mineral resources and enhance shareholder value.
3
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The Company is focused on improving operating performance through the production of higher volumes of ore to reduce unit costs, strengthening its asset base,
continuing to increase its mineral reserves and resources at each of its mines, and exploring organic and external growth opportunities to enhance and deliver
shareholder value.
3.
2018 OPERATING AND FINANCIAL HIGHLIGHTS
(In
thousands
of
dollars,
except
per
share
and
cash
cost
amounts,
consolidated
figures
unless
noted
otherwise)
Operating
Ore Processed / Tonnes Milled
Silver Ounces Produced (000's)
Copper Pounds Produced (000's)
Lead Pounds Produced (000's)
Zinc Pounds Produced (000's)
Gold Ounces Produced
Copper Equivalent Pounds Produced (000's) 1
Zinc Equivalent Pounds Produced (000's) 1
Silver Equivalent Ounces Produced (000's) 1
Cash Cost per Tonne Processed
Cost of sales per AgEqOz
Cash Cost per AgEqOz 2
AISC per AgEqOz 2
Cost of sales per CuEqLb 2
Cash Cost per CuEqLb 2
AISC per CuEqLb 2
Cost of sales per ZnEqLb 2
Cash Cost per ZnEqLb 2
AISC per ZnEqLb 2
Cash Cost per ZnEqLb (Yauricocha) 2
AISC per ZnEqLb (Yauricocha) 2
Cash Cost per CuEqLb (Bolivar) 2
AISC per CuEqLb (Bolivar) 2
Cash Cost per AgEqOz (Cusi) 2
AISC per AgEqOz (Cusi) 2
Financial
Revenues
Adjusted EBITDA 2
Operating cash flows before movements in working capital
Adjusted net income attributable to shareholders 2
Net income (loss) attributable to shareholders
Cash and cash equivalents
Working capital
Three Months Ended
Twelve Months Ended
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
599,297
701
8,932
7,948
17,545
2,137
23,447
56,287
4,445
50.44 $
7.99 $
7.68 $
10.59 $
1.51 $
1.45 $
2.00 $
0.63 $
0.61 $
0.84 $
0.52 $
0.73 $
1.67 $
2.37 $
18.96 $
23.27 $
55,019 $
15,263 $
15,167 $
783 $
(2,654) $
21,832 $
(8,290) $
498,199
496
7,471
5,736
19,545
1,591
21,856
47,287
4,078
50.57 $
7.91 $
7.54 $
12.42 $
1.48 $
1.41 $
2.32 $
0.68 $
0.65 $
1.07 $
0.57 $
0.90 $
1.72 $
3.03 $
18.66 $
36.33 $
51,170 $
19,208 $
17,812 $
3,241 $
2,118 $
23,878 $
(6,784) $
2,325,288
2,716
33,968
27,714
76,831
7,743
95,184
215,053
17,988
47.55 $
7.35 $
7.03 $
10.04 $
1.39 $
1.33 $
1.90 $
0.61 $
0.58 $
0.83 $
0.52 $
0.73 $
1.44 $
2.13 $
15.71 $
22.09 $
232,371 $
89,756 $
90,148 $
29,009 $
18,814 $
21,832 $
(8,290) $
1,988,738
2,317
26,775
29,704
76,088
6,197
90,354
193,152
14,865
46.87
7.75
7.41
12.34
1.27
1.22
2.03
0.60
0.57
0.95
0.50
0.78
1.49
2.68
15.37
33.90
205,118
81,034
79,785
23,482
(4,645)
23,878
(6,784)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2018 were calculated using the following realized prices: $14.63/oz Ag, $2.77/lb Cu,
$0.89/lb Pb, $1.16/lb Zn, $1,238/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2017 were calculated using the following realized
prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2018 were
calculated using the following realized prices: $15.65/oz Ag, $2.96/lb Cu, $1.02/lb Pb, $1.31/lb Zn, $1,269/oz Au. Silver equivalent ounces and copper and zinc
equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $1.06/lb Pb, $1.32/lb Zn, $1,265/oz Au.
(2) This is a non-IFRS performance measure, see Non-IFRS Performance Measures section of the MD&A.
2018 Operational Highlights and Growth Initiatives
During 2018, the annual consolidated production of silver, copper, zinc and gold increased 17%, 27%, 1%, and 25%, respectively, while annual consolidated lead
production decreased 7% compared to 2017. The Company achieved record consolidated quarterly ore throughput during Q4 2018, as well as record quarterly ore
throughput from the Bolivar and Cusi Mines. These results continued the Company’s successful production increases realized during the first three quarters of
2018, which resulted in strong annual consolidated production figures.
4
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Metal production at Yauricocha increased 14% in Q4 2018 compared to Q4 2017 due to 5% higher ore throughput, higher head grades of all metals, except zinc,
and higher lead and gold recoveries. At Bolivar, 20% higher ore throughput, and higher silver and gold head grades resulted in a 16% increase in copper equivalent
pounds produced in Q4 2018 compared to Q4 2017. The Cusi Mine realized a 258% increase in throughput which resulted in a 70% increase in silver equivalent
ounces produced during Q4 2018 compared to Q4 2017.
2019 will be an important year for the Company as we ramp up production in Mexico while continuing to modernize and improve all Mines implementing best
operational practices. These changes should allow the Company to increase metal production to new highs. Our Company wide ongoing brownfield exploration
programs should also lead to further significant growth in reserves and resources, which will add to the value of our assets during the year ahead.
2018 Consolidated Production Highlights
Silver production of 2.7 million ounces; a 17% increase from 2017
Copper production of 34.0 million pounds; a 27% increase from 2017
Zinc production of 76.8 million pounds; a 1% increase from 2017
Lead production of 27.7 million pounds; a 7% decrease from 2017
·
·
·
·
· Gold production of 7,743 ounces; a 25% increase from 2017
·
Total of 2.3 million tonnes processed; a 16% increase from 2017
Q4 2018 Production Highlights
Silver production of 0.7 million ounces; a 41% increase from Q4 2017
Copper production of 8.9 million pounds; a 20% increase from Q4 2017
Zinc production of 17.5 million pounds; a 10% decrease from Q4 2017
Lead production of 7.9 million pounds; a 39% increase from Q4 2017
·
·
·
·
· Gold production of 2,137 ounces; a 34% increase from Q4 2017
2018 Consolidated Financial Highlights
·
Revenue from metals payable of $232.4 million in 2018 increased by 13% from $205.1 million in 2017. Higher revenues are primarily attributable to the
8% increase in throughput, and the higher head grades and recoveries for copper and gold at Yauricocha in 2018 compared to 2017; the 16% increase in
throughput, higher silver and gold head grades, and higher gold recoveries resulted in Bolivar’s revenues being 17% higher than 2017; and the 112%
increase in throughput, and higher silver recoveries resulted in Cusi’s revenues being 88% higher than 2017; the increase in revenues were realized
despite decreases in the prices of silver (9%), lead (4%), and zinc (1%), which copper prices increased by 5% and gold prices were consistent with 2017;
5
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
· Yauricocha’s cost of sales per zinc equivalent payable pound was $0.55 (2017 - $0.54), cash cost per zinc equivalent payable pound was $0.52 (2017 -
$0.50), and AISC per zinc equivalent payable pound of $0.73 (2017 - $0.78). The decrease in the AISC per zinc equivalent payable pound for 2018
compared to 2017 was a result of lower sustaining capital expenditures and higher zinc equivalent payable pounds, while cash costs remained consistent;
this was partially offset by slight increases in general and administrative costs. These cost decreases were realized in spite of the $2.0 million payment
made to the Company’s union of mining employees made during Q4 2018;
·
·
Bolivar’s cost of sales per copper equivalent payable pound was $1.73 (2017 - $1.54), cash cost per copper equivalent payable pound was $1.44 (2017 -
$1.49), and AISC per copper equivalent payable pound was $2.13 (2017 - $2.698) for 2018 compared to 2017. The decrease in the AISC per copper
equivalent payable pound during 2018 compared to 2017 was due to the increase in copper equivalent payable pounds resulting from higher throughput,
higher silver and gold head grades and higher gold recoveries, as well as a decrease in sustaining capital expenditures;
Cusi’s cost of sales per silver equivalent payable ounce was $8.97 (2017 - $12.51), cash cost per silver equivalent payable ounce was $15.71 (2017 -
$15.37), and AISC per silver equivalent payable ounce was $22.09 (2017 - $33.90) for 2018 compared to 2017. AISC per silver equivalent payable ounce
decreased due to higher silver equivalent payable ounces resulting from higher throughput, higher silver recoveries, lower treatment and refining charges,
and lower sustaining capital expenditures;
· Adjusted EBITDA (1) of $89.8 million for 2018 increased 11% compared to $81.0 million in 2017. The increase in adjusted EBITDA in 2018 was due to
the increase in revenues realized at all three mines during 2018, mainly the result of higher throughput;
· Net income (loss) attributable to shareholders for 2018 was $18.8 million (2017: $(4.6) million) or $0.12 per share (basic and diluted) (2017: $(0.03)).
The net loss incurred in 2017 included a $4.4 million non-cash loss on the distribution of Cautivo Mining Inc. assets to Sierra shareholders;
· Adjusted net income attributable to shareholders (1) of $29.0 million, or $0.17 per share, for 2018 was higher than the adjusted net income of $23.5
million, or $0.14 per share for 2017;
· A large component of the net income for every period is the non-cash depletion charge in Peru, which was $10.5 million for 2018 (2017: $31.5 million).
The non-cash depletion charge is based on the aggregate fair value of the Yauricocha mineral property at the date of acquisition of Corona of $371.0
million amortized over the total proven and probable reserves of the mine. The decrease in the non-cash depletion charge in 2018 was due to the 134%
increase in proven and probable reserves reported in the Company’s NI 43-101 Technical Report issued on October 26, 2017;
·
Cash flow generated from operations before movements in working capital of $90.1 million for 2018 increased compared to $79.8 million in 2017. The
increase in operating cash flow is mainly the result of higher revenues generated and higher gross margins realized; and
6
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
·
Cash and cash equivalents of $21.8 million and working capital of $(8.3) million as at December 31, 2018 compared to $23.9 million and $(6.8) million,
respectively, at the end of 2017. Cash and cash equivalents have decreased by $2.0 million during 2018 due to $61.9 million of operating cash flows, and
$10.0 million drawn down from a short term revolving line of credit, being offset by capital expenditures incurred in Mexico and Peru of $(49.3) million,
repayment of loans, credit facilities and interest of $(21.5) million, dividends paid to non-controlling interest shareholders of $(2.9) million.
(1) This is a non-IFRS performance measure, see non-IFRS Performance Measures section of this MD&A.
Project Development
·
·
·
·
·
The Company provided an updated Mineral Reserve and Resource Estimate at the Bolivar Mine (press release dated July 5, 2018). The NI 43-101
Technical Report was filed on SEDAR and was prepared by SRK Consulting (U.S.) Inc.;
The Company reported the results of a Preliminary Economic Assessment (“PEA”) for the Bolivar Mine (press release dated July 9, 2018) yielding a
550% return on investment and after-tax net present value (“NPV”) of US$214 million at an 8% discount rate. The PEA was compiled under NI 43-101
standards by Mining Plus Peru SAC, and filed on SEDAR on August 23, 2018;
The Company reported the results of a PEA for the Yauricocha Mine (press release dated June 27, 2018) yielding a 486% return on investment and after-
tax NPV of US$393 million at an 8% discount rate. The PEA was compiled under NI 43-101 standards by Mining Plus Peru SAC;
The Company reported the results of a PEA for the Cusi Mine (press release dated June 18, 2018) yielding a 75% internal rate of return (“IRR”) and after-
tax NPV of US$92 million at an 8% discount rate. The PEA was compiled under NI 43-101 standards by Mining Plus Peru SAC;
The Company reported that their subsidiary Sociedad Minera Corona S.A. received approval for its Environmental Impact Assessment (“EIA”) Study for
the expansion of its tailings deposition facility at the Yauricocha Mine;
· Mine development at Bolívar during Q4 2018 totaled 1,136 meters. Most of these meters (553m) were developed to prepare stopes for mine production.
The remainder of the meters (583m) were related to the deepening of ramps and developing service ramps to be used for ventilation and pumping in the
El Gallo Inferior orebody; and
· During Q4 2018, at the Cusi property, mine development totaled 1,059 meters, which included 25 meters of ramp development at the Santa Rosa de Lima
Zone; the rest of the development related to stope preparation in various zones within the mines;
7
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Exploration Highlights
Peru:
During Q4 2018, the Company drilled 58 holes totaling 10,537 meters at Yauricocha. The drilling included the following:
Exploration Drilling:
·
·
·
·
·
·
Copper Porphyry Mineralization (Central Mine Zone Level 720): 2 holes totaling 1,341 meters were drilled to continue to test the priority anomaly
located in the monzonite intrusive zone, where a copper molybdenum mineralized porphyry was discovered earlier in the year; drill results continue to
display the presence of a copper molybdenum porphyry orebody, where we have observed typical alterations, as well as copper mineralization
disseminated in the encased rock, as veinlets with quartz and copper are present with molybdenum;
Cuye Orebody (Level 1070 Central Mine Zone): 1 hole totaling 210 meters to explore the continuity of mineralization of the orebody at depth; the hole
confirmed the continuity of this mineralized orebody at depth;
Catas Orebody (Level 1070 Central Mine Zone) – 1 hole totaling 681 meters confirmed the continuity of the copper mineralization at depth;
Contacto Occidental Orebody (Level 1070 Central Mine Zone): 1 hole totaling 86 meters confirmed the continuity of mineralization at depth of this
“cuerpo chico”, or small orebody;
Escondida Norte (Level 870 Cachi Cachi): 4 holes totaling 1,745 meters with the objective of exploring and defining the fresh sulphide zones, as areas
previously explored in this area have intercepted oxide zones with silver and lead mineralization; these holes drilled intercepted mineralized structures of
polymetallic sulphide zones;
Cachi Cachi Norte (Level 720 Cachi Cachi): 2 holes totaling 681 meters with the objective of exploring the northern part of the mineralized orebodies
already recognized within the Cachi Cachi Mine, but did not encounter any mineralization of ore grade material.
Definition Drilling:
· Antacaca Sur (Level 920): 17 holes totaling 2,186 meters with the objective of defining more certainty on the orebody between the 970 level and the 8th
·
floor on the 1020 level;
Esperanza (Level 970): 14 holes totaling 1,770 meters which confirmed the continuity of mineralization of the orebody; holes were executed between the
sublevel development level 8 meters above the 1020 level;
· Angelita (Level 870 Cachi Cachi): 11 holes totaling 1,577 meters to further define the orebody on the 870 level between floors 8 and 16;
· Yoselin (920 Level Cachi Cachi Mine): 5 holes totaling 260 meters which confirmed the orebody and the extension of the orebody to 1070 level. These
drill holes provided more geological information to help plan potential mining of the orebody. Once the drift reaches the 1070 level the remainder of
orebody below will be drilled off from the 1070 level. Initial highlights of the average grades encountered in this “cuerpo chico” or “small orebody”
included grades of 1.2 Oz Ag, 4.8% Pb, 0.09% Cu, 8.5% Zn.
8
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Mexico:
Bolivar
· At Bolívar during Q4 2018, 6,258 meters were drilled from surface as well as diamond drilling within the mine. 2,183 meters were drilled within the mine
in the El Gallo zone. There was also 3,865 meters drilled at the Bolivar West extension to explore the extension of the orebody to the North and West,
exploring the skarn orebody with semi-massive magnetite, and disseminated nodules of chalcopyrite. There was also 210 meters drilled at La Campana,
which is a new exploration target where we are exploring the possibility of finding a skarn orebody with copper and zinc;
Cusi
· During Q4 2018 the Company drilled 1,781 meters to support the development of the Santa Rosa de Lima vein in Promontorio to further verify the size
and continuity of the orezone. 2,497 meters of surface diamond drilling was performed to explore the depth of the mineralized structure of San Nicolas in
the area of the San Juan Mine.
9
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
4. OUTLOOK
The Company has continued to be successful in maintaining positive operating cash flow generation from its existing operations in order to reduce debt levels,
fund required capital expenditures, and maintain liquidity. Planned capital expenditures of $83 million have been approved for 2019 to deliver on the focus of
capitalizing on the successful drilling campaigns during the previous two years which resulted in significant increases to the reserves and resources at each of the
three mines, in addition to providing the basis for the successful results of the PEA’s released during 2018 at all three mines. Also, the new $100 million Corporate
Credit Facility finalized during March 2019, provides the Company with additional liquidity and will provide the financial flexibility to fund future capital projects
in Mexico as well as corporate working capital requirements. The Company will also use the proceeds of the new facility to repay existing debt balances in the near
term.
The Company has made significant progress on the expansion plans at all three mines, as well as the preparation of updated Life Of Mine (“LOM”) Plans, and NI
43-101 Technical Reports, based on the encouraging PEA’s results released for all three mines, demonstrating positive economics, and supporting the immense
potential for future operational production increases. These studies are intended to provide further clarity and confidence to either progress with the potential future
operational production increases, which are scalable in nature, and potential production increases can be made gradually, if optimal. Development at all three mines
will continue with the objective of expediting the resource increases at the Cusi Mine, as well as the reserve and resource increases at the Yauricocha and Bolivar
Mines into the mine plans. Continued production growth is expected to be realized from the strategic allocation of operating cash flows towards growth efficient
capital, in order to provide the infrastructure, and scoping studies necessary to continue the process of monetizing the reserve and resource increases as quickly as
possible.
Looking ahead 2019 represents a critical year at Yauricocha for projects, improvements and exploration. The Company continues to work on the expansion plans
at Yauricocha, which we expect to complete during 2019. Having now received approval for the EIA study at Yauricocha, we can now proceed to obtain a
construction permit for the next phase of the tailings deposition facility, and a permit for the expanded waste rock facility. Once those permits have been received,
we would then be able to complete a final submission for an ITS permit, which is required for any potential expansion of the Mine.
We have also commenced internal studies on a potential secondary stage expansion plan at the Mine, as well as an updated NI 43-101 report which we expect to
have completed during Q2 2019. The Company continues to make progress on projects at the Mine and during the fourth quarter we completed the refurbishment
of the lower part of the Mascota Shaft as well as the infrastructure and tie-ins for the Yauricocha tunnel, allowing for faster turn-around in the cycle time of the
trolley locomotives, and providing for increased capacity and handling of larger volumes of ore and waste.
Additionally, the Yauricocha shaft will continue to be sunk to the 1270 level this year to provide access to further reserves and resources at the Mine and loading
pockets will be added on the 1210 level. Work will also commence on a ramp connecting the 920 level with the 720 level of the Yauricocha Mine providing for an
additional 10,000 tonnes per month of increased capacity to move ore and waste from the Mine.
10
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Furthermore, the Company continues to have success in its drilling campaigns at the Mine as evidenced in a recent press release dated October 1, 2018,
demonstrating the existence of porphyry style mineralization at Yauricocha and a great opportunity for further expansion potential at the Mine. There are several
higher-grade intercepts between 798 and 980 meters, and the objective is to follow-up drilling programs to define the geometry of the higher-grade core of the
porphyry during 2019. The Company continues to perform drilling on the porphyry and has budgeted approximately $4.0 million for this drilling during 2019.
Also, during 2019 infill drilling programs will be focused on the Central Mine Zone, Esperanza, Cachi Cachi and the Cuerpos Chicos. While brownfield drilling
campaigns will focus on the Kilkaska and Dona Leona areas located on the Chonta Fault System. Mine development during 2019 will continue to focus on the
Central Mine Zone and Cachi Cachi areas, and the Company is planning on making improvements to the ventilation system within the mine.
We are very pleased with the progress made with our expansion plans at the Bolivar Mine. With the early completion of construction at the Piedras Verdes Mill,
we expect deliver on our goal of a 20% increase in production from 3,000 TPD to 3,600 TPD, during H1 2019. Completion of the expansion included the
installation of a refurbished mill, an electrical substation with 1250 KVA of capacity, a secondary crusher and a hydrocyclone cluster that allows for finer grind
size optionality that is estimated to provide a 6% increase in copper recoveries from 80% to 86% at Bolivar Mine. The expansion at Bolivar will contribute through
a 20% increase in production rates, a 6% increase in copper recoveries and a decrease in costs per unit.
A revised LOM plan is nearing completion at Bolivar, and we expect to have an updated NI 43-101 report for the Bolivar Mine during Q4 2019. Development and
infrastructure improvements continue in the effort to push throughput at Bolivar to 4,000 tpd during the second half of 2019. During 2019, target mining areas will
be the Gallo Inferior, Mina de Fierro, Chimneys, Breccias and Gallo Superior orebodies. Infill drilling will continue on the Bolivar West and Gallo Inferior areas,
while mine development will focus on the Gallo Inferior and Breccia zones. This work will allow the Company to increase the number of minable stopes available
in order to increase throughput at the plant. Improvements continue to be made at the Piedras Verdes Plant, as one flash flotation cell has been installed, and two
more will be installed during the first half of 2019. Also, a new concentrate filter and fine ore bin are currently being installed.
The Company is also pleased to report that the replacement program for the main reservoir of the Bolivar water dam has progressed successfully and is 50%
complete. We expect the work to be finished during the first half of 2019.
At Cusi, the Company realized continued improvements in tonnage in the fourth quarter, and the Mine realized a sequential increase in ore throughput and a 6%
increase when compared to Q3 2018. The increase in throughput was partially the result of the Company's successful development and mining of ore from the
recently discovered high-grade silver stockwork zone located within the Santa Rosa de Lima ("SRL") vein complex. This mineralized zone extends to over 100
meters in length, 50 meters in width and 70 meters in height. Our development plan is now incorporating the wider dimensions of this zone.
11
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
A revised LOM plan is nearing completion at Cusi, and we expect to have an updated NI 43-101 report completed during Q4 2019, which will include a maiden
reserve estimate for the mine. The Company continues to increase mill feed from the Santa Rosa de Lima zone, while mining selected structures in the older part of
the mine. The successful addition of another ball mill has seen the capacity increase from 650 tonnes per day to approximately 1,200 tonnes per day during H1
2019. A decanter was also installed at the Mal Paso Mill which will help improve water availability and provide some flexibility with the tailings facility.
Development plans are in place to increase production from 1,200 tpd to 2,400 tpd by Q1 2020.
During 2019, the majority of the mine production at Cusi will come from the SRL zone, from sublevel long hole stoping and sublevel caving from the SRL zone.
Infill drilling will be performed on the SRL zone, San Nicolas zone, and the Promontorio Mine. Plant improvements during 2019 will include the installation of an
additional ball mill during Q3 2019, as well as new tank cells to improve flotation, and are required to push the plant’s capacity up to 2,400 tpd.
Brownfield exploration remains a key component of the Company’s growth program. The Company has budgeted drilling campaigns of 51,000 meters to be
performed during 2019. 21,500 meters have been budgeted at Yauricocha, which includes underground exploration drilling on the Cuerpos Chicos, Esperanza –
Norte – Mascota, and other areas on the interior of the mine, as well as brownfield exploration on the Dona Leona, Victoria, Alida, El Paso, Millpoca and Kilkasa
areas on the Chonta Fault. 20,000 meters of brownfield exploration drilling have been budgeted at Bolivar for 2019 which will focus on the Bolivar West and
Bolivar Northwest areas. While at Cusi, 9,500 meters of brownfield exploration drilling has been budgeted for 2019 which will focus on the Margarita, San Juan,
SRL Extension Norte, and Sayra and Bibiana areas, all located within the SRL mine complex.
Management is very optimistic for the next twelve months, and beyond, as the groundwork has been set for continued improvements, through the modernizing and
implementation of best operational practices. We continue to realize positive returns on our capital investments, and the recent PEA results demonstrate a path for
continued growth at all our Mines. Ongoing aggressive brownfield exploration programs at all mines are expected to provide further growth in reserves and
resources adding to the value of our assets going forward.
12
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Confirmation of Porphyry Mineralization at Yauricocha
On October 1, 2018, the Company confirmed the discovery of a new style of mineralization (copper - molybdenum porphyry). The results were from testing of the
geophysical anomalies, in the quartz monzonite intrusive, in the eastern part of the mineralized area. This area is known as the Central Mine which is located
between the Cuye and Esperanza zones.
Prior evidence of copper-molybdenum porphyry mineralization had been observed on surface within the monzonite intrusive and had previously been sampled by
Rio Tinto Zinc. Subsequently, drill core was sampled at 10-meter intervals over the entire hole length and the Company obtained 122 samples. The hole was drilled
from the Klepetko Tunnel located on the 720 level to a depth of 1,394.6 meters. The samples indicated an average of >0.1% Copper.
A recently completed TITAN 24 Geophysical Study identified more than 100 anomalies at Yauricocha and a program to test this first geophysical anomaly was
designed. Hole (E-PORF 10-18-01) was drilled from the Klepetko Tunnel to test the priority anomaly located in the monzonite intrusive as this zone had high
conductivity within the Intrusive. A copper-molybdenum mineralized porphyry was discovered. Results to date show mineralized sectors with notable grades of
copper and molybdenum (see table 1) and this discovery confirms the existence of a new style of mineralization at Yauricocha. The Company will continue with a
drilling program which will allow for a better understanding of the distribution of mineralization.
Table 1 – Assays obtained from Drill Hole E PORF 10-18-10 showing copper, molybdenum and cobalt values.
Description
From
To
Width
m
Cu
%
Mo
ppm
Co
Ppm
396.00
418.00
432.00
454.00
468.00
574.00
600.00
702.00
798.00
806.00
822.00
844.00
854.00
872.00
950.00
958.00
968.00
980.00
1024.00
1072.00
1092.00
418.00
432.00
454.00
468.00
574.00
600.00
702.00
798.00
806.00
822.00
844.00
854.00
872.00
950.00
958.00
968.00
980.00
1024.00
1072.00
1092.00
1294.00
22.00
14.00
22.00
14.00
106.00
26.00
102.00
96.00
8.00
14.00
22.00
10.00
18.00
78.00
8.00
10.00
12.00
44.00
48.00
20.00
202.00
0.13
0.08
0.11
0.07
0.13
0.07
0.15
0.19
0.46
0.21
0.46
0.18
0.54
0.15
0.49
0.23
0.45
0.19
0.23
0.21
0.15
19.45
25.71
27.36
26.00
39.60
20.00
94.84
48.02
219.00
39.57
133.73
104.00
131.44
68.41
110.00
50.40
68.00
55.23
90.33
173.30
194.00
7.73
6.71
8.55
6.29
10.70
7.69
8.69
11.27
24.25
10.57
10.73
10.60
17.67
7.05
6.25
7.80
6.50
9.50
5.33
4.30
3.90
13
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Closing of New Senior Secured US$100 Million Corporate Credit Facility
On March 11, 2019, the Company entered into a new six-year senior secured corporate credit facility (“Corporate Facility”) with Banco de Credito del Peru
(“BCP”) that provides funding of up to US$100 million effective March 8, 2019. The Corporate Facility provides the Company with additional liquidity and will
provide the financial flexibility to fund future capital projects in Mexico as well as corporate working capital requirements. The Company will also use the
proceeds of the Corporate Facility to repay existing debt balances in the near term.
The most significant terms of the Corporate Facility are as follows:
-
-
-
-
Term: 6-year term maturing March 2025
Principal Repayment Grace Period: 2 years
Principal Repayment Period: 4 years
Interest Rate: 3.15% + LIBOR 3M
The Corporate Facility is subject to customary covenants, including consolidated net leverage and interest coverage ratios and customary events of default.
Initiation of Normal Course Issuer Bid with 1.5 Million Share Target
On December 11, 2018, the Company approved a share repurchase program in the form of a normal course issuer bid (the “NCIB”) in the open market through the
facilities of the Toronto Stock Exchange (the "TSX") and other Canadian marketplaces / alternative trading systems. Pursuant to the NCIB, the Company proposed
to repurchase for cancellation up to 1,500,000 common shares of the Company (the “Common Shares”), which represented approximately 0.92% of the issued and
outstanding Common Shares as at December 11, 2018.
In connection with its implementation of the NCIB, Sierra Metals obtained TSX approval of its notice of intention to make a normal course issuer bid (the
“Notice”). The Notice provided that the Company may purchase up to 1,500,000 Common Shares through the facilities of the TSX and other Canadian
marketplaces / alternative trading systems during the 12-month period commencing on December 17, 2018 and ending on or before December 16, 2019. Any
Common Share purchases made pursuant to the NCIB will be at the prevailing market price at the time of the transaction, purchased in accordance with the
policies of the TSX and conducted by CIBC. In accordance with TSX rules, any daily purchases made under the NCIB are limited to a maximum of 4,214
Common Shares, which represents 25% of the average daily trading volume of 16,858 Common Shares on the TSX for the six months ended November 30, 2018.
However, the Company may make one block purchase per calendar week which exceeds the daily repurchase restriction, up to and including the maximum annual
aggregate limit of 1,500,000 Common Shares. Once the block purchase exception has been relied on, the Company may not make any further purchases under the
NCIB for the remainder of that calendar day.
14
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Repayment of FIFOMI Loan in Mexico
During February 2019, the Company repaid the remaining US$1,657 owed on Dia Bras Mexicana’s loan from FIFOMI. This repayment prior to the loan’s maturity
date did not result in any financial penalties and was within the terms of the agreement.
2019 Production and Cost Guidance
This section of the MD&A provides management’s production, cost, and capex estimates for 2019. These are “forward-looking statements” and subject to the
cautionary note regarding the risks associated with forward-looking statements contained at the end of this document
The Company anticipates that 2019 silver equivalent production will range between 19.5 to 21.8 million ounces, copper equivalent production will range between
107.0 to 119.9 million pounds, and zinc equivalent production will range between 261.5 to 292.9 million pounds. The increase in 2019 guidance for silver ounces
and copper pounds compared to the actual 2018 production is due to the significant throughput and recovery increases planned at Bolivar and Cusi. At Yauricocha,
higher copper production should be realized due to consistent copper head grades and improvement to recoveries expected from the various areas planned to be
mined from the copper areas in the Esperanza Zone during 2019.
A table summarizing 2019 production guidance has been provided below:
Silver ounces (000's)
Copper pounds (000's)
Lead pounds (000's)
Zinc pounds (000's)
Gold ounces
Silver equivalent ounces (000's) (1)
Copper equivalent pounds (000's) (1)
Zinc equivalent pounds (000's) (1)
2019 Guidance
Low
High
2018
Actual
3,730
45,000
25,500
72,400
8,100
19,478
107,035
261,545
4,176
50,400
28,600
81,100
9,000
21,812
119,858
292,880
2,716
33,968
27,714
76,831
7,743
17,988
95,184
215,053
(1) 2019 Silver equivalent ounces, copper and zinc equivalent pounds were calculated using the following metal prices: $16.65/oz Ag, $3.03/lb Cu, $1.01/lb Pb,
$1.24/lb Zn, $1,275/oz Au
2019 Cost Guidance
A mine by mine breakdown of 2019 production guidance, cash costs and all-in sustaining costs (“AISC”) are included in the table below. Cash costs and AISC
guidance is shown per zinc equivalent payable pound at Yauricocha, copper equivalent payable pound at Bolivar, and silver equivalent payable ounce at Cusi.
15
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Mine
Yauricocha
Bolivar
Cusi
Equivalent
Production Range
Cash Costs per
ZnEqLb or
CuEqLb or
AgEqOz Sold
AISC ($)* per
ZnEqLb or
CuEqLb or
AgEqOz Sold
Zinc Eq Lbs (000's)
Copper Eq Lbs (000's)
Silver Eq Ozs (000's)
163,884 - 183,478 $
29,877 - 33,449 $
1,862 - 2,085 $
0.58/lb $
1.35/lb $
14.29/oz $
0.88/lb
2.08/lb
20.70/oz
*AISC includes Treatment and Refining Charges, Selling Costs, G&A Costs and Sustaining Capex
(1) 2019 Silver equivalent ounces, copper and zinc equivalent pounds were calculated using the following metal prices: $16.65/oz Ag, $3.03/lb Cu, $1.01/lb Pb,
$1.24/lb Zn, $1,275/oz Au
2019 Capital Expenditures
In 2019, the Company plans to invest a total of up to $83 million on capital expenditures, including $39 million for sustaining capital requirements and $44 million
for expansion, growth projects and exploration expenses. These capital expenditures will allow Sierra Metals to continue to significantly grow our mineral reserves
and resources, complete the development work required in operations in order to increase production in the future, as well as complete plant expansion projects to
process the increased production. These significant capital expenditure projects are expected to result in increased cash flows, and lower cash costs. These capital
expenditure programs will be funded through the generation of operating cash flows, as well as additional liquidity provided from the new credit facility in process
if needed.
A breakdown by mine of the throughput and planned capital investments is shown below:
The Yauricocha Mine in Peru plans to process up to 1.1 million tonnes (3,250 tpd) in 2019. Sustaining capex will be approximately $18 million and growth capex
will be approximately $23 million.
2019 major capital investments include:
Yauricocha 2019 Major Capital Investments
Deepening of the Yauricocha Shaft
Regional and Brownfield Exploration and Lower Level Development
Ventilation
Mine Camp Improvements
Equipment
Tailings Dam Facility Expansion (next lift)
Mascota Ramp from 920 to 720 Level
Central Mine Zone and Cachi Cachi Mine Development
Up to ($ millions)
8
6
5
4
4
2
2
7
$
$
$
$
$
$
$
$
The Bolivar Mine in Mexico plans to process up to 1.4 million tonnes, with an average production rate of 4,000 tpd in 2019. Sustaining capex will be
approximately $12.0 million and growth capex will be approximately $10 million.
16
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
2019 major capital investments include:
Bolivar 2019 Major Capital Investments
Regional and Brownfield Exploration and Drift and Drill Station Development
Equipment
Concentrator Plant
Tailings Dam Facility Expansion
Up to ($ millions)
$
$
$
$
9
5
4
2
The Cusi Mine in Mexico plans to process up to 515,500 tonnes, ramping up from 650 tpd with an objective of reaching 1,200 tpd in Q2 2019 and 2,400 tpd in Q1
2020. Sustaining capex will be approximately $8 million and growth capex will be $12 million.
2019 major capital investments include:
Cusi 2019 Major Capital Investments
Regional and Brownfield Exploration and Drift and Drill Station Development
Equipment
Concentrator Plant
Tailings Dam Facility Expansion
Market Review and Trends
Metal Prices
Up to ($ millions)
$
$
$
$
5
4
5
4
One of the primary drivers of Sierra’s earnings and ability to generate operating cash flows are the market prices of silver, copper, zinc, lead and gold, which were
approximately 5% higher for copper, 4% lower for lead, 1% lower for zinc, 9% lower for silver, and consistent for gold, during 2018 compared to the average
realized prices for 2017. A shortage of non-ferrous raw materials combined with an improved view of the Chinese economy have, in recent months, had a positive
impact on the base metal prices. However, recent uncertainty has arose following the imposition of trade tariffs by the U.S. government on Chinese exports which
has negatively impacted base metal prices.
LME
Average
Prices
(In
US
dollars)
Silver (oz)
Copper (lb)
Lead (lb)
Zinc (lb)
Gold (oz)
Three months ended
December 31,
2018
2017
Year ended December 31,
2017
2018
$
$
$
$
$
14.55 $
2.80 $
0.89 $
1.19 $
1,229.00 $
16.70 $
3.09 $
1.13 $
1.47 $
1,277 $
15.71 $
2.96 $
1.02 $
1.33 $
1,270.00 $
17.05
2.80
1.05
1.31
1,258
17
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The price of gold can fluctuate widely and is affected by a number of macroeconomic factors, including the sale or purchase of gold by central banks and financial
institutions, interest rates, exchange rates, inflation or deflation, global and regional supply and demand and the political and economic conditions of major gold-
producing and gold-consuming countries throughout the world. A steady tightening of US monetary policy provided the backdrop for gold price movement in
2018, with the US Federal Reserve raising benchmark interest rates four times during the year, for a total of nine such increases since the current cycle began three
years ago. The US dollar was a major beneficiary of the higher interest rate environment and this negatively impacted gold prices. Gold recorded its highest price
for the year in late January at $1,366 per ounce and remained relatively strong until mid-April, before falling steadily until mid-August when it recorded a low
price of $1,160 per ounce. Notwithstanding this period of weakness in the second and third quarters, the precious metal rallied over the remainder of the year to
close 2018 at $1,282 per ounce; recording a modest overall annual loss of 2%.
During 2018, the price of silver was 9% lower, and gold 1% lower, compared to 2017, with the price ranging from $14.00 to $17.50 per ounce for silver and
$1,180 to $1,360 per ounce for gold. Sierra’s average realized silver price for 2018 was $15.65 per ounce compared to $17.14 per ounce in 2017. Sierra’s average
realized gold price for 2018 was $1,269 per ounce compared to $1,265 per ounce in 2017.
London Metal Exchange (LME) copper prices in the fourth quarter of 2018 averaged US$2.80 per pound, up 1% from the third quarter, but down 9% from the
fourth quarter a year ago. Annual prices in 2018 averaged US$2.96 per pound, a 6% increase from 2017 averages. Copper prices hit a three-year high in June,
settling at US$3.29 per pound due to improving outlook for global synchronized demand in the first half of 2018. However, copper prices then began to weaken for
the remainder of the year on concerns over impending global trade disputes and averaged 11% lower in the second half of the year. Although copper prices were
affected by overall global macro investor sentiment, fundamentals in the second half remained strong with global exchange stocks falling 58%. During 2018,
copper prices traded in a range of $2.61 to $3.32 per pound with an average price of $2.96 per pound compared with $2.80 per pound in 2017. Sierra’s average
realized copper price for 2018 was $2.96 per pound compared to $2.82 per pound in 2017.
London Metal Exchange (LME) zinc prices averaged US$1.19 per pound in the fourth quarter of 2018, an increase of 4% over the third quarter, but down 19%
from the fourth quarter of 2017. Annual LME zinc prices in 2018 averaged US$1.33 per pound, similar to US$1.31 per pound in 2017. Zinc reached an 11-year
high in February at just over US$1.64 per pound, a price last seen in July 2007. Sierra’s realized zinc price for 2018 was $1.31 per pound compared to $1.32 per
pound in 2017.
Lead prices traded in a range of $0.87 to $1.16 per pound in 2018. Sierra’s realized lead price during 2018 was $1.02 per pound compared to $1.06 per pound in
2017.
Currency Exchange Rates
The results of Sierra’s operations are affected by US dollar exchange rates. Sierra’s largest exposures are to the US dollar/Peruvian Nuevo Sol exchange rate and
the US dollar/Mexican Peso exchange rate which impacts operating and administration costs in Peru and Mexico incurred in Nuevo Soles and Pesos while
revenues are earned in US dollars. As at December 31, 2018 the US dollar/Peruvian Nuevo Sol exchange rate was 3.38 (December 31, 2017: 3.26) and the US
dollar/Mexican Peso exchange rate was 19.64 (December 31, 2017: 19.74). A 10% change in the value of the Nuevo Sol and Peso against the US dollar would
have resulted in a change of $4.7 million and $2.3 million in the Company’s net profit, respectively, assuming that our operational performance during 2018 was
consistent with 2017.
18
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The Company also has a minor exposure to the Canadian dollar through corporate administrative costs.
5. RESULTS OF OPERATIONS
Selected Production Results on a Mine-by-Mine Basis for the Past Eight Quarters
Production Highlights
Ore Processed/tonnes milled
Yauricocha
Bolivar
Cusi
Consolidated
Silver ounces produced (000's)
Yauricocha
Bolivar
Cusi
Consolidated
Copper pounds produced (000's)
Yauricocha
Bolivar
Cusi
Consolidated
Lead pounds produced (000's)
Yauricocha
Bolivar
Cusi
Consolidated
Zinc pounds produced (000's)
Yauricocha
Bolivar
Cusi
Consolidated
Gold ounces produced
Yauricocha
Bolivar
Cusi
Consolidated
Q4
2018
2017
Q3
Q2
Q1
Q4
Q3
Q2
Q1
268,363
272,645
58,289
599,297
402
128
171
701
4,702
4,230
-
8,932
7,528
-
421
7,949
17,545
-
-
17,545
850
1,163
124
2,137
283,446
227,690
55,058
566,194
404
94
230
728
4,428
3,898
-
8,326
6,114
-
244
6,358
20,772
-
-
20,772
911
911
84
1,906
283,450
272,040
46,597
602,087
271,389
259,375
26,946
557,710
266,222
226,986
16,280
509,488
268,178
223,339
13,234
504,751
237,912
192,937
23,956
454,805
251,180
243,974
34,541
529,695
392
110
190
692
3,884
4,737
-
8,621
6,809
-
287
7,096
20,300
-
-
20,300
807
911
96
1,814
366
120
108
594
3,727
4,363
-
8,090
6,069
-
243
6,312
18,144
-
70
18,214
835
1,048
69
1,952
330
84
82
496
3,567
3,904
-
7,471
5,431
-
305
5,736
19,393
-
152
19,545
723
791
77
1,591
376
76
55
507
3,178
3,522
-
6,700
6,112
-
246
6,358
19,717
-
160
19,877
827
629
61
1,517
448
73
95
616
2,192
3,123
-
5,315
8,010
-
457
8,467
18,268
-
262
18,530
566
620
126
1,312
499
94
104
697
2,783
4,508
-
7,290
8,382
-
761
9,143
17,774
-
363
18,137
779
840
159
1,778
19
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Q4
Production Highlights
Silver equivalent ounces produced (000's) 1
3,209
Yauricocha
1,029
Bolivar
207
Cusi
Consolidated
4,445
Copper equivalent pounds produced (000's) 1
Yauricocha
Bolivar
Cusi
Consolidated
Cash cost per tonne processed
Yauricocha
Bolivar
Cusi
Consolidated
16,929
5,426
1,092
23,447
69.37
30.25
57.74
50.44
$
$
$
$
$
$
$
$
2018
2017
Q3
Q2
Q1
Q4
Q3
Q2
Q1
3,292
902
253
4,447
17,493
4,790
1,345
23,628
60.34
31.06
59.00
48.43
$
$
$
$
3,361
1,085
217
4,663
17,624
5,691
1,137
24,452
60.51 $
24.31 $
66.56 $
44.62 $
3,236
1,021
136
4,393
17,266
5,450
728
23,444
63.04 $
25.68 $
83.57 $
46.66 $
3,084
873
121
4,078
16,527
4,677
652
21,856
64.90 $
28.84 $
119.06 $
50.57 $
2,973
736
88
3,797
17,107
4,235
509
21,851
62.33 $
25.69 $
134.77 $
48.01 $
2,551
586
149
3,286
17,029
3,914
995
21,938
64.63 $
26.35 $
88.41 $
49.64 $
2,735
825
186
3,746
18,346
5,533
1,247
25,126
57.81
19.51
52.71
39.84
Consolidated
Production
Tonnes processed
Daily
throughput
Silver ounces
(000's)
Copper pounds
(000's)
Lead pounds
(000's)
Zinc pounds
(000's)
Gold ounces
Silver equivalent
ounces (000's) (1)
Copper
equivalent pounds
(000's) (1)
Zinc equivalent
pounds (000's) (1)
Metals payable in
concentrates
Silver ounces
(000's)
Copper pounds
(000's)
Lead pounds
(000's)
Zinc pounds
(000's)
Gold ounces
Silver equivalent
ounces (000's) (1)
Copper
equivalent pounds
(000's) (1)
Zinc equivalent
pounds (000's) (1)
December 31, 2018
Three Months Ended
December 31, 2017
% Var
December 31, 2018 December 31, 2017
% Var
Twelve Months Ended
599,297
6,849
701
8,932
7,949
17,545
2,137
4,445
23,447
56,287
573
8,293
7,161
14,918
1,370
3,878
20,480
48,904
498,199
5,694
496
7,471
5,736
19,545
1,591
4,078
21,856
47,287
400
7,078
5,193
15,047
815
3,428
18,367
39,648
20%
20%
41%
20%
39%
-10%
34%
9%
7%
19%
43%
17%
38%
-1%
68%
13%
12%
23%
2,325,288
1,988,738
6,644
5,711
2,716
33,968
27,714
76,831
7,743
17,988
2,317
26,775
29,704
76,088
6,197
14,865
95,184
90,354
215,053
193,152
2,222
31,255
26,506
64,872
5,176
15,673
1,976
25,602
28,075
62,796
3,708
13,034
82,992
79,222
188,750
169,248
17%
16%
17%
27%
-7%
1%
25%
21%
6%
12%
12%
22%
-6%
3%
40%
20%
4%
11%
(1) Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2018 were calculated using the following realized prices: $14.63/oz Ag, $2.77/lb Cu,
$0.89/lb Pb, $1.16/lb Zn, $1,238/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2017 were calculated using the following realized
prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2018 were
calculated using the following realized prices: $15.65/oz Ag, $2.96/lb Cu, $1.02/lb Pb, $1.31/lb Zn, $1,269/oz Au. Silver equivalent ounces and copper and zinc
equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $1.06/lb Pb, $1.32/lb Zn, $1,265/oz Au.
The Peruvian Operation
Yauricocha Mine, Yauyos, Peru
Corona’s main asset, Yauricocha, is an underground mine located in western central Peru in the Yauyos province, approximately 12 km west of the Continental
Divide. The Yauricocha property covers 18,778 hectares that straddle a 20 km strike length of the prolific Yauricocha fault, a major ore controlling structure in this
part of western central Peru. The mine is at an average altitude of 4,600 meters and has been producing for more than 68 years. Ore is processed at the on-site
Chumpe plant using a combination of crushing, grinding and flotation and is permitted to produce at a rate of 3,150 tpd, which we expect to increase to 3,600 tpd
during 2019 upon receipt of the ITS permit. The ore is treated in two separate circuits and is extracted from three different types of deposits which include the
following:
20
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
-
-
-
A polymetallic deposit, containing silver, lead, zinc, copper, and gold
A lead oxide deposit, containing lead, silver and gold
A copper oxide deposit, containing copper, silver, lead and gold
Yauricocha Preliminary Economic Assessment (“PEA”)
On June 27, 2018, the Company reported the results of the PEA for the Yauricocha Mine, which included the following highlights (see Company’s website for the
Press Release):
PEA Highlights
Base case of US$1,323/oz Gold, US$18.68/oz
Silver, US$0.98/lb Lead, US$1.19/lb Zinc,
US$3.15/lb Copper.
Net Present Value (After Tax 8% Discount Rate)
Return On Investment (ROI)
Mill Feed
Mining Production Rate
LOM Project Operating Period
Total Capital Costs
Net After – Tax Cashflow
Total Operating Unit Cost
LOM Gold Production (Payable)
LOM Silver Production (Payable)
LOM Lead Production (Payable)
LOM Zinc Production (Payable)
LOM Copper Production (Payable)
$
$
$
$
Unit
US$ M
ROI%
Tonnes (Millions)
t/year
years
US$ M
US$ M
US$/t
oz
oz
t
t
t
Value
393
486%
13.5
1,800,000
9
238
532
43.86
17,621
11,408,281
87,881
281,746
102,821
The PEA calculates a Base Case after – tax NPV of US$393 million with an after – tax Return on Investment (ROI) of 486% using a discount rate of 8%. The total
life of mine capital cost of the project is estimated to total US$238 million. The payback period for the LoM capital is estimated at 4.1 years. Operating costs of the
LoM total US$593 million, equating to an operating cost of US$43.86 per tonne milled.
21
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Yauricocha Production
A summary of contained metal production from the Yauricocha Mine for the three months and year ended December 31, 2018 has been provided below:
Yauricocha Production
Tonnes processed (mt)
Daily throughput
Silver grade (g/t)
Copper grade
Lead grade
Zinc grade
Gold Grade (g/t)
Silver recovery
Copper recovery
Lead recovery
Zinc recovery
Gold Recovery
Silver ounces (000's)
Copper pounds (000's)
Lead pounds (000's)
Zinc pounds (000's)
Gold ounces
Zinc equivalent pounds (000's) (1)
Q4 2018
3 Months Ended
Q4 2017
% Var.
Q4 2018
12 Months Ended
Q4 2017
% Var.
268,363
3,067
254,933
2,914
5%
5%
1,106,649
3,162
1,023,491
2,924
64.06
1.06%
1.51%
3.41%
0.57
72.66%
74.89%
84.42%
87.07%
17.20%
402
4,702
7,528
17,545
850
40,640
53.57
0.80%
1.19%
3.91%
0.55
75.13%
78.86%
81.32%
88.25%
16.02%
330
3,567
5,431
19,393
723
35,758
20%
33%
27%
-13%
3%
-3%
-5%
4%
-1%
7%
22%
32%
39%
-10%
18%
60.32
0.97%
1.30%
3.55%
0.58
72.85%
70.84%
83.75%
88.74%
16.63%
1,563
16,741
26,520
76,761
3,403
67.13
0.79%
1.48%
3.74%
0.54
74.82%
65.45%
83.64%
89.14%
16.30%
1,653
11,719
27,934
75,151
2,894
14%
157,151
146,816
8%
8%
-10%
22%
-12%
-5%
7%
-3%
8%
0%
0%
2%
-5%
43%
-5%
2%
18%
7%
(1) Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2018 were calculated using the following realized prices: $14.63/oz Ag, $2.77/lb Cu,
$0.89/lb Pb, $1.16/lb Zn, $1,238/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2017 were calculated using the following realized
prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2018 were
calculated using the following realized prices: $15.65/oz Ag, $2.96/lb Cu, $1.02/lb Pb, $1.31/lb Zn, $1,269/oz Au. Silver equivalent ounces and copper and zinc
equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $/1.06lb Pb, $1.32/lb Zn, $1,265/oz Au.
The Yauricocha Mine processed a total of 1,106,649 tonnes during 2018, representing an 8% increase from 2017, and 268,363 tonnes in Q4 2018, representing a
5% increase compared to Q4 2017. Zinc equivalent metal production in Q4 2018 increased by 14% due to higher ore throughput, higher head grades for all metals,
except zinc, and higher lead and copper recoveries. The higher lead head grades and lead production realized during Q4 2018 was the result of increased
production from the cuerpos chicos that contained higher lead grades during the quarter. Higher copper head grades and lower zinc head grades resulted from the
inclusion of certain copper-enriched zones at Esperanza, polymetallic ore from the Central Mine Zone, and a small inclusion of polymetallic ore from the cuerpos
chicos.
22
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Year over year zinc equivalent production was 7% higher in 2018 compared to the prior year. Copper Production was 43% higher, zinc production 2% higher, and
gold production was 18% higher. This was partially offset by a 5% decrease in silver production, and a 5% decrease in lead production from 2017.
The Mexican Operations
Bolivar Mine, Chihuahua State
The Bolivar Mine is a contiguous portion of the 15,217 hectare Bolívar Property land package within the municipality of Urique, in the Piedras Verdes mining
district of Chihuahua State, Mexico. During 2012, the Company achieved its first full year of commercial production at the Piedras Verdes plant, which is located 6
kilometres from the Bolivar Mine that had an initial capacity of 1,000 tpd. In September 2013, the Piedras Verdes plant further increased its daily throughput
capacity to 2,000 tpd by installing a new circuit. Work continues on the installation of an additional mill in the fourth quarter which will help grind size optionality
and improve recoveries at the plant. Production has increased incrementally in Q4 2018 and we should be at the 3,600 tonnes per day level during Q1 2019.
At Bolívar during Q4 2018, 6,258 meters were drilled from surface as well as diamond drilling within the mine. 2,183 meters were drilled within the mine in the El
Gallo zone. There was also 3,865 meters drilled at the Bolivar West extension to explore the extension of the orebody to the North and West, exploring the skarn
orebody with semi-massive magnetite, and disseminated nodules of chalcopyrite. There was also 210 meters drilled at La Campana, which is a new exploration
target where we are exploring the possibility of finding a skarn orebody with copper and zinc.
Bolivar Reserve and Resource Update
On May 22, 2018, the Company provided an update to its Mineral Reserve and Resource Estimate for the Bolivar Mine.
Mineral Reserve and Resource Estimate
Mineral Reserve Estimations have been conducted or reviewed by the following Qualified Persons:
·
Enrique Rubio, Ph.D. of REDCO Mining Consultants (Chile); Datamine Studio 5DP™ and Enhanced Production Scheduler (EPS)™ software.
23
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
·
Shannon L. Rhéaume, P.Eng. of SRK Consulting (Canada) Inc.; Datamine Studio 5DP™ and Enhanced Production Scheduler (EPS)™ software.
Mineral Resource Estimations have been conducted by David Keller, P.Geo. of SRK Consulting Canada and reviewed by Giovanny Ortiz, FAusIMM CP an
associate of SRK Consulting (U.S.) Inc. and a Qualified Person under National Instrument 43-101 – Standards of Disclosure for Mineral Projects. The estimations
were carried out using Datamine Studio RM™ and Leapfrog Geo™ software.
The consolidated mineral reserve statement for the Bolivar Mine area is presented in Table 1. The effective date for the reserves estimated herein is October 31,
2017. SRK has prepared an NI 43-101 Technical Report which supports this disclosure.
Table 1: Consolidated Bolivar Mineral Reserve Estimate as of October 31, 2017 – SRK Consulting (U.S.), Inc.
Category
Proven Probable
P+P
Tonnes
(000's)
Ag
(g/t)
Au
(g/t)
Cu
(%)
Ag
(Koz)
Au
(Koz)
Cu
(t)
7,925
7,925
18.9
18.9
0.25
0.25
0.86
0.86
4,823
4,823
63
63
67,925
67,925
(1) All figures rounded to reflect the relative accuracy of the estimates. Totals may not sum due to rounding.
(2) Ore reserves are reported at unit value cut-offs based on metal price assumptions*, metallurgical recovery assumptions**, mining costs, processing costs,
general and administrative (G&A) costs, and treatment and refining charges.
* Metal price assumptions considered are: Copper (Cu): US$/lb 3.00, Silver (Ag): US$/oz 18.25, and Gold (Au): US$/oz 1,291.00.
** Metallurgical recovery assumptions are 83% Cu, 78% Ag, and 64% Au.
(3) The mining costs are based on historical actual costs.
(4) The NSR cut-off values are variable by proposed mining method.
·
·
The economic NSR cut-off value is:
o US$30.80 = Room and Pillar; and
o US$33.10 = Longhole Stoping.
The marginal NSR cut-off value is:
o US$26.50 = Room and Pillar; and
o US$28.70 = Longhole Stoping.
(5) Mining recovery and dilution have been applied and are variable by mining area and proposed mining method.
The October 31, 2017, consolidated mineral resource statement for the Bolivar Mine area is presented in Table 2. These resources have been stated in unmined
areas of the deposits. Potential resources within surveyed pillar shapes in the existing mined out areas are not reported. SRK has prepared an NI 43-101 Technical
Report which supports this disclosure.
24
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Table 2: Consolidated Bolivar Mineral Resource Estimate as of October 31, 2017 – SRK Consulting (U.S.), Inc.
Category
Indicated
Inferred
Tonnes
(000's)
Ag
(g/t)
Au
(g/t)
Cu
(%)
Ag
(Koz)
Au
(Koz)
13,267
8,012
22.5
22.4
0.29
0.42
1.04
0.96
9,616
5,779
124
109
Cu
(t)
137,537
76,774
(6) Mineral resources are reported inclusive of ore reserves. Mineral resources are not ore reserves and do not have demonstrated economic viability. All figures
rounded to reflect the relative accuracy of the estimates. Copper, gold, and silver assays were capped where appropriate.
(7) Mineral resources are reported at variable metal value cut-off grades based on metal price assumptions*, metallurgical recovery assumptions**,
mining/transport costs (US$17.95/t), processing costs (US$8.33/t), and general and administrative costs (US$2.41/t).
(8) The metal value cut-off grade for the Bolivar Mine is US$29. No mineral resources are reported for remaining pillars.
(9) * Metal price assumptions considered for the calculation of metal value are: Copper (Cu): US$/lb 3.00, Silver (Ag): US$/oz 18.25, and Gold (Au): US$/oz
1,291.00.
(10) ** Metallurgical recovery assumptions are 83% Cu, 78% Ag, and 64% Au.
Bolivar Preliminary Economic Assessment (“PEA”)
On July 9, 2018, the Company reported the results of the PEA for the Bolivar Mine, which included the following highlights (see Company’s website for the Press
Release):
PEA Highlights
Base case of $1,291/oz Gold, $18.25/oz Silver, $3.00/lb.
Copper
Net Present Value (After Tax 8% Discount Rate)
Return on Investment
Mill Feed
Peak Mining Production Rate
LOM Project Operating Period
Total Life of Mine (LoM) Capital Costs
Net After – Tax Cashflow
Total Operating Unit Costs
LOM Gold Production (Payable)
LOM Silver Production (Payable)
LOM Copper Production (Payable)
$
$
$
$
Unit
US$ M
ROI (%)
Tonnes (Mt)
t/year
Years
US$ M
US$ M
US$/t
oz
oz
t
Value
214
550%
16.9
1,800,000
11
96
303
21.18
86,472
7,013,157
114,537
The PEA calculates a Base Case after-tax NPV of US$214 million, with an after – tax Return on Investment of 550% using a discount rate of 8%. The total life of
mine capital cost of the project is estimated to total US$96.0 million. The payback period for the Life of Mine (LoM) capital is estimated at 3.4 years. Operating
costs of the life of mine total US$359 million, equating to an operating cost of US$21.18 per tonne milled.
25
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Bolivar Production
A summary of contained metal production from the Bolivar Mine for the three months and year ended December 31, 2018 has been provided below:
Bolivar Production
Tonnes processed (mt)
Daily throughput
Copper grade
Silver grade (g/t)
Gold grade (g/t)
Copper recovery
Silver recovery
Gold recovery
Copper pounds (000's)
Silver ounces (000's)
Gold ounces
Copper equivalent pounds (000's) (1)
Q4 2018
3 Months Ended
Q4 2017
% Var.
Q4 2018
12 Months Ended
Q4 2017
% Var.
272,645
3,116
226,986
2,594
0.89%
19.00
0.21
79.27%
77.14%
64.29%
4,230
128
1,163
5,426
0.94%
14.67
0.16
83.03%
78.35%
68.42%
3,904
84
791
4,677
20%
20%
-6%
30%
30%
-5%
-2%
-6%
8%
53%
47%
16%
1,031,750
2,948
887,237
2,535
0.95%
17.69
0.17
79.95%
77.08%
68.55%
17,227
452
3,968
21,323
0.96%
14.93
0.17
79.82%
76.88%
59.50%
15,056
327
2,880
18,338
16%
16%
-2%
19%
3%
0%
0%
15%
14%
38%
38%
16%
(1) Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2018 were calculated using the following realized prices: $14.63/oz Ag, $2.77/lb Cu,
$0.89/lb Pb, $1.16/lb Zn, $1,238/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2017 were calculated using the following realized
prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2018 were
calculated using the following realized prices: $15.65/oz Ag, $2.96/lb Cu, $1.02/lb Pb, $1.31/lb Zn, $1,269/oz Au. Silver equivalent ounces and copper and zinc
equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $/1.06lb Pb, $1.32/lb Zn, $1,265/oz Au.
The Bolivar Mine processed 1,031,750 tonnes in 2018, representing a 16% increase over 2017. Q4 2018 record throughput was 272,645 tonnes, which was 20%
higher when compared to Q4 2017. The higher throughput and higher gold and silver head grades resulted in a 16% increase in copper equivalent production in Q4
2018 compared to Q4 2017. The increase in throughput was due to the work performed to increase the profile of the ramps and main access drives to 5 meters wide
x 5 meters high within the mine to provide access to larger conventional road dump trucks as well as articulating 6-wheel trucks to move higher volumes of ore out
of the mine. The development work performed during the year resulted in increased access to more minable stopes which also contributed to the higher throughput.
The Company is pleased with the progress made on the expansion plans at the Bolivar Mine. With the early completion of construction at the Piedras Verdes Mill,
we expect to deliver on the goal of a 20% increase in production from 3,000 TPD to 3,600 TPD, in Q1 2019.
26
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Copper equivalent production at the Bolivar Mine increased 16% in 2018 compared to 2017, with copper production 14% higher, silver production 38% higher,
and gold production 38% higher. In Q4 2018, copper production increased by 8% to 4,230,000 pounds, silver production increased 53% to 128,000 ounces, and
gold production increased 47% to 1,163 ounces compared to Q4 2017. The 16% increase in copper equivalent production was driven by higher throughput, and
higher silver and gold head grades.
The Company continues to define higher grade ore sources at Bolivar West and Bolivar Northwest which are expected to come into the mine plan by the second
half of 2019. However, as a short-term planning strategy, the Bolivar Mine continues to focus on developing and mining the El Gallo Inferior zone to centralize
operations, optimize equipment usage and to improve productivity.
The Cusi Mine, Chihuahua
The Company’s Cusi Mine encompasses 73 concessions covering 11,977 hectares that include 12 historical mines, each located on a mineralized structure, which
lie within 40 kilometers of the Malpaso Plant located in Chihuahua State, Mexico. On January 1, 2013 the Company announced that the Cusi Mine achieved
commercial production.
During Q4 2018 the Company drilled 1,781 meters to support the development of the Santa Rosa de Lima vein in Promontorio to further verify the size and
continuity of the orezone. 2,497 meters of surface diamond drilling was performed to explore the depth of the mineralized structure of San Nicolas in the area of
the San Juan Mine.
Cusi Preliminary Economic Assessment (“PEA”)
On June 18, 2018, the Company reported the results of the PEA for the Cusi Mine, which included the following highlights (see Company’s website for the Press
Release):
PEA Highlights
Base case of $1,283/oz Gold, $18.30/oz Silver, $0.93/lb.
Lead, $1.15/lb. Zinc
Net Present Value (After Tax 8% Discount Rate)
Internal Rate of Return
Mill Feed
Peak Mining Production Rate
LOM Project Operating Period
Total Life of Mine (LoM) Capital Costs
Net After – Tax Cashflow
Total Operating Unit Costs
LOM Gold Production (Payable)
LOM Silver Production (Payable)
LOM Lead Production (Payable)
LOM Zinc Production (Payable)
$
$
$
$
Unit
US$ M
IRR
Tonnes (Mt)
t/year
Years
US$ M
US$ M
US$/t
Oz
MOz
t
t
Value
92.2
75%
6.27
972,000
9
104.5
150.6
41.36
19,706
30
28,256
19,160
27
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The PEA calculates a Base Case after-tax NPV of US$92.2 million, with an after-tax IRR of 75% using a discount rate of 8%. The total life of mine capital cost of
the project is estimated to total US$104.5 million. The payback period for the Life of Mine (LoM) capital is estimated at 4.6 years. Operating costs of the life of
mine total US$259.3 million, equating to an operating cost of US$41.36 per tonne milled.
Cusi Production
A summary of contained metal production from the Cusi Mine for the three months and year ended December 31, 2018 has been provided below:
Cusi Production
Tonnes processed (mt)
Daily throughput
Silver grade (g/t)
Gold grade (g/t)
Lead grade
Zinc grade
Silver recovery
Gold recovery
Lead recovery
Zinc recovery
Silver ounces (000's)
Gold ounces
Lead pounds (000's)
Zinc pounds (000's)
Silver equivalent ounces (000's) (1)
Q4 2018
3 Months Ended
Q4 2017
% Var.
Q4 2018
12 Months Ended
Q4 2017
% Var.
58,289
666
111.10
0.16
0.41%
0.49%
82.06%
40.72%
80.61%
0.00%
171
124
421
0
207
16,280
186
178.60
0.25
0.97%
1.00%
88.15%
58.09%
87.65%
42.50%
82
77
305
152
122
258%
258%
-38%
-36%
-58%
-50%
-7%
-30%
-8%
-100%
107%
62%
38%
-100%
70%
186,889
534
140.17
0.16
0.36%
0.40%
83.10%
39.14%
79.92%
4.26%
700
372
1,194
71
813
88,011
251
164.93
0.26
1.12%
1.13%
72.17%
58.40%
81.26%
42.56%
337
423
1,769
937
550
112%
112%
-15%
-38%
-68%
-64%
15%
-33%
-2%
-90%
108%
-12%
-33%
-92%
48%
(1) Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2018 were calculated using the following realized prices: $14.63/oz Ag, $2.77/lb Cu,
$0.89/lb Pb, $1.16/lb Zn, $1,238/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2017 were calculated using the following realized
prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2018 were
calculated using the following realized prices: $15.65/oz Ag, $2.96/lb Cu, $1.02/lb Pb, $1.31/lb Zn, $1,269/oz Au. Silver equivalent ounces and copper and zinc
equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $/1.06lb Pb, $1.32/lb Zn, $1,265/oz Au.
Annual production at the Cusi Mine was 186,889 tonnes in 2018, which was 112% higher than 2017. Total ore processed increased 258% to 58,289 tonnes during
Q4 2018 compared to Q4 2017. The higher throughput was partially offset by lower head grades and recoveries for all metals, but still resulted in a 70% increase in
silver equivalent production in Q4 2018 compared to Q4 2017.
28
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Silver equivalent production increased 48% during 2018 compared to 2017, as silver production increased 108% to 700,000 ounces, while gold production
decreased 12% to 372 ounces, lead production decreased 33% to 1,194,000 pounds and zinc production decreased 92% to 71,000 pounds. However, during Q4
2018, silver, gold, and lead production were 107%, 62%, and 38% higher than Q4 2017, respectively.
The increase in throughput was partially the result of the Company’s successful development and mining of ore from the recently discovered high-grade silver
stockwork zone located within the Santa Rosa de Lima (“SRL”) vein complex. This mineralized zone extends to over 100 meters in length, 50 meters in width and
70 meters in height. Our development plan is now incorporating the wider dimensions of this zone.
Consolidated Mineral Resources
Consolidated Reserves and Resources
Reserves - Proven and Probable
Contained Metal
Tonnes Ag Cu Pb Zn Au AgEq CuEq ZnEq Ag Cu Pb Zn Au AgEq CuEq ZnEq
(M oz) (M lb) (M lb) (M lb) (K oz) (M oz) (M lb) (M lb)
(x1000) (g/t) (%) (%) (%) (g/t) (g/t)
234
105
-
Proven
1,836 47 1.08 0.84 2.59 0.64
893
372
-
Probable 7,081 49 1.23 0.75 2.38 0.49
Proven &
Probable 8,917 48 1.20 0.77 2.43 0.52
-
Proven
-
-
- 0.25
Probable 7,925 19 0.86
Proven &
Probable 7,925 19 0.86
Proven &
Probable 16,842 34 1.04 0.41 1.29 0.39
- 5.73
-
-
-
-
-
- 1.14
- 1,127
-
-
-
199
(%)
- 5.78
- 5.72
477
-
-
150
-
64
235
-
150
151
-
-
14
-
5
44
192
38
112
34
117
- 1.14
- 0.25
3
11
-
-
-
-
-
-
199
150
386
151
477
213
19
64
5
-
-
-
-
-
-
-
(%)
-
Yauricocha
Bolivar
Total
Resources - Measured and Indicated
Contained Metal
Pb Zn Au AgEq CuEq ZnEq
(%) (M oz) (M lb) (M lb) (M lb) (K oz) (M oz) (M lb) (M lb)
-
550
- 1,478
117
326
84
185
219
595
78
196
-
-
(%)
(g/t)
-
-
Tonnes Ag Cu Pb Zn Au AgEq CuEq ZnEq Ag Cu
(x1000) (g/t) (%) (%) (%) (g/t)
Measured 3,094 70 1.72 1.23 3.20 0.79
Indicated 10,112 60 1.46 0.83 2.67 0.60
Measured
&
Indicated 13,206 62 1.52 0.92 2.79 0.65
-
Measured
-
-
- 0.30
Indicated 13,267 23 1.04
Measured
&
Indicated 13,267 23 1.04
Measured
362 225
Indicated 4,195 217
- 6.97
-
-
-
-
-
- 1.37
- 0.55 0.68 0.13 269
- 0.64 0.66 0.21 267
- 1.37
-
-
- 8.06
- 6.63
26
-
10
10
3
29
-
-
-
- 0.30
7
19
-
-
-
-
-
444
-
304
304
-
-
Measured
&
Indicated 4,557 218
Measured
&
Indicated 31,030 68 1.09 0.49 1.29 0.43
- 0.63 0.66 0.20 267
Yauricocha
Bolivar
Cusi
Total
269
-
-
813
-
-
274
-
128
-
-
-
- 2,028
-
-
-
402
-
4
59
-
5
61
128
2
28
-
3
36
402
-
-
-
-
-
-
-
-
32
-
64
66
30
39
-
68
748
333
880
432
Contained Metal
Resources - Inferred
Tonnes Ag Cu Pb Zn Au AgEq CuEq ZnEq Ag Cu
(x1000) (g/t) (%) (%) (%) (g/t)
6,632 43 1.19 0.47 2.16 0.55
8,012 22 0.96
- 0.42
1,633 158
Pb Zn Au AgEq CuEq ZnEq
(%) (M oz) (M lb) (M lb) (M lb) (K oz) (M oz) (M lb) (M lb)
753
-
-
- 5.15
-
-
-
- 1.35
-
- 0.54 0.84 0.16 207
-
238
-
-
-
11
(%)
(g/t)
-
9
6
8
23
175
170
-
344
68
-
19
87
315
-
30
345
117
108
8
234
Inferred 16,277 44 0.96 0.24 0.96 0.45
Yauricocha
Bolivar
Cusi
Total
Notes:
1. The effective date of the Yauricocha mineral reserve and resource estimate is July 31, 2017. Details of the estimate are provided in a NI 43-101 technical
report filed on SEDAR on November 10, 2017. Zinc equivalency is based on the following metal price assumptions: US$17.80/oz Ag, US$2.60/lb Cu,
US$1.01/lb Pb, US$1.25/lb Zn and US$1,255/oz Au. Metallurgical recovery assumptions are variable between mineralization types, and are based on
actual plant data for 2017. They range (where recovered) from 28-67% Ag, 39-65% Cu, 66-85% Pb, 89% Zn, 16-54% Au. The equivalency expression is
designed to present an in-situ zinc equivalent, considering the recovered value of the other metals expressed in the value of zinc percent.
29
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
•
The equation is: ZnEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Zn$*Znrec).
2. The effective date of the Bolivar mineral reserve and resource estimate is October 31, 2017. Details of the estimate are provided in the
Company’s May 22, 2018 press releases and a NI 43-101 technical report will be filed on SEDAR within 45 days of the May 22, 2018 press
release. Measured, Indicated and Inferred Resources include Proven and Probable Reserves. Copper equivalent is based on the following metal
prices: US$18.25/oz Ag, US3.00/lb Cu and US$1,291 Au. Totals for Proven and Probable are diluted for internal waste. Metallurgical recovery
assumptions are based on actual plant data for 2017 and are 78% Ag, 83% Cu, and 64% Au. The equivalency expression is designed to present
an in-situ copper equivalent, considering the recovered value of the other metals expressed in the value of copper percent.
•
The equation is: CuEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Au*Au$*Aurec)) / (Cu$*Curec).
3. The effective date of the Cusi mineral resource estimate is Aug 31, 2017. Details of the estimate are provided in a NI 43-101 technical report
filed on SEDAR on February 12, 2018. Mineral resources that are not mineral reserves do not have demonstrated economic viability. Silver
equivalency is based on the following metal price assumptions: US$18.30/oz Ag, US$0.93/lb Pb, US$1.15/lb Zn and US$1,283/oz Au. Based on
the historical production information for Cusi, the metallurgical recovery assumptions are 84% Ag, 86% Pb, 51% Zn, 57% Au. The equivalency
expression is designed to present an in-situ silver equivalent, considering the recovered value of the other metals expressed in the value of silver
g/t.
•
The equation is: AgEq = ((Ag*Ag$*Agrec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Ag$*Agrec).
6. SUMMARIZED FINANCIAL RESULTS
Year ended December 31, 2018 (compared to the year ended December 31, 2017)
(In
thousands
of
United
States
dollars,
except
cash
costs)
Revenue
Adjusted EBITDA 1
Cash flow from operations before movements in working capital
Adjusted net income attributable to shareholders
Non-cash charge on the acquisition of Corona
Gross profit
Income tax expense
Net income (loss) attributable to shareholders
Year ended
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
$
232,371 $
89,756
90,148
29,009
10,534
85,782
(26,340)
18,814
205,118 $
81,034
79,785
23,482
31,448
45,964
(10,348)
(4,645)
143,180
41,887
44,303
7,006
24,384
16,780
(5,757)
(12,265)
(In
thousands
of
United
States
dollars)
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Cash and cash equivalents
Assets
Liabilities
Net Debt 2
Equity
$
21,832 $
356,441
152,836
34,421
203,605
23,878 $
340,601
159,923
40,982
180,678
42,145
364,812
178,850
36,537
185,962
1 This is a non-IFRS performance measure, see Non-IFRS Performance Measures section
2 Loans payable minus cash and cash equivalents.
Net income (loss) attributable to shareholders for 2018 was $18.8 million (2017: $(4.6) million) or $0.12 per share (basic and diluted) (2017: $(0.03)). The net loss
incurred in 2017 included a $4.4 million non-cash loss on the distribution of Cautivo Mining Inc. assets to Sierra shareholders. The other major differences
between these periods are explained below.
30
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Revenues
Revenue from metals payable at the Yauricocha Mine in Peru of $168.7 million for 2018 increased by 9% compared to $154.2 million of revenues in 2017. Higher
revenues are primarily attributable to the 8% increase in throughput, and the higher head grades and recoveries for copper and gold at Yauricocha in 2018
compared to 2017. The increase in revenues were realized despite decreases in the prices of silver (9%), lead (4%), and zinc (1%), which copper prices increased
by 5% and gold prices were consistent with 2017. The Company continued to achieve consistent production throughout 2018 as the operational improvement
program, and the focus on extracting higher value ore, in addition to ore sourced from the Esperanza Zone, continues to generate significant cash flows.
Revenue from metals payable in Mexico were $63.7 million for 2018 compared to $51.0 million in 2017. Revenues increased by 25% in Mexico during 2018 as a
result of the 16% increase in throughput, higher silver and gold head grades, and higher gold recoveries realized at Bolivar; as well as the 112% increase in
throughput, and higher silver recoveries realized at Cusi. The increase in revenues were realized despite decreases in the prices of silver (9%), lead (4%), and zinc
(1%), which copper prices increased by 5% and gold prices were consistent with 2017; Revenue from metals payable at the Bolivar Mine were $52.5 million for
2018 compared to $45.0 million in 2017. The increase in revenue from the Bolivar Mine in 2018 was due to the 5% increase in the price of copper realized, the
16% increase in throughput, higher silver and gold head grades, and higher recoveries of gold realized due to plant enhancements completed at Bolivar which
included the installation of a new vibrating screen, filters, and cyclones.
Revenue from metals payable at the Cusi Mine for 2018 were $11.3 million compared to $6.0 million in 2017. The increase in revenues was the result of a 112%
increase in throughput, and higher silver recoveries realized at Cusi. The Company has successfully transitioned to mining the recently developed Santa Rosa de
Lima zone. This zone was being developed for the majority of 2017 as ramps were being prepared to access the minable stopes within the deposit. The Company is
currently mining selected higher-grade structures at the old mine, the San Antonio vein, as well as the Santa Rosa de Lima structure containing improved head
grades to the mill at Cusi.
The following table shows the Company’s realized selling prices for each quarter in 2018 and 2017:
Realized
Metal
Prices
(In
US
dollars)
Q4
Q3
2018
Q2
Q1
YTD
Q3
Q2
Q1
YTD
2017
Silver (oz)
Copper (lb)
Lead (lb)
Zinc (lb)
Gold (oz)
$
$
$
$
$
14.63 $
2.77 $
0.89 $
1.16 $
1,238 $
14.85 $
2.79 $
0.94 $
1.14 $
1,206 $
16.36 $
3.12 $
1.09 $
1.38 $
1,296 $
16.75 $
3.14 $
1.15 $
1.56 $
1,334 $
15.65 $
2.96 $
1.02 $
1.31 $
1,269 $
16.86 $
2.93 $
1.08 $
1.36 $
1,280 $
17.22 $
2.58 $
0.99 $
1.20 $
1,265 $
17.71 $ 17.14
2.64 $ 2.82
1.04 $ 1.06
1.27 $ 1.32
1,231 $ 1,265
Yauricocha’s cost of sales per zinc equivalent payable pound was $0.55 (2017 - $0.54), cash cost per zinc equivalent payable pound was $0.52 (2017 - $0.50), and
AISC per zinc equivalent payable pound of $0.73 (2017 - $0.78). The decrease in the AISC per zinc equivalent payable pound for 2018 compared to 2017 was a
result of lower sustaining capital expenditures and higher zinc equivalent payable pounds, while cash costs remained consistent; this was partially offset by slight
increases in general and administrative costs. These cost decreases were realized despite a $2.0 million increase in labor costs, due to the Company’s union
agreement and a salary adjustment to bring the 2018 salaries in line with the current market rates. The payment was made during November and December 2018
but retroactive to the entire year’s salaries. Going forward these costs will be amortized over the entire year for 2019. The union was formed in July 2017 and has
grown to 406 workers at the end of 2018, equivalent to approximately 60% of the Company’s workforce, representing the majority of the mine employees.
31
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Bolivar’s cost of sales per copper equivalent payable pound was $1.73 (2017 - $1.54), cash cost per copper equivalent payable pound was $1.44 (2017 - $1.49),
and AISC per copper equivalent payable pound was $2.13 (2017 - $2.698) for 2018 compared to 2017. The decrease in the AISC per copper equivalent payable
pound during 2018 compared to 2017 was due to the increase in copper equivalent payable pounds resulting from higher throughput, higher silver and gold head
grades and higher gold recoveries, as well as a decrease in sustaining capital expenditures.
Cusi’s cost of sales per silver equivalent payable ounce was $8.97 (2017 - $12.51), cash cost per silver equivalent payable ounce was $15.71 (2017 - $15.37), and
AISC per silver equivalent payable ounce was $22.09 (2017 - $33.90) for 2018 compared to 2017. AISC per silver equivalent payable ounce decreased due to
higher silver equivalent payable ounces resulting from higher throughput, higher silver recoveries, lower treatment and refining charges, and lower sustaining
capital expenditures.
Non-cash depletion, depreciation and amortization
The Company recorded total non-cash depletion, depreciation and amortization expense for 2018 of $31.3 million compared to $58.2 million for the same period in
2017.
A large component of the net income for every period is the non-cash depletion charge in Peru, which was $10.5 million for 2018 (2017: $31.5 million). The non-
cash depletion charge is based on the aggregate fair value of the Yauricocha mineral property at the date of acquisition of Corona of $371.0 million amortized over
the total proven and probable reserves of the mine. The decrease in the non-cash depletion charge in 2018 was due to the 134% increase in proven and probable
reserves reported in the Company’s NI 43-101 Technical Report issued on October 26, 2017.
General and Administrative Expenses
The Company incurred general and administrative expenses of $18.9 million in 2018 compared to $20.3 million in 2017. The decrease in general and
administrative costs in 2018 compared to 2017 was due to a decrease in consultant fees, professional fees and legal fees incurred in Canada during 2017 with
regards to the work being performed towards listing Sierra Metals Inc. on the NYSE AMERICAN stock exchange, as well as the spin-out of the Northern Peruvian
Properties from the Company’s previous subsidiary, Plexmar Resources Inc.
Adjusted EBITDA (1)
The Company recorded adjusted EBITDA of $89.8 million during 2018 (2017: $81.0 million) which was comprised of $79.5 million (2017: $74.8 million) from
the Peruvian operations and $13.8 million (2017: $10.5 million) from the operations in Mexico. The increase in adjusted EBITDA is due to the increase in
revenues discussed previously. Adjusted EBITDA is a non-IFRS measure that represents an indication of the Company’s continuing capacity to generate earnings
from operations before taking into account management’s financing decisions and costs of consuming capital assets, which vary according to their vintage,
technological currency, and management’s estimate of their useful life. Adjusted EBITDA comprises revenue less operating expenses before interest expense
(income), property, plant and equipment amortization and depletion, foreign exchange variations, non-recurring provisions, share-based payments expense, and
income taxes. The Company considers cash flow before movements in working capital to be the IFRS performance measure that is most closely comparable to
adjusted EBITDA.
32
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Income taxes
The Company recorded current tax expense of $25.4 million for 2018 compared to $23.4 million in 2017. The increase was the result of the higher taxable income
generated in Peru during 2018 compared to 2017.
During 2018, the Company recorded a deferred tax expense of $(0.9) million compared to $13.1 million deferred tax recovery in 2017. The main driver for the
Company’s consolidated deferred tax recovery is the non-cash recovery associated with the acquisition of Corona which has decreased period over period, in line
with the non-cash depletion charge mentioned previously.
Adjusted net income attributable to shareholders (1)
Adjusted net income attributable to shareholders (1) of $29.0 million, or $0.17 per share, for 2018 was higher than the adjusted net income of $23.5 million, or
$0.14 per share for 2017. Adjusted net income is defined by management as the net income attributable to shareholders shown in the condensed interim
consolidated statements of income excluding the non-cash depletion charge due to the acquisition of Corona, the corresponding deferred income tax recovery, and
certain non-recurring or non-cash items. Accordingly, management considers this metric to be more meaningful to measure the Company’s profitability than net
income as it adjusts for specific non-cash items.
Other Comprehensive Income
Other comprehensive income (“OCI”) for 2018 was $24.3 million compared to OCL of $(0.4) million in 2017. OCI includes a foreign currency loss of $1.6 million
for 2018 (2017: $0.5 million). The unrealized foreign currency translation loss was caused by the weakening of the Canadian dollar relative to the US dollar during
the period which resulted in a foreign exchange loss on the translation of the Canadian dollar net assets into the Company’s US dollar presentation currency.
(1) This is a non-IFRS performance measure, see non-IFRS Performance Measures section of this MD&A.
The following tables display selected quarterly financial results detailed by operating segment:
33
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Year ended December 31, 2018
Revenue (1)
Peru
Mexico
Mexico
Canada
Yauricocha Mine Bolivar Mine Cusi Mine Corporate
$
$
$
Total
$
168,657
52,451
11,263
-
232,371
Production cost of sales
Depletion of mineral property
Depreciation and amortization of property, plant and equipment
Cost of sales
(74,731)
(13,229)
(4,626)
(92,586)
(33,168)
(2,918)
(8,197)
(44,283)
(7,281)
(640)
(1,799)
(9,720)
Gross profit from mining operations
76,071
8,168
1,543
-
-
-
-
-
(115,180)
(16,787)
(14,622)
(146,589)
85,782
Net income (loss) from operations
34,938
(3,593)
(1,228)
(4,277)
25,840
Adjusted EBITDA
79,524
10,984
2,792
(3,544)
89,756
Year ended December 31, 2017
Peru
Mexico
Mexico
Canada
Yauricocha Mine Bolivar Mine Cusi Mine Corporate
$
$
$
Total
$
Revenue
154,153
44,949
6,016
-
205,118
Production cost of sales
Depletion of mineral property
Depreciation and amortization of property, plant and equipment
Cost of sales
(67,542)
(31,448)
(12,783)
(111,773)
(27,418)
(3,163)
(8,275)
(38,856)
(6,019)
(690)
(1,816)
(8,525)
Gross profit (loss) from mining operations
42,380
6,093
(2,509)
-
-
-
-
-
(100,979)
(35,301)
(22,874)
(159,154)
45,964
Net income (loss) from operations
17,958
(3,230)
(4,593)
(10,995)
(860)
Adjusted EBITDA
Cash Flows
74,815
11,900
(1,404)
(4,277)
81,034
Cash flow generated from operations before movements in working capital of $90.1 million for 2018 increased compared to $79.8 million in 2017. The increase in
operating cash flow is mainly the result of higher revenues generated and higher gross margins realized.
Net cash flow of $(49.3) million (2017: $(51.6) million) used in investing activities during 2018 consists of purchases of property, plant and equipment, capital
expenditures related to the Yauricocha shaft and tunnel development, and exploration and evaluation assets in Peru and Mexico.
A breakdown of the Company’s capital expenditures of $49.3 million during the year ended December 31, 2018 is presented below:
34
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
($ Millions)
Expenditure
Mascota Shaft Refurbishing
Concentrator Plant Improvements
Investment in Equipment
Exploration Drilling
Mine Development
Plant Improvements (production increases)
Ventilation
Yauricocha Tunnel
Yauricocha Shaft
Tailings Dam
Mining Concession Fees
2018 Capital Expenditures by Mine
Yauricocha
Bolivar
Cusi
Total
$
$
$
$
$
$
$
$
$
$
$
$
1.50 $
2.00 $
3.90 $
1.80 $
5.70 $
0.90 $
1.00 $
3.60 $
4.60 $
0.20 $
- $
25.20 $
- $
- $
2.20 $
2.20 $
2.50 $
6.30 $
- $
- $
- $
0.50 $
0.40 $
14.10 $
- $
- $
2.10 $
2.60 $
2.30 $
2.40 $
- $
- $
- $
0.60 $
- $
10.00 $
1.50
2.00
8.20
6.60
10.50
9.60
1.00
3.60
4.60
1.30
0.40
49.30
Net cash flow of $(14.5) million (2017: $(21.1) million) from (used in) financing activities for 2018 consists of $(18.8) million (2017: $(44.5) million) in
repayments of loans and credit facilities, $(2.8) million (2017: $(3.0) million) in interest paid on loans and credit facilities, and $(2.9) million (2017: $(3.4) million)
of dividends paid to non-controlling interest shareholders. This was partially offset by proceeds received from the issuance of credit facilities of $10.0 million
during 2018 (2017: $29.8 million).
7. QUARTERLY FINANCIAL REVIEW
The following table displays selected results from the eight most recent quarters:
(In
thousands
of
United
States
dollars,
except
per
share
amounts) Dec-31
Revenues
Adjusted EBITDA
Adjusted net income attributable to shareholders
Net income (loss) attributable to shareholders
55,019
15,263
783
(2,654)
Sep-30
Jun-30
Mar-31
Dec-31
Sep-30
Jun-30
Mar-31
52,956
18,212
4,482
1,922
62,721
28,878
12,557
10,843
61,675
27,403
11,187
8,703
51,170
19,208
3,241
2,118
50,859
18,845
4,993
(6,523)
48,571
17,620
4,258
(2,798)
54,518
25,361
10,990
2,558
2018
2017
Basic and diluted earnings (loss) per share ($)
(0.01)
0.01
0.07
0.05
0.01
(0.04)
(0.02)
0.02
Three months ended December 31, 2018 (compared to the three months ended December 31, 2017)
Net income (loss) attributable to shareholders for Q4 2018 was $(2.7) million, or $(0.01) per share (basic and diluted), compared to net income of $2.1 million, or
$0.01 per share (basic and diluted) for the same period in 2017. The major differences between these periods are explained below.
Revenues
Revenues from metals payable from the Yauricocha Mine in Peru were $39.2 million for Q4 2018 compared to $38.2 million in Q4 2017. The increase in revenues
for Q4 2018 compared to Q4 2017 was due to a 5% increase in tonnes processed, higher head grades for all metals, except zinc, and higher recoveries for lead and
gold. Increased revenues were realized due to the higher metal production, despite decreases in the prices of silver (13%), copper (12%), zinc (20%), lead (20%),
and gold (3%).
35
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Revenue from metals payable in Mexico were $15.8 million for Q4 2018, compared to $12.9 million for the same period in 2017. Revenues in Mexico increased as
a result the 20% increase in throughput, higher silver and gold head grades at Bolivar; and the 258% increase in throughput at Cusi. Increased revenues were
realized due to the higher metal production, despite decreases in the prices of silver (13%), copper (12%), zinc (20%), lead (20%), and gold (3%).
Revenues generated at the Bolivar Mine for Q4 2018 were $12.0 million, compared to $12.0 million for the same period in 2017. The 20% increase in throughput,
and higher head grades of silver and gold resulted in an increase in equivalent metal production and revenues compared to Q4 2017.
Revenues generated at the Cusi Mine for Q4 2018 were $3.8 million compared to $1.0 million for Q4 2017. The increased revenue resulted as tonnage continued to
improve in the fourth quarter, and the Mine realized a 258% increase in ore throughput when compared to Q4 2017. The Company continues to increase mill feed
from the Santa Rosa de Lima zone, while mining selected structures in the older part of the mine. The addition of another ball mill will see the capacity increase to
approximately 1,200 tonnes per day in 2019. Additionally, the company has recently defined a significant high-grade silver zone, which remains open to depth
within the Santa Rosa de Lima structure which will help contribute increased, higher grade mill feed going forward.
Yauricocha’s cost of sales per zinc equivalent payable pound was $0.54 (Q4 2017 - $0.63), cash cost per zinc equivalent payable pound was $0.52 (Q4 2017 -
$0.57), and AISC per zinc equivalent payable pound of $0.73 (Q4 2017 - $0.90). The decrease in the AISC per zinc equivalent payable pound for Q4 2018
compared to Q4 2017 was the result of higher zinc equivalent payable pounds due to higher throughput, and higher copper and gold head grades and recoveries.
These cost decreases were realized despite a $2.0 million increase in labor costs, due to the Company’s union agreement and a salary adjustment to bring the 2018
salaries in line with the current market rates. The payment was made during November and December 2018 but retroactive to the entire year’s salaries. Going
forward these costs will be amortized over the entire year for 2019. The union was formed in July 2017 and has grown to 406 workers at the end of 2018,
equivalent to approximately 60% of the Company’s workforce, representing the majority of the mine employees
Bolivar’s cost of sales per copper equivalent payable pound was $2.11 (Q4 2017 - $1.66), cash cost per copper equivalent payable pound was $1.67 (Q4 2017 -
$1.72), and AISC per copper equivalent payable pound was $2.37 (Q4 2017 - $3.03) for Q4 2018 compared to Q4 2017. The decrease in the AISC per copper
equivalent payable pound during Q4 2018 compared to Q4 2017 was due to the increase in copper equivalent payable pounds resulting from higher throughput,
and silver and gold head grades, as well as a decrease in sustaining capital expenditures.
Cusi’s cost of sales per silver equivalent payable ounce was $11.04 (Q4 2017 - $17.18), cash cost per silver equivalent payable ounce was $18.96 (Q4 2017 -
$18.66), and AISC per silver equivalent payable ounce was $23.27 (Q4 2017 - $36.33) for Q4 2018 compared to Q4 2017. AISC per silver equivalent payable
ounce decreased due to higher silver equivalent payable ounces resulting from higher throughput, and lower sustaining capital expenditures.
36
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Non-cash depletion, depreciation and amortization
The Company recorded total non-cash depletion, depreciation and amortization expense for Q4 2018 of $8.0 million compared to $7.9 million for the same period
in 2017.
A large component of the non-cash depletion, depreciation and amortization expense is the depletion charge on the acquisition of Corona of $2.5 million for Q4
2018 compared to $2.7 million for the same period in 2017. The non-cash depletion charge is based on the aggregate fair value of the Yauricocha mineral property
at the date of acquisition of Corona of $371.0 million amortized over the total proven and probable reserves of the mine.
General and Administrative Expenses
The Company incurred general and administrative expenses of $5.0 million for Q4 2018 compared to $8.6 million for Q4 2017. General and administrative costs in
Q4 2017 included a substantial amount of legal fees incurred in Canada with regards to the work performed towards listing Sierra Metals Inc on the NYSE MKT
stock exchange, as well as the spin-out of the Northern Peruvian Properties.
Adjusted EBITDA
Adjusted EBITDA (1) of $15.3 million for Q4 2018 decreased 21% compared to $19.2 million in Q4 2017. The decrease in adjusted EBITDA in Q4 2018 was due
to the decreases in the prices of silver (13%), copper (12%), lead (20%), zinc (20%), and gold (3%) during Q4 2018 compared to Q4 2017, which had a negative
impact on the Company’s revenues. The Company also made a payment of $2.0 million to the Yauricocha union of mining employees during Q4 2018, which had
a negative impact on the Adjusted EBITDA during the quarter.
Income taxes
The Company recorded current tax expense of $5.3 million for Q4 2018 compared to $5.6 million in Q4 2017 and the decrease was the result of the slightly lower
taxable income generated in Peru during Q4 2018 compared to Q4 2017.
During Q4 2018, the Company recorded a deferred tax expense of $(1.3) million compared to a deferred tax recovery of $0.6 million in Q4 2017. The main driver
for the Company’s consolidated deferred tax recovery is the non-cash recovery associated with the acquisition of Corona which has decreased year over year in
line with the non-cash depletion charge mentioned previously.
37
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Adjusted net income attributable to shareholders
The Company recorded an adjusted net income of $0.8 million for Q4 2018 compared to $3.2 million for Q4 2017. Adjusted net income is defined by management
as the net income attributable to shareholders shown in the condensed interim consolidated statements of income excluding the non-cash depletion charge due to
the acquisition of Corona, the corresponding deferred income tax recovery, and certain non-recurring or non-cash items. Accordingly, management considers this
metric to be more meaningful to measure the Company’s profitability than net income as it adjusts for specific non-cash items.
Other Comprehensive Income (Loss)
OCL for Q4 2018 was $(2.8) million compared to OCI of $3.6 million for the same period in 2017. OCI includes a foreign currency loss of $(1.1) million in Q4
2018 (Q4 2017: $(0.1) million). The unrealized foreign currency translation loss was caused by the weakening of the Canadian dollar relative to the US dollar
during the quarter, which resulted in a foreign exchange loss on the translation of the Canadian dollar net assets into the Company’s US dollar presentation
currency.
38
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
8. LIQUIDITY AND CAPITAL RESOURCES
Financial Condition Review
The following table provides a comparison of key elements of Sierra’s balance sheet as at December 31, 2018 and December 31, 2017:
(000's)
Cash and cash equivalents
Working capital
Total assets
Debt (net of financing fees)
Total liabilities
Equity attributable to owners of the Company
December 31, 2018 December 31, 2017
23,878
$
(6,784)
$
340,601
$
21,832 $
(8,290) $
356,441 $
$
$
$
56,253 $
152,836 $
173,355 $
64,860
159,923
154,571
Cash and cash equivalents of $21.8 million and working capital of $(8.3) million as at December 31, 2018 compared to $23.9 million and $(6.8) million,
respectively, at the end of 2017. Cash and cash equivalents have decreased by $2.0 million during 2018 due to $61.9 million of operating cash flows, and $10.0
million drawn down from a short term revolving line of credit, being offset by capital expenditures incurred in Mexico and Peru of $(49.3) million, repayment of
loans, credit facilities and interest of $(21.5) million, dividends paid to non-controlling interest shareholders of $(2.9) million.
Trade and other receivables include $5.8 million (December 31, 2017 - $5.7 million) of Mexican value-added tax (“VAT”) receivables. During 2014, the Company
commenced the process to request the refund of the VAT receivable relating to 2012 and 2013 and has successfully received refunds of $15.6 million for some of
the monthly claims submitted over the past three years. The Company expects to collect or offset the VAT balance against 2019 VAT payables. Amounts included
in trade and other receivables are current and the Company has no allowance for doubtful accounts as at December 31, 2018.
Sierra’s outstanding loan and credit facilities are shown below:
(000's)
Dia Bras Peru loan with BCP (Corona Acquisition) (1)
Corona loan with BCP (Corona Operating) (2)
DBP revolving credit facility with BCP (3)
Corona Notes payable to BBVA Banco Continental (4)
FIFOMI working capital facility
Total Debt
Less cash balances
Net Debt
Limit
Balance Outstanding
December 31, 2018 December 31, 2017
34,596 $
- $
- $
- $
15,000 $
15,000 $
5,000 $
5,000 $
1,657 $
7,543 $
56,253 $
$
40,377
6,309
15,000
-
3,174
64,860
$
$
$
$
$
$
$
21,832 $
34,421 $
23,878
40,982
(1 – 4) See consolidated financial statements as at December 31, 2018 for details of each loan and credit facility.
Outstanding shares
The authorized share capital at December 31, 2018 was an unlimited number of common shares without par value. As at March 27, 2019, the Company had 163.5
million shares issued and outstanding (December 31, 2017 – 162.8 million shares issued and outstanding).
39
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
As at December 31, 2018, there were 1,380,085 RSUs outstanding at a weighted average fair value of C$3.01.
As at March 27, 2019 there are 1,255,285 RSU’s outstanding at a weighted average fair value of C$3.15.
9. SAFETY, HEALTH AND ENVIRONMENT
Sierra Metals is fully committed to disciplined and responsible growth and has Safety and Health and Environmental Policies in place to support this commitment.
The Company’s corporate responsibility objectives are to prevent pollution, minimize the impact operations may cause to the environment and practice progressive
rehabilitation of areas impacted by its activities. The Company aims to operate in a socially responsible and sustainable manner, and to follow international
guidelines in Mexico and Peru. The Company focuses on social programs with the local communities in Mexico and Peru on an ongoing basis.
10. FINANCIAL INSTRUMENTS AND RELATED RISKS
Financial risk management
The Company is exposed to financial risks, including credit risk, liquidity risk, currency risk, interest rate risk and price risk. The aim of the Company’s overall
risk management strategy is to reduce the potential adverse effect that these risks may have on the Company’s financial position and results.
The Company’s Board of Directors has overall responsibility and oversight of management’s risk management practices. Risk management is carried out under
policies approved by the Board of Directors. The Company may from time to time, use foreign exchange contracts, future and forward contracts to manage its
exposure to fluctuations in foreign currency and metals prices. The Company does not ordinarily enter into hedging arrangements to cover long term commodity
price risk unless it has the obligation to do so under a credit facility, which would be approved by the Board of Directors.
i)
Market Risk
(1) Currency risk
Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in
foreign exchange rates. The Company and its subsidiaries’ financial instruments are exposed to currency risk where those instruments are
denominated in currencies that are not the same as their functional currency; exchange gains and losses in these situations impact net income or
loss. The Company’s sales of silver, copper, lead and zinc are denominated in United States dollars and the Company’s costs are incurred in
Canadian dollars, United States dollars, Mexican pesos and Peruvian Nuevo Soles. The United States dollar is the functional currency of the
Peruvian and Mexican entities. The Canadian dollar is the functional currency of all other entities. The company also holds cash and cash
equivalents, trade and other receivables and accounts payable that are subject to currency risk.
40
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The following are the most significant areas of exposure to currency risk:
Cash and cash equivalents
Income tax and other receivables
December 31, 2018
CAN dollar
Mexican
Peso
Peruvian
Nuevo
Soles
Total $
183
32
215
393
8,748
9,141
1,064
617
1,681
1,640
9,397
11,037
Accounts payable and other liabilities
(1,268)
(22,865)
(19,632)
(43,765)
Total
(1,053)
(13,724)
(17,951)
(32,728)
Cash and cash equivalents
Income tax and other receivables
December 31, 2017
CAN dollar
Mexican
Peso
Peruvian
Nuevo
Soles
Total $
132
158
290
167
9,618
9,785
634
918
1,552
933
10,694
11,627
Accounts payable and other liabilities
(1,461)
(30,674)
(21,838)
(53,973)
Total
(1,171)
(20,889)
(20,286)
(42,346)
The Company manages and monitors this risk with the objective of mitigating the potential adverse effect that fluctuations in currencies against
the Canadian dollar and US dollar could have on the Company’s Consolidated Statement of Financial Position and Consolidated Statement of
income (loss). As at December 31, 2018, the Company has not entered into any derivative contracts to mitigate this risk.
A 10% appreciation in the US dollar exchange rate against the Peruvian Nuevo Soles and the Mexican Peso based on the financial assets and
liabilities held at December 31, 2018, with all the other variables held constant, would have resulted in an increase to the Company’s net income
of $1,992 (increase in loss in 2017 of $4,118).
A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial assets and liabilities held at December 31,
2018 and 2017, with all the other variables held constant, would have resulted in a negligible impact to the Company’s net income (loss).
41
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
(2) Interest rate risk
Interest rate risk is the risk that the fair values or future cash flows of the Company will fluctuate because of changes in market interest rates.
The Company is exposed to interest rate risk on its loans payable (note 10). The Company monitors its exposure to interest rates closely and has
not entered into any derivative contracts to manage its risk. The weighted average interest rate paid by the Company during the year ended
December 31, 2018 on its loans and notes payable in Peru was 4.26% (2017 – 4.31%). With all other variables unchanged a 1% increase in the
interest rate would have increased the Company’s net loss by $486 (2017 - $541). The interest rate paid by the Company during the year ended
December 31, 2018 on its loans payable in Mexico was 5.63% (2017 – 5.74%). With all other variables unchanged a 1% increase in the interest
rate would have increased the Company’s net income by $57 (2017 - $60).
(3) Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices (other than those arising from interest risk or currency risk), whether those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting all similar financial instruments in the market.
As at December 31, 2018 and 2017, the Company had certain amounts related to the sales of concentrates that have only been provisionally
priced. Commodity price risk exists solely in Mexico as the Company fixes metal prices with the purchaser of its concentrates for specific sales
for which concentrates have been delivered. The Company’s exposure to commodity price risk is as follows:
Commodity
10% decrease in silver prices
10% decrease in copper prices
10% decrease in lead prices
10% decrease in gold prices
2018
$
2017
$
(62)
(325)
(1)
(134)
(27)
(456)
(1)
(87)
As at December 31, 2018 and 2017, the Company did not have any forward contracts outstanding.
ii) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligation as they fall due. The Company has in place planning,
budgeting and forecasting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing
basis and its expansion and development plans. The Company tries to ensure that it has sufficient committed credit facilities to meet its short-
term operating needs.
In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following
table summarizes the remaining contractual maturities and undiscounted cash flows as at December 31, 2018 of the Company’s financial
liabilities and operating and capital commitments:
42
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Within 1 year
1-2 years
2-5 years
After 5 years
Total
As at December 31,
$
$
$
$
$
Accounts payable and accrued liabilities
Loans payable
Interest on loans payable
Other liabilities
Total Commitments
36,092
27,520
198
8,908
72,718
-
6,000
127
1,081
7,208
-
22,733
250
-
22,983
-
-
-
-
-
36,092
56,253
575
9,989
102,909
2018
$
36,092
56,253
575
9,989
102,909
In the opinion of management, the working capital at December 31, 2018, together with future cash flows from operations and available loan
facilities, is sufficient to support the Company’s commitments through 2019.
iii) Credit risk
Credit risk is the risk that the counterparty to a financial instrument might fail to discharge its obligations under the terms of a financial contract.
Credit risk is primarily associated with trade receivables; however, it also arises on cash and cash equivalents. The Company sells its concentrate
to large international organizations. The Company is exposed to significant concentration of credit risk given that all of its revenues from Peru
and Mexico were from two customers at each of the locations. At December 31, 2018 the Company has not recorded an allowance against trade
receivables because it is confident that all of the balances will be collected in full when due and there have not been any issues collecting
balances owed to the Company in the past.
The Company’s policy is to keep its cash and cash equivalents only with highly rated financial institutions and to only invest in government
securities. The Company considers the risk of loss associated with cash and cash equivalents to be low. The counterparty to the financial asset is
a large international financial institution with strong credit ratings and thus the credit risk is considered to be low.
11. OTHER RISKS AND UNCERTAINTIES
Foreign operations
The Company currently conducts foreign operations and has exploration properties in Peru and Mexico, and as such is exposed to various levels of economic,
political and other risks and uncertainties. These risks and uncertainties vary from country to country and include, but are not limited to, royalties and tax increases
or claims by governmental bodies, expropriation or nationalization, foreign exchange controls, import and export regulations, cancellation or renegotiation of
contracts and environmental permitting regulations. The occurrence of these various factors and uncertainties cannot be accurately predicted and could have a
material adverse effect on operations or profitability.
The Company currently has no political risk insurance coverage against these risks. The Company is unable to determine the impact of these risks on its future
financial position or results of operations. Changes, if any, in mining or investment policies or shifts in political attitude in foreign countries may substantively
affect Company’s exploration, development and production activities.
43
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Environmental regulation
The Company’s activities are subject to extensive laws and regulations governing environmental protection which are complex and have tended to become more
stringent over time. The Company is required to obtain governmental permits and in some instances provide bonding requirements under federal, state, or
provincial air, water quality, and mine reclamation rules and permits. Although the Company makes provisions for reclamation costs, it cannot be assured that
these provisions will be adequate to discharge its future obligations for these costs. Failure to comply with applicable environmental laws may result in injunctions,
damages, suspension or revocation of permits and imposition of penalties. While responsible environmental stewardship is one of the Company’s top priorities,
there can be no assurance that the Company has been or will be at all times in complete compliance with such laws, regulations and permits, or that the costs of
complying with current and future environmental laws and permits will not materially and adversely affect the Company’s business, results of operations or
financial condition.
Exploration, development and mining risk
Sierra’s operations will be subject to all the hazards and risks normally encountered in the exploration, development and production of base or precious metals,
including, without limitation, unusual and unexpected geologic formations, seismic activity, rock bursts, pit-wall failures, cave-ins, flooding, mudrushes and other
conditions involved in the drilling, mining and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities,
damage to life or property, environmental damage and legal liability. Milling operations are also subject to various hazards, including, without limitation,
equipment failure and failure of retaining dams around tailings disposal areas, which may result in environmental pollution and legal liability.
Loan repayment risk
The Company’s ability to repay its loans depends on its future cash flows, profitability, results of operations and financial condition. The Company has prepared
budgets based on estimates of commodity prices, future production, operating costs and capital costs however the Company cannot assure you that such revenues,
production plans, costs or other estimates will be achieved. Actual revenues and production costs may vary from the estimates depending on a variety of factors,
many of which are not within the Company’s control. These factors include, but are not limited to: commodity price fluctuations; actual ore mined varying from
estimates of grade, tonnage, dilution, and metallurgical and other characteristics; mine failures, slope failures or equipment failures; industrial accidents; natural
phenomena such as inclement weather conditions, floods, droughts, rock slides and earthquakes; encountering unusual or unexpected geological conditions;
changes in power costs and potential power shortages; exchange rate and commodity price fluctuations; shortages of principal supplies needed shortages of
principal supplies needed for operations, including explosives, fuels, chemical reagents, water, equipment parts and lubricants; labor shortages or strikes; high rates
of inflation; civil disobedience and protests; and restrictions (including change to the taxation regime) or regulations imposed by governmental or regulatory
authorities or other changes in the regulatory environments. Failure to achieve revenue, production or cost estimates or material increases in costs or material
decreases in commodity prices could have a material adverse impact on the Company’s future cash flows, profitability, results of operations and financial
condition.
44
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Title risk
Although the Company believes that it has exercised commercially reasonable due diligence with respect to determining title to properties that it owns or controls,
there is no guarantee that title to such properties will not be challenged or impugned. The Company’s properties may be subject to prior unrecorded agreements or
transfers or native land claims and title may be affected by undetected defects. There may be valid challenges to the title of the Company’s properties which could
impair development and/or operations of the Company.
Permit risk
In the ordinary course of business, the Company will be required to obtain and renew governmental permits and licenses for the operation and expansion of
existing operations or for the commencement of new operations. Obtaining or renewing the necessary governmental permits is a complex and time-consuming
process. The duration and success of the Company’s efforts to obtain and renew permits and licenses are contingent upon many variables not within its control
including the interpretation of applicable requirements implemented by the permitting or licensing authority. The Company may not be able to obtain or renew
permits and licenses that are necessary to continue its operations or the cost to obtain or renew permits and licenses may exceed what the Company expects. Any
unexpected delays or costs associated with the permitting and licensing process could delay the development or impede operations, which may adversely affect the
Company’s revenues and future growth.
Estimates of mineralized materials are subject to geologic uncertainty and inherent sample variability
Although the estimated resources have been delineated with appropriately spaced drilling and sampling, both underground and surface, there is inherent variability
between duplicate samples taken adjacent to each other and between sampling points that cannot be reasonably eliminated. There also may be unknown geologic
details that have not been identified or correctly appreciated at the current level of delineation. This results in uncertainties that cannot be reasonably eliminated
from the estimation process. Some of the resulting variances can have a positive effect and others can have a negative effect on mining and processing operations.
Acceptance of these uncertainties is part of any mining operation.
Estimates of mineralized material constitute forward-looking information, which is inherently subject to variability. Although resource estimates require a high
degree of assurance in the underlying data when the estimates are made, unforeseen events and uncontrollable factors can have significant adverse or positive
impacts on the estimates. Actual results will inherently differ from estimates. The unforeseen events and uncontrollable factors include: geologic uncertainties
including inherent sample variability, metal price fluctuations, variations in mining and processing parameters, and adverse changes in environmental or mining
laws and regulations. The timing and effects of variances from estimated values cannot be accurately predicted.
45
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Mineral resources
Although the Company’s reported mineral resources have been carefully prepared by qualified persons, these amounts are estimates only by independent
geologists, and the Company cannot be certain that any specified level of recovery of mineral will in fact be realized or that any identified mineral deposit will ever
qualify as a commercially mineable (or viable) ore body that can be economically exploited. Mineralized materials, which are not mineral reserves, do not have
demonstrated economic viability. Any material change in the quantity of mineralization, grade or stripping ratio, or the metal price may affect the economic
viability of the Company’s properties. In addition, the Company cannot be certain that metal recoveries in small-scale laboratory tests will be duplicated in larger
scale tests under on-site conditions or during production.
Until an un-mined deposit is actually mined and processed, the quantity of mineral resources and reserves and grades must be considered as estimates only. In
addition, the economic value of mineral reserves and mineral resources may vary depending on, among other things, metal prices.
Insurance risk
The Company’s insurance will not cover all the potential risks associated with a mining company’s operations. The Company may also be unable to maintain
insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any
resulting liability. Moreover, the Company expects that insurance against risks such as environmental pollution or other hazards as a result of exploration and
production may be prohibitively expensive to obtain for a company of Sierra’s size and financial means. The Company might also become subject to liability for
pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons.
Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon the Company’s financial condition and
results of operations.
Competitive risk
The mining industry is competitive in all of its phases. The Company faces strong competition from other mining companies in connection with the acquisition of
properties producing, or capable of producing, base and precious metals. Many of these companies have greater financial resources, operational experience and
technical capabilities than the Company does. As a result of this competition, the Company may be unable to maintain or acquire attractive mining properties on
terms acceptable to the Company or at all. Consequently, the Company’s revenues, operations and financial condition could be materially adversely affected.
46
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Sierra’s common shares may experience price volatility
Securities of mineral resource and mining companies have experienced substantial volatility in the past, often based on factors unrelated to the financial
performance or prospects of the companies involved. These factors include macroeconomic developments in North America and globally, as well as market
perceptions of the attractiveness of particular industries. The price of the Company’s common shares is also likely to be significantly affected by short-term
changes in commodity prices and currency exchange fluctuation. As a result of any of these factors, the market price of the Company’s common shares at any
given point in time may not accurately reflect the long-term value of the Company. Securities class-action litigation often has been brought against companies
following periods of volatility in the market price of their securities. The Company may in the future be the target of similar litigation. Securities litigation could
result in substantial costs and damages and divert management’s attention and resources.
Global financial risk
Financial markets globally have been subject to increased volatility. Access to financing has been negatively impacted by liquidity crises throughout the world.
These factors may impact the Company’s ability to obtain loans and other credit facilities in the future and, if obtained, on terms favorable to Sierra. The levels of
volatility and market turmoil are on the rise, and the Company may not be able to secure appropriate debt or equity financing, any of which could affect the trading
price of the Company’s securities in an adverse manner.
Reliance on Key Personnel and Labour Relations
The Company’s operations are dependent on the abilities, experience and efforts of key personnel. If any of these individuals were to be unable or unwilling to
continue to provide their services to the Company, there may be a material adverse effect on the Company’s operations. The Company’s success is dependent upon
its ability to attract and retain qualified employees and personnel to meet its needs from time to time. The Company may be negatively impacted by the availability
and potential increased costs that may be associated with experienced key personnel and general labour. Sierra’s ability to achieve its future goals and objectives is
dependent, in part, on maintaining good relations with its employees and minimizing employee turnover. Work stoppages or other industrial relations events at any
of Sierra’s operations could lead to delayed revenues, increased costs and delayed operation cash flows. As a result, prolonged labor disruptions at any of Sierra’s
operations could have a material adverse impact on its operations as a whole.
Claims and Legal Proceedings
The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the normal course of business. Each of these matters
is subject to various uncertainties and it is possible that some of these matters may be resolved unfavorably to the Company. The Company carries liability
insurance coverage and will establish accruals and provisions for matters that are probable and can be reasonably estimated. In addition, the Company may be
involved in disputes with other parties in the future which may result in a significant impact on our financial condition, cash flow and results of operations.
47
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The claims associated with the Company’s Mexican operations are discussed in detail below:
a)
In October 2009, Polo y Ron Minerals, S.A. de C.V. (“P&R”) sued the Company and one of its subsidiaries, Dia Bras Mexicana S.A. de C.V. (“DBM”).
P&R claimed damages for the cancellation of an option agreement (the “Option Agreement”) regarding the San Jose properties in Chihuahua, Mexico
(the “San Jose Properties”). The San Jose Properties are not located in any areas where DBM currently operates, nor are these properties included in any
resource estimates of the Company. The Company believes that it has complied with all of its obligations pertaining to the Option Agreement. In October
2011, the 8th Civil Court of the Judicial District of Morelos in Chihuahua issued a resolution that absolved the Company from the claims brought against
it by P&R on the basis that P&R did not provide evidence to support any of its claims. P&R appealed this resolution to the State Court, which overruled
the previous resolution and ordered the Company to: (i) transfer to P&R 17 mining concessions from the Company’s Bolivar project, including the mining
concessions where both mine operations and mineral reserves are located; and (ii) pay $423 to P&R; the Company was not appropriately notified of this
resolution. In February 2013, a Federal Court in the State of Chihuahua granted the Company a temporary suspension of the adverse resolution issued by
the State Court of Chihuahua, Mexico. In July 2014, a Federal Court in the State of Chihuahua ordered that the Company was entitled to receive proper
notice of the adverse resolution previously issued by the State Court of Chihuahua. This allows the Company to proceed with its appeal (writ of
“amparo”) of the State Court’s previous resolution. The adverse resolution has been temporarily suspended since March 2013, which suspension will
remain in place pending the writ of amparo. The amparo is being heard in Federal Court and will challenge the State Court’s ruling. The Federal Court’s
verdict in the amparo will be final and non-appealable. The Company continues to vigorously defend its position by applying the proper legal resources
necessary to defend its position. On February 12, 2016, The Second Federal Collegiate Court of Civil and Labor Matters, of the Seventeenth circuit in the
State of Chihuahua, ("the Federal Court") issued a new judgment ruling that the State Court lacked jurisdiction to rule on issues concerning mining titles,
and that no previous rulings by the State Court against the Company shall stand. They ordered the cancellation of the previous adverse resolution by the
state Court. The Company will continue to vigorously defend this claim. Sierra Metals continues to believe that the original claim is without merit.
b)
In 2009, a personal action was filed in Mexico against DBM by an individual, Ambrosio Bencomo Muñoz as administrator of the intestate succession of
Ambrosio Bencomo Casavantes y Jesus Jose Bencomo Muñoz, claiming the annulment and revocation of the purchase agreement of two mining
concessions, Bolívar III and IV between Minera Senda de Plata S.A. de C.V. and Ambrosio Bencomo Casavantes, and with this, the nullity of purchase
agreement between DBM and Minera Senda de Plata S.A. de C.V. In June 2011, the Sixth Civil Court of Chihuahua, Mexico, ruled that the claim was
unfounded and dismissed the case, the plaintiff appealed to the State Court. The process is in the appealing court. The Company will continue to
vigorously defend this action and is confident that the claim is of no merit.
12. NON-IFRS PERFORMANCE MEASURES
The non-IFRS performance measures presented do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be directly comparable to
similar measures presented by other issuers.
48
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Non-IFRS reconciliation of adjusted EBITDA
EBITDA is a non-IFRS measure that represents an indication of the Company’s continuing capacity to generate earnings from operations before taking into
account management’s financing decisions and costs of consuming capital assets, which vary according to their vintage, technological currency, and management’s
estimate of their useful life. EBITDA comprises revenue less operating expenses before interest expense (income), property, plant and equipment amortization and
depletion, and income taxes. Adjusted EBITDA has been included in this document. Under IFRS, entities must reflect in compensation expense the cost of share-
based payments. In the Company’s circumstances, share-based payments involve a significant accrual of amounts that will not be settled in cash but are settled by
the issuance of shares in exchange for cash. As such, the Company has made an entity specific adjustment to EBITDA for these expenses. The Company has also
made an entity-specific adjustment to the foreign currency exchange (gain)/loss. The Company considers cash flow before movements in working capital to be the
IFRS performance measure that is most closely comparable to adjusted EBITDA.
The following table provides a reconciliation of adjusted EBITDA to the consolidated financial statements for the three months and year ended December 31, 2018
and 2017:
(In
thousands
of
United
States
dollars)
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
Three Months Ended
Twelve Months Ended
Net income (loss)
$
1,616 $
3,719 $
25,840 $
(860)
Adjusted for:
Depletion and depreciation
Interest expense and other finance costs
Loss on spin out of Cautivo Mining Inc.
Interest income
Share-based payments
Foreign currency exchange and other provisions
Income taxes
Adjusted EBITDA
Non-IFRS reconciliation of adjusted net income
7,959
1,055
-
(50)
346
959
6,610
15,263 $
7,906
860
-
(253)
554
1,463
4,959
19,208 $
31,349
3,634
-
(159)
1,542
1,210
26,340
89,756 $
58,236
3,639
4,412
(376)
1,198
4,437
10,348
81,034
$
The Company has included the non-IFRS financial performance measure of adjusted net income, defined by management as the net income attributable to
shareholders shown in the statement of earnings plus the non-cash depletion charge due to the acquisition of Corona and the corresponding deferred tax recovery
and certain non-recurring or non-cash items such as share-based compensation and foreign currency exchange (gains) losses. The Company believes that, in
addition to conventional measures prepared in accordance with IFRS, certain investors may want to use this information to evaluate the Company’s performance
and ability to generate cash flows. Accordingly, it is intended to provide additional information and should not be considered in isolation or as a substitute for
measures of performance in accordance with IFRS.
The following table provides a reconciliation of adjusted net income to the consolidated financial statements for the three months and year ended December 31,
2018 and 2017:
49
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
(In
thousands
of
United
States
dollars)
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
Three Months Ended
Twelve Months Ended
Net income (loss) attributable to shareholders
Non-cash depletion charge on Corona's acquisition
Deferred tax recovery on Corona's acquisition depletion charge
Share-based compensation
Foreign currency exchange gain
Loss on spin out of Cautivo Mining Inc.
Adjusted net income attributable to shareholders
$
$
2,654 $
2,497
(365)
346
959
-
783 $
2,118 $
2,721
(915)
554
(1,237)
-
3,241 $
18,814 $
10,534
(3,091)
1,542
1,210
-
29,009 $
(4,645)
31,448
(10,668)
1,198
1,737
4,412
23,482
Cash cost per silver equivalent payable ounce, copper equivalent payable pound, and zinc equivalent payable pound
The Company uses the non-IFRS measure of cash cost per silver equivalent ounce, copper equivalent payable pound, and zinc equivalent payable pound to manage
and evaluate operating performance. The Company believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this
information to evaluate the Company’s performance and ability to generate cash flows. Accordingly, it is intended to provide additional information and should not
be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The Company considers cost of sales per silver
equivalent payable ounce, copper equivalent payable pound, and zinc equivalent payable pound to be the most comparable IFRS measure to cash cost per silver
equivalent payable ounce, copper equivalent payable pound, and zinc equivalent payable pound, and has included calculations of this metric in the reconciliations
within the applicable tables to follow.
All-in sustaining cost per silver equivalent payable ounce, copper equivalent payable pound, and zinc equivalent payable pound
All-In Sustaining Cost (“AISC”) is a non-IFRS measure and was calculated based on guidance provided by the World Gold Council (“WGC”) in June 2013. WGC
is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements. Other mining companies may
calculate AISC differently as a result of differences in underlying accounting principles and policies applied, as well as differences in definitions of sustaining
versus development capital expenditures.
AISC is a more comprehensive measure than cash cost per ounce/pound for the Company’s consolidated operating performance by providing greater visibility,
comparability and representation of the total costs associated with producing silver and copper from its current operations.
The Company defines sustaining capital expenditures as, “costs incurred to sustain and maintain existing assets at current productive capacity and constant
planned levels of productive output without resulting in an increase in the life of assets, future earnings, or improvements in recovery or grade. Sustaining capital
includes costs required to improve/enhance assets to minimum standards for reliability, environmental or safety requirements. Sustaining capital expenditures
excludes all expenditures at the Company’s new projects and certain expenditures at current operations which are deemed expansionary in nature.”
50
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Consolidated AISC includes total production cash costs incurred at the Company’s mining operations, including treatment and refining charges and selling costs,
which forms the basis of the Company’s total cash costs. Additionally, the Company includes sustaining capital expenditures and corporate general and
administrative expenses. AISC by mine does not include certain corporate and non-cash items such as general and administrative expense and share-based
payments. The Company believes that this measure represents the total sustainable costs of producing silver and copper from current operations and provides the
Company and other stakeholders of the Company with additional information of the Company’s operational performance and ability to generate cash flows. As the
measure seeks to reflect the full cost of silver and copper production from current operations, new project capital and expansionary capital at current operations are
not included. Certain other cash expenditures, including tax payments, dividends and financing costs are also not included.
The following table provides a reconciliation of cash costs to cost of sales, as reported in the Company’s consolidated statement of income for the three months and
year ended December 31, 2018 and 2017:
(In
thousand
of
US
dollars,
unless
stated)
Yauricocha
Twelve months ended
December 31, 2018
Cusi
Bolivar
Consolidated Yauricocha
Twelve months ended
December 31, 2017
Cusi
Bolivar
Consolidated
Cash Cost per Tonne of Processed Ore
Cost of Sales
Reverse: Workers Profit Sharing
Reverse: D&A/Other adjustments
Reverse: Variation in Finished
Inventory
Total Cash Cost
Tonnes Processed
Cash Cost per Tonne Processed
US$
92,586
(4,938)
(17,726)
37,499
-
(9,931)
54
69,976
1,106,649
63.23
1,026
28,593
1,031,750
27.71
16,505
-
(3,752)
(745)
12,008
186,889
64.25
146,589
(4,938)
(31,409)
111,733
(4,446)
(44,619)
335
110,577
2,325,288
47.55
1,222
63,890
1,023,492
62.42
36,616
-
(10,148)
(4,342)
22,126
887,236
24.94
10,804
-
(3,409)
264
7,659
88,011
87.02
159,153
(4,446)
(58,176)
(2,856)
93,675
1,998,739
46.87
(In
thousand
of
US
dollars,
unless
stated)
Yauricocha
Three months ended
December 31, 2018
Cusi
Bolivar
Consolidated Yauricocha
Three months ended
December 31, 2017
Cusi
Bolivar
Consolidated
Cash Cost per Tonne of Processed Ore
Cost of Sales
Reverse: Workers Profit Sharing
Reverse: D&A/Other adjustments
Reverse: Variation in Finished
Inventory
Total Cash Cost
Tonnes Processed
Cash Cost per Tonne Processed
US$
23,785
(1,206)
(4,195)
231
18,615
268,363
69.37
10,230
-
(2,520)
537
8,246
272,644
30.25
4,948
-
(1,269)
(313)
3,366
58,289
57.74
38,962
(1,206)
(7,984)
455
30,227
599,297
50.44
22,551
(1,268)
(4,536)
531
17,278
266,222
64.90
9,964
-
(2,552)
(867)
6,545
226,986
28.84
2,423
-
(725)
240
1,938
16,281
119.06
34,938
(1,268)
(7,812)
(96)
25,762
509,488
50.57
The following table provides detailed information on Yauricocha’s cost of sales, cash cost, and all-in sustaining cost per silver equivalent payable ounce, copper
equivalent payable pound, and zinc equivalent payable pound for the three months and year ended December 31, 2018 and 2017:
51
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Yauricocha:
(In
thousand
of
US
dollars,
unless
stated)
YAURICOCHA
Cash Cost per zinc equivalent payable pound
Total Cash Cost
Variation in Finished inventory
Total Cash Cost of Sales
Treatment and Refining Charges
Selling Costs
G&A Costs
Sustaining Capital Expenditures
All-In Sustaining Cash Costs
Silver Equivalent Payable Ounces (000's)
Cost of Sales
Cost of Sales per Silver Equivalent Payable Ounce
Cash Cost per Silver Equivalent Payable Ounce
All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce
Copper Equivalent Payable Pounds (000's)
Cost of Sales per Copper Equivalent Payable Pound
Cash Cost per Copper Equivalent Payable Pound
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound
Zinc Equivalent Payable Pounds (000's)
Cost of Sales per Zinc Equivalent Payable Pound
Cash Cost per Zinc Equivalent Payable Pound
All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound
Three months ended
Twelve months ended
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
18,615
(231)
18,384
2,371
1,167
1,648
2,043
25,613
2,810
19,085
6.79
6.54
9.12
14,838
1.29
1.24
1.73
35,288
0.54
0.52
0.73
17,278
(531)
16,747
4,461
1,057
1,844
2,156
26,265
2,534
18,443
7.28
6.61
10.37
13,575
1.36
1.23
1.93
29,303
0.63
0.57
0.90
69,976
(54)
69,922
9,909
4,382
7,203
7,186
98,602
11,238
74,731
6.65
6.22
8.77
59,508
1.26
1.18
1.66
135,505
0.55
0.52
0.73
63,890
(1,222)
62,668
12,447
4,156
6,054
11,632
96,957
9,633
67,542
7.01
6.51
10.07
58,547
1.15
1.07
1.66
125,077
0.54
0.50
0.78
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
The following table provides detailed information on Bolivar’s cost of sales, cash cost, and all-in sustaining cost per copper equivalent payable pound, zinc
equivalent payable pound, and silver equivalent payable ounce for the three months and year ended December 31, 2018 and 2017:
Bolivar:
(In
thousand
of
US
dollars,
unless
stated)
BOLIVAR
Cash Cost per copper equivalent payable pound
Total Cash Cost
Variation in Finished inventory
Total Cash Cost of Sales
Treatment and Refining Charges
Selling Costs
G&A Costs
Sustaining Capital Expenditures
All-In Sustaining Cash Costs
Silver Equivalent Payable Ounces (000's)
Cost of Sales
Cost of Sales per Silver Equivalent Payable Ounce
Cash Cost per Silver Equivalent Payable Ounce
All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce
Copper Equivalent Payable Pounds (000's)
Cost of Sales per Copper Equivalent Payable Pound
Cash Cost per Copper Equivalent Payable Pound
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound
Zinc Equivalent Payable Pounds (000's)
Cost of Sales per Zinc Equivalent Payable Pound
Cash Cost per Zinc Equivalent Payable Pound
All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound
Three months ended
Twelve months ended
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
8,246
(537)
7,710
1,007
938
1,015
256
10,926
873
9,751
11.17
8.83
12.52
4,614
2.11
1.67
2.37
11,018
0.89
0.70
0.99
6,545
867
7,412
1,152
726
834
2,891
13,015
803
7,121
8.87
9.23
16.21
4,302
1.66
1.72
3.03
9,286
0.77
0.80
1.40
28,593
(1,026)
27,568
4,233
3,419
3,651
2,011
40,882
3,623
33,168
9.15
7.61
11.28
19,183
1.73
1.44
2.13
43,644
0.76
0.63
0.94
22,126
4,342
26,468
4,695
2,777
2,577
11,054
47,571
2,920
27,418
9.39
9.06
16.29
17,747
1.54
1.49
2.68
37,914
0.72
0.70
1.25
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
The following table provides detailed information on Cusi’s cost of sales, cash cost, and all-in sustaining cost per silver equivalent payable ounce, copper
equivalent payable pound, and zinc equivalent payable pound for the three months and year ended December 31, 2018 and 2017:
52
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Cusi:
(In
thousand
of
US
dollars,
unless
stated)
CUSI
Cash Cost per silver equivalent payable ounce
Total Cash Cost
Variation in Finished inventory
Total Cash Cost of Sales
Treatment and Refining Charges
Selling Costs
G&A Costs
Sustaining Capital Expenditures
All-In Sustaining Cash Costs
Silver Equivalent Payable Ounces (000's)
Cost of Sales
Cost of Sales per Silver Equivalent Payable Ounce
Cash Cost per Silver Equivalent Payable Ounce
All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce
Copper Equivalent Payable Pounds (000's)
Cost of Sales per Copper Equivalent Payable Pound
Cash Cost per Copper Equivalent Payable Pound
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound
Zinc Equivalent Payable Pounds (000's)
Cost of Sales per Zinc Equivalent Payable Pound
Cash Cost per Zinc Equivalent Payable Pound
All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound
Consolidated:
Three months ended
Twelve months ended
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
3,366
313
3,679
250
205
223
157
4,513
194
2,141
11.04
18.96
23.27
1,028
2.08
3.58
4.39
2,598
0.82
1.42
1.74
1,938
(240)
1,698
181
160
183
1,084
3,306
91
1,563
17.18
18.66
36.33
490
3.19
3.47
6.75
1,059
1.48
1.60
3.12
12,008
745
12,753
1,498
750
802
2,132
17,934
812
7,281
8.97
15.71
22.09
4,301
1.69
2.97
4.17
9,601
0.76
1.33
1.87
7,659
(264)
7,395
2,412
610
566
5,323
16,306
481
6,019
12.51
15.37
33.90
2,928
2.06
2.53
5.57
6,257
0.96
1.18
2.61
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(In
thousand
of
US
dollars,
unless
stated)
CONSOLIDATED
Three months ended
Twelve months ended
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
Total Cash Cost of Sales
All-In Sustaining Cash Costs
Silver Equivalent Payable Ounces (000's)
Cost of Sales
Cost of Sales per Silver Equivalent Payable Ounce
Cash Cost per Silver Equivalent Payable Ounce
All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce
Copper Equivalent Payable Pounds (000's)
Cost of Sales per Copper Equivalent Payable Pound
Cash Cost per Copper Equivalent Payable Pound
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound
Zinc Equivalent Payable Pounds (000's)
Cost of Sales per Zinc Equivalent Payable Pound
Cash Cost per Zinc Equivalent Payable Pound
All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound
Additional non-IFRS measures
29,772
41,052
3,877
30,977
7.99
7.68
10.59
20,480
1.51
1.45
2.00
48,904
0.63
0.61
0.84
25,857
42,586
3,428
27,127
7.91
7.54
12.42
18,367
1.48
1.41
2.32
39,648
0.68
0.65
1.07
110,242
157,418
15,673
115,180
7.35
7.03
10.04
82,992
1.39
1.33
1.90
188,750
0.61
0.58
0.83
96,531
160,834
13,034
100,979
7.75
7.41
12.34
79,222
1.27
1.22
2.03
169,248
0.60
0.57
0.95
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
(US$)
The Company uses other financial measures, the presentation of which is not meant to be a substitute for other subtotals or totals presented in accordance with
IFRS, but rather should be evaluated in conjunction with such IFRS measures. The following other financial measures are used:
· Operating cash flows before movements in working capital - excludes the movement from period-to-period in working capital items including trade and
other receivables, prepaid expenses, deposits, inventories, trade and other payables and the effects of foreign exchange rates on these items.
The terms described above do not have a standardized meaning prescribed by IFRS, and therefore the Company’s definitions are unlikely to be comparable to
similar measures presented by other companies. The Company’s management believes that their presentation provides useful information to investors because cash
flows generated from operations before changes in working capital excludes the movement in working capital items. This, in management’s view, provides useful
information of the Company’s cash flows from operations and are considered to be meaningful in evaluating the Company’s past financial performance or its
future prospects. The most comparable IFRS measure is cash flows from operating activities.
53
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
13. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018, the Company recorded consulting fees of $200 (2017 - $200) to companies related by common directors or officers. At
December 31, 2018, accounts payable and accrued liabilities include $Nil (2017 – $Nil) with these related parties. Related party transactions occurred in the
normal course of business. As at December 31, 2018, the Company has accounts receivable outstanding from these related parties of $Nil (2017 - $Nil).
(a) Compensation of directors and key management personnel
The remuneration of the Company’s directors, officers and other key management personnel during the years ended December 31, 2018 and 2017 are as
follows:
Salaries and other short term employment benefits
Share-based payments
Total compensation
(b) Principal Subsidiaries
2018
$
2017
$
2,816
1,500
4,316
2,968
2,753
5,721
The consolidated financial statements include the accounts of the Company and its subsidiaries, which are entities controlled by the Company. Control exists
when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its
power over the entity. Subsidiaries are consolidated from the date that control commences until the date that control ceases.
Non-controlling interests represent equity interests in subsidiaries owned by outside parties. Changes in the parent company’s ownership interest in
subsidiaries that do not result in a loss of control are accounted for as equity transactions.
54
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
The principal subsidiaries of the Company and their geographical locations as at December 31, 2018 are as follows:
Name of the subsidiary
Ownership interest
Location
Dia Bras EXMIN Resources Inc.
Sociedad Minera Corona, S. A. (“Corona”) 1
Dia Bras Peru, S. A. C. (“Dia Bras Peru”) 1
Dia Bras Mexicana, S. A. de C. V. (“Dia Bras Mexicana”)
Servicios de Minería de la Sierra, S. A. de C. V.
Bolívar Administradores, S. A. de C. V.
Exploraciones Mineras Dia Bras, S. A. de C. V.
EXMIN, S. A. de C. V.
100%
81.84%
100%
100%
100%
100%
100%
100%
Canada
Perú
Perú
México
México
México
México
México
1 The Company, through its wholly owned subsidiary Dia Bras Peru, holds an 81.84% interest in Corona, which represents 92.33% of the voting shares. The
Company consolidates Corona's financial results and records a non-controlling interest for the 18.16% that it does not own.
14. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Significant accounting judgments and estimates
In the application of the Company’s accounting policies, which are described in note 2 of the Company’s December 31, 2018 consolidated financial
statements, management is required to make judgments, estimates and assumptions about the effects of uncertain future events on the carrying amounts of
assets and liabilities. The estimates and associated assumptions are based on management’s best knowledge of the relevant facts and circumstances and
historical experience. Actual results may differ from these estimates; potentially having a material future effect on the Company’s consolidated financial
statements.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future
periods.
The following are the significant judgments that management has made in the process of applying the Company’s accounting policies and that have the most
significant effect on the amounts recognized in the consolidated financial statements:
I.
Impairment review of asset carrying values
In accordance with the Company’s accounting policy, at every reporting period, the Company assesses whether there are any indicators that the carrying
value of its assets or CGUs may be impaired, which is a significant management judgment. Where there is an indication that the carrying amount of an
asset may not be recoverable, the Company prepares a formal estimate of the recoverable amount by analyzing discounted cash flows. The resulting
valuations are particularly sensitive to changes in estimates such as long- term commodity prices, exchange rates, sales volume, operating costs, and
discount rates. In the event of impairment, if there is an adverse change in any of the assumptions or estimates used in the discounted cash flow model,
this could result in a further impairment of the asset. Also, in accordance with the Company’s accounting policy, the Company capitalizes evaluation
expenditures when there is a high degree of confidence that these costs are recoverable and have a probable future benefit. As at December 31, 2018,
management assessed its mining property assets and exploration and evaluation expenditures for impairment and determined that no impairment was
required.
55
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
II. Mineral reserves and resources
The Company estimates mineral reserves and resources based on information prepared by qualified persons as defined in accordance with the Canadian
Securities Administrators’ National Instrument (“NI”) 43-101. These estimates form the basis of the Company’s life of mine (“LOM”) plans, which are
used for a number of important and significant accounting purposes, including: the calculation of depletion expense and impairment charges, forecasting
the timing of the payment of decommissioning costs and future taxes. There are significant uncertainties inherent in the estimation of mineral reserves and
the assumptions used which include commodity prices, production costs, recovery rates and exchange rates may change significantly when new
information becomes available. Changes in assumptions could result in mineral reserves being revised, which in turn would impact our depletion expense,
asset carrying values and the provision for decommissioning costs.
III. Deferred tax assets and liabilities
The Company’s management makes significant estimates and judgments in determining the Company’s tax expense for the period and the deferred tax
assets and liabilities. Management interprets tax legislation in a variety of jurisdictions and makes estimates of the expected timing of the reversal of
deferred tax assets and liabilities. In addition, management makes estimates related to expectations of future taxable income based on cash flows from
operations and the application of existing tax laws in each jurisdiction. Assumptions used in the cash flow forecast are based on management’s estimates
of future production and sales volume, commodity prices, operating costs, capital expenditures, dividends, and decommissioning and reclamation
expenditures. These estimates are subject to risk and uncertainty and could result in an adjustment to the deferred tax provision and a corresponding credit
or charge to the statement of loss. The Company is subject to assessments by the various tax authorities who may interpret the tax laws differently. These
differences may impact the final amount or the timing of the payment of taxes. The Company provides for such differences where known based on
management’s best estimates of the probable outcome of these matters.
IV. Decommissioning and restoration liabilities costs
The Company’s provision for decommissioning and restoration costs is based on management’s best estimate of the present value of the future cash
outflows required to settle the liability. In determining the liability, management makes estimates about the future costs, inflation, foreign exchange rates,
risks associated with the cash flows, and the applicable risk-free interest rates for discounting future cash flows. Changes in any of these estimates could
result in a change in the provision recognized by the Company. Also, the ultimate costs of environmental disturbance are uncertain and cost estimates can
vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other
mine sites.
56
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Changes in decommissioning and restoration liabilities are recorded with a corresponding change to the carrying amounts of the assets to which they
relate. Adjustments made to the carrying amounts of the asset can result in a change to the depreciation charged in the consolidated statement of loss.
V. Functional currency
The determination of a subsidiary’s functional currency often requires significant judgment where the primary economic environment in which the
subsidiary operates may not be clear. This can have a significant impact on our consolidated results based on the foreign currency translation methods
described in the audited consolidated financial statements.
Future accounting changes
The following standards and amendments to existing standards have been published and are mandatory for annual periods beginning January 1, 2019, or later
periods:
IFRS
16,
Leases
(“IFRS
16”)
In January 2016, the IASB issued this standard which is effective for periods beginning on or after January 1, 2019, which replaces the current guidance in
IAS 17, Leases , and is to be applied either retrospectively or a modified retrospective approach. Early adoption is permitted, but only in conjunction with
IFRS 15, Revenue from Contracts with Customers . Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and
an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflective of future lease payments and a “right-of-use asset”
for virtually all lease contracts. The Company is in the process of determining the effect that the adoption of IFRS 16 will have on its consolidated financial
statements.
15. OFF BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as at December 31, 2018.
16. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”)
Disclosure controls and procedures
The Company's management is responsible for designing and maintaining adequate internal controls over financial reporting and disclosure controls and
procedures, under the supervision of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the financial statements in accordance with IFRS.
Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as at December
31, 2018, as defined in the rules of the Canadian Securities Administration. Based on this evaluation, they concluded that our disclosure controls and procedures
are effective in providing reasonable assurance that the information required to be disclosed in reports we filed or submitted under Canadian securities legislation
was recorded, processed, summarized and reported within the time periods specified in those rules.
57
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
Internal controls over financial reporting
Management, including the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, and used the
framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of our controls in 2018.
Based on this evaluation, management concluded that our internal control over financial reporting was effective as at December 31, 2018 and provided a
reasonable assurance of the reliability of our financial reporting and preparation of the financial statements.
No matter how well designed any system of internal control has inherent limitations. Even systems determined to be effective can provide only reasonable
assurance of the reliability of financial statement preparation and presentation.
Changes in internal controls over financial reporting
There have been no changes in ICFR during the three months ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect,
ICFR.
17. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This discussion includes certain statements that may be deemed “forward-looking”. All statements in this discussion, other than statements of historical fact,
addressing future exploration drilling, exploration and development activities, production activities and events or developments that the Company expects, are
forward looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions,
such statements are not guarantees of future performance and actual results or developments may differ materially from those expressed in forward-looking
statements. Factors that could cause actual results to differ materially from those in forward-looking statements include market prices, exploitation and exploration
successes, continued availability of capital and financing, general economic, market or business conditions, and other factors which are discussed under “Risk
Factors” in the Company’s Annual Information Form dated March 28, 2019 available at www.sedar.com and at www.sec.gov under the Company’s name.
The MD&A contains “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and “forward looking
information” within Canadian securities laws (collectively “forward-looking statements”) related to the Company and its operations, and in particular, the
anticipated developments in the Company’s operations in future periods, the Company’s planned exploration activities, the adequacy of the Company’s financial
resources and other events or conditions that may occur in the future. Statements concerning mineral reserve and resource estimates may also be deemed to
constitute forward-looking statements to the extent that they involve estimates of the mineralization that will be encountered if and when the properties are
developed or further developed. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet
determinable and assumptions of management.
58
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
These forward-looking statements include, but are not limited to, relate to, among other things: future production of silver, lead, copper and zinc (the “metals”);
future cash costs per ounce or pound of the metals; the price of the metals; the effects of domestic and foreign laws, regulations and government policies and
actions affecting the Company’s operations or potential future operations; future successful development of the Yauricocha, Bolivar and Cusi near-mine
exploration projects and other exploration and development projects; the sufficiency of the Company’s current working capital, anticipated operating cash flow or
the Company’s ability to raise necessary funds; estimated production rates for the metals produced by the Company; timing of production; the estimated cost of
sustaining capital; ongoing or future development plans and capital replacement, improvement or remediation programs; the estimates of expected or anticipated
economic returns from the Company’s mining projects; future sales of the metals, concentrates or other future products produced by the Company; and the
Company’s plans and expectations for its properties and operations.
Risks and uncertainties relating to foreign currency fluctuations; risks inherent in the mining industry including environmental hazards, industrial accidents,
unusual or unexpected geological formations, ground control problems, flooding and mud rushes; risks associated with the estimation of mineral resources and the
geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining results will not be consistent with the Company’s
expectations; the potential for and effects of labour disputes or other unanticipated difficulties or shortages of labour or interruptions in production; actual material
mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of pilot-mining activities and cost
estimates, including the potential for unexpected costs/expenses and commodity price fluctuations; uncertain political and economic environments; changes in laws
or policies, foreign taxation, delays or the inability to obtain necessary governmental permits.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or
performance (often, but not always, using words or phrases such as “expects”, “anticipates”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”,
“goals”, “objectives”, “potential” or variations thereof, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur
or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking information.
Forward-looking information is subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ
from those expressed or implied by the forward-looking information, including, without limitation: uncertainty of production and cost estimates for the Yauricocha
Mine (as hereinafter defined), the Bolivar Mine (as hereinafter defined) and the Cusi Mine (as hereinafter defined); uncertainty of production at the Company’s
exploration and development properties; risks and uncertainties associated with developing and exploring new mines including start-up delays; risks and hazards
associated with the business of mineral exploration, development and mining (including operating in foreign jurisdictions, environmental hazards, industrial
accidents, unusual or unexpected geological or structure formations, pressures, cave-ins and flooding); risks and uncertainties relating to the interpretation of drill
results and the geology, grade and continuity of the Company’s mineral deposits; risks related to the Company’s ability to obtain adequate financing for the
Company’s planned development activities and to complete further exploration programs; fluctuations in spot and forward markets for the metals and certain other
commodities; risks related to obtaining long-term sales contracts or completing spot sales for the Company’s products; the Company’s history of losses and the
potential for future losses; risks related to general economic conditions, including recent market and world events and conditions; inadequate insurance, or inability
to obtain insurance, to cover these risks and hazards; relationships with and claims by local communities and indigenous populations; diminishing quantities or
grades of mineral reserves as properties are mined; challenges to, or difficulty maintaining, the Company’s title to properties and continued ownership thereof;
risks related to the Company’s covenants with respect to the Corporate Facility (as hereinafter defined); changes in national and local legislation, taxation, controls
or regulations and political or economic developments or changes in Canada, Mexico, Peru or other countries where they may carry on business; risks related to the
delay in obtaining or failure to obtain required permits, or non-compliance with permits the Company has obtained; increased costs and restrictions on operations
due to compliance with environmental laws and regulations; regulations and pending legislation governing issues involving climate change, as well as the physical
impacts of climate change; risks related to reclamation activities on the Company’s properties; uncertainties related to title to the Company’s mineral properties
and the surface rights thereon, including the Company’s ability to acquire, or economically acquire, the surface rights to certain of the Company’s exploration and
development projects; the Company’s ability to successfully acquire additional commercially mineable mineral rights; risks related to currency fluctuations (such
as the Canadian dollar, the United States dollar, the Peruvian sol and the Mexican peso); increased costs affecting the mining industry, including occasional high
rates of inflation; increased competition in the mining industry for properties, qualified personnel and management; risks related to some of the Company’s
directors’ and officers’ involvement with other natural resource companies; the Company’s ability to attract and retain qualified personnel and management to
grow the Company’s business; risks related to estimates of deferred tax assets and liabilities; risks related to claims and legal proceedings and the Company’s
ability to maintain adequate internal control over financial reporting.
59
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
This list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements. Forward looking statements are statements about the
future and are inherently uncertain, and the Company’s actual achievements or other future events or conditions may differ materially from those reflected in the
forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in this MD&A under the
heading ‘‘Other Risks and Uncertainties”. The Company’s forward-looking statements are based on the beliefs, expectations and opinions of management on the
date the statements are made, and the Company does not assume any obligation to update forward-looking statements if circumstances or management’s beliefs,
expectations or opinions should change, other than as required by applicable law. For the reasons set forth above, one should not place undue reliance on forward-
looking statements.
Cautionary Note to U.S. Investors Concerning Estimates of Inferred Resources
This document uses the term “Inferred Mineral Resources”. U.S. investors are advised that while this term is recognized and required by Canadian regulations, the
Securities and Exchange Commission (“SEC”) does not recognize it. Inferred Mineral Resources have a great amount of uncertainty as to their existence, and great
uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher
category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of economic studies other than a Preliminary Economic
Assessment (PEA).
60
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2018
(In thousands of United States dollars, unless otherwise stated )
This document also uses the terms “Measured and Indicated Mineral Resources”. The Company advises U.S. investors that while these terms are recognized by
Canadian regulations, the SEC does not recognize them. U.S. investors are cautioned not to assume that any part or all of mineral deposits included in these
categories will ever be converted into mineral reserves. Mineral resources that are not mineral reserves do not have demonstrated economic viability. Disclosure of
“contained ounces” is permitted under Canadian regulations; however, the SEC normally only permits the reporting of non-reserve mineralization as in-place
tonnage and grade.
61
SIERRA METALS INC.
Consolidated Financial Statements
Years ended December 31, 2018 and 2017
Exhibit 99.3
1 | Page
March 27, 2019
Management’s Responsibility for Financial Reporting
Management is responsible for the preparation of the consolidated financial statements. The consolidated financial statements were prepared in accordance with
International Financing Reporting Standards (“IFRS”) and reflect management’s best estimates and judgments based on information currently available.
Management maintains accounting systems and internal controls to produce reliable consolidated financial statements and provide reasonable assurance that assets
are properly safeguarded.
The consolidated financial statements have been audited by PricewaterhouseCoopers LLP and their report outlines the scope of their examination and gives their
opinion on the consolidated financial statements.
The Board of Directors of the Company is responsible for ensuring that Management fulfills its responsibilities for financial reporting. The Board of Directors
carries out this responsibility through its Audit Committee, which is composed of three members. The committee meets various times during the year and at least
once per year with the external auditors, with and without Management being present, to review the consolidated financial statements and to discuss audit and
internal control related matters.
The Board of Directors approved the Company’s audited consolidated financial statements.
“Igor Gonzales”
Igor Gonzales
President and Chief Executive Officer
“Ed Guimaraes”
Ed Guimaraes
Chief Financial Officer
2 | Page
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Sierra Metals Inc.
Opinion
on
the
Financial
Statements
We have audited the accompanying consolidated statements of financial position of Sierra Metals Inc. and its subsidiaries (together, the Company) as of December
31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss), changes in equity and cash flows for the years then
ended, including the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and their financial performance and their cash flows for
the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).
Basis
for
Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
“/s/PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 27, 2019
We have served as the Company's auditor since 1997.
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2
T: +1 416 863 1133, F: +1 416 365 8215
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
3 | Page
Sierra Metals Inc.
Consolidated Statements of Financial Position
December 31, 2018 and 2017
(In thousands of United States dollars)
ASSETS
Current assets:
Cash and cash equivalents
Trade and other receivables
Income tax receivable
Prepaid expenses
Inventories
Non-current assets:
Property, plant and equipment
Deferred income tax
Total assets
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities
Income tax payable
Loans payable
Decommissioning liability
Other liabilities
Non-current liabilities:
Loans payable
Deferred income tax
Decommissioning liability
Other liabilities
Total liabilities
EQUITY
Share capital
Accumulated deficit
Other reserves
Equity attributable to owners of the Company
Non-controlling interest
Total equity
Total liabilities and equity
Contingencies (note 24) and Subsequent Events (note 26)
Approved on behalf of the Board and authorized for issue on March 27, 2019:
“Alberto Arias”
Alberto Arias
Chairman of the Board
“Doug Cater”
Doug Cater
Chairman Audit Committee
The accompanying notes are an integral part of the consolidated financial statements.
Note
December 31, 2018 December 31, 2017
$
$
5
6
7
9
8
10
11
10
9
11
12
13
14
21,832
26,007
142
1,531
21,986
71,498
283,513
1,430
356,441
36,091
5,032
27,718
2,038
8,908
79,787
28,535
32,167
11,266
1,081
152,836
231,792
(69,307)
10,870
173,355
30,250
203,605
23,878
27,876
220
1,130
20,799
73,903
266,240
458
340,601
32,319
9,440
28,977
1,372
8,579
80,687
35,883
30,341
11,899
1,113
159,923
230,283
(88,121)
12,409
154,571
26,107
180,678
356,441
340,601
4 | Page
Sierra Metals Inc.
Consolidated Statements of Income (Loss)
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, except per share amounts)
Note
Year Ended December 31,
2017
2018
$
$
23
15
15
15
16
17
25
9
9
Revenue
Cost of sales
Mining costs
Depletion, depreciation and amortization
Gross profit from mining operations
General and administrative expenses
Selling expenses
Income from operations
Other income (loss)
Foreign currency exchange loss
Interest expense and other finance costs
Loss on spin out of Plexmar net assets
Income before income tax
Income taxes (expense) recovery:
Current tax expense
Deferred tax recovery (expense)
Net income (loss)
Net income (loss) attributable to:
Shareholders of the Company
Non-controlling interests
Weighted average shares outstanding (000s)
Basic
Diluted
Basic earnings (loss) per share
Diluted earnings (loss) per share
The accompanying notes are an integral part of the consolidated financial statements.
232,371
205,118
(115,180)
(31,409)
(146,589)
(100,979)
(58,175)
(159,154)
85,782
(18,919)
(8,551)
58,312
(1,288)
(1,210)
(3,634)
-
52,180
(25,432)
(908)
(26,340)
25,840
18,814
7,026
25,840
163,296
164,676
0.12
0.12
45,964
(20,339)
(7,543)
18,082
818
(1,737)
(3,263)
(4,412)
9,488
(23,416)
13,068
(10,348)
(860)
(4,645)
3,785
(860)
162,554
162,554
(0.03)
(0.03)
5 | Page
Sierra Metals Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars)
Net income (loss)
Other comprehensive income (loss)
Items that may be subsequently classified to net income (loss):
Currency translation adjustments on foreign operations
Total comprehensive income (loss)
Total comprehensive income (loss) attributable to shareholders
Non-controlling interests
Total comprehensive income (loss) attributable to shareholders
The accompanying notes are an integral part of the consolidated financial statements.
Year ended December 31,
2017
2018
$
$
25,840
(860)
(1,572)
24,268
17,242
7,026
24,268
450
(410)
(4,195)
3,785
(410)
6 | Page
Sierra Metals Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars)
Balance at January 1, 2018
162,812,764
230,283
Common Shares
Shares
Amounts
$
Exercise of RSUs
Share-based compensation expense
Dividends paid to non-controlling interest
Total comprehensive income (loss)
Balance at December 31, 2018
614,572
-
-
-
163,427,336
1,509
-
-
-
231,792
(1,509)
1,542
-
(1,572)
10,870
Other
reserves
$
12,409
Retained earnings Total attributable Non-controlling
(accumulated deficit)
to shareholders
$
Interest
$
$
Total
shareholders' equity
(88,121)
154,571
26,107
-
-
-
18,814
(69,307)
-
1,542
-
17,242
173,355
-
-
(2,883)
7,026
30,250
$
180,678
-
1,542
(2,883)
24,268
203,605
Balance at January 1, 2017
162,073,293
228,326
(80,776)
160,268
25,694
185,962
Common Shares
Shares
Amounts
$
Other
reserves
$
12,718
Retained earnings
(accumulated deficit)
$
Total attributable Non-controlling
to shareholders
$
Interest
$
Total
shareholders' equity
$
Exercise of RSUs
Share-based compensation expense
Non-cash dividend distribution of Plexmar net
assets
Dividends paid to non-controlling interest
Total comprehensive income (loss)
Balance at December 31, 2017
739,471
-
1,957
-
(1,957)
1,198
-
-
-
162,812,764
-
-
-
230,283
-
-
450
12,409
-
-
(2,700)
-
(4,645)
(88,121)
-
1,198
(2,700)
-
(4,195)
154,571
-
-
-
(3,372)
3,785
26,107
The accompanying notes are an integral part of the consolidated financial statements.
-
1,198
(2,700)
(3,372)
(410)
180,678
7 | Page
Sierra Metals Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars)
Cash flows from operating activities
Net income (loss) from operations
Adjustments for:
Items not affecting cash:
Depletion, depreciation and amortization
Share-based compensation
Change in supplies inventory reserve
Interest expense and other finance costs
Loss on spin out of Plexmar net assets
NRV adjustment to inventory
Current income tax expense
Deferred income taxes recovery
Unrealized foreign currency exchange gain (loss)
Operating cash flows before movements in working capital
Net changes in non-cash working capital items
Decomissioning liabilities settled
Income tax paid
Cash generated from operating activities
Cash used in investing activities
Capital expenditures
Cash used in investing activities
Cash (used in) financing activities
Proceeds from issuance of notes payable
Proceeds from issuance of loans and credit facilities
Repayment of loans and credit facilities
Loans interest paid
Dividends paid to non-controlling interest
Cash (used in) financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Note
2018
$
2017
$
25,840
(860)
31,349
1,542
1,730
3,634
-
1,110
25,432
908
(1,397)
90,148
2,447
(1,163)
(29,529)
61,903
(49,315)
(49,315)
10,000
15,000
(33,810)
(2,766)
(2,883)
(14,459)
(175)
(2,046)
23,878
21,832
58,236
1,198
-
3,726
4,412
2,106
23,416
(13,068)
619
79,785
(7,899)
(1,423)
(15,994)
54,469
(51,607)
(51,607)
14,750
15,000
(44,516)
(2,953)
(3,372)
(21,091)
(38)
(18,267)
42,145
23,878
8 | Page
22
11
10
10
10
10
22
The accompanying notes are an integral part of these consolidated financial statements.
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
1 Description of business and nature of operations
Sierra Metals Inc. (“Sierra Metals” or the “Company”) was incorporated under the Canada Business Corporations Act on April 11, 1996, and is a Canadian
and Peruvian listed mining company focused on the production, exploration and development of precious and base metals in Peru and Mexico. The
Company’s key priorities are to generate strong cash flows and to maximize shareholder value.
The Company’s shares are listed on the TSX, NYSE American Exchange, and the Bolsa de Valores de Lima (“BVL”) and its registered office is 161 Bay
Street, Suite 4260, Toronto, Ontario, M5J 2S1, Canada.
The Company owns an 81.84% interest in the polymetallic Yauricocha Mine in Peru and a 100% interest in the Bolivar and Cusi Mines in Mexico. In addition
to its producing mines, the Company also owns various exploration projects in Mexico and Peru.
2
Significant accounting policies
The significant accounting policies used in the preparation of these consolidated financial statements are as follows:
(a) Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee
(“IFRIC”). The financial statements were approved by the Board of Directors on March 27, 2019.
(b) Basis of consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries, which are entities controlled by the Company. Control
exists when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. Subsidiaries are consolidated from the date that control commences until the date that control ceases.
Non-controlling interests represent equity interests in subsidiaries owned by outside parties. Changes in the parent company’s ownership interest in
subsidiaries that do not result in a loss of control are accounted for as equity transactions.
9 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
The principal subsidiaries of the Company and their geographical locations as at December 31, 2018 are as follows:
Name of the subsidiary
Ownership interest
Location
Dia Bras EXMIN Resources Inc.
Sociedad Minera Corona, S. A. (“Corona”) 1
Dia Bras Peru, S. A. C. (“Dia Bras Peru”) 1
Dia Bras Mexicana, S. A. de C. V. (“Dia Bras Mexicana”)
Servicios de Minería de la Sierra, S. A. de C. V.
Bolívar Administradores, S. A. de C. V.
Exploraciones Mineras Dia Bras, S. A. de C. V.
EXMIN, S. A. de C. V.
100%
81.84%
100%
100%
100%
100%
100%
100%
Canada
Perú
Perú
México
México
México
México
México
1 The Company, through its wholly owned subsidiary Dia Bras Peru, holds an 81.84% interest in Corona, which represents 92.33% of the voting shares.
The Company consolidates Corona's financial results and records a non-controlling interest for the 18.16% that it does not own.
(c) Foreign currency translation
(i) Functional currency
Items included in the financial statements of each of the Company’s subsidiaries are measured using the currency of the primary economic
environment in which the entity operates (the “functional currency”).
The functional currency of Sierra Metals Inc., the parent entity, is the Canadian dollar (“C$”). The functional currency of the Mexican and Peruvian
subsidiaries is the United States dollar.
(ii) Presentation currency
The financial statements of entities that have a functional currency different from the presentation currency are translated into the presentation
currency as follows: assets and liabilities – at the closing rate at the date of the statement of financial position, income and expenses – at the average
rate of the period (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting differences are
recognized in other comprehensive income as cumulative translation adjustments.
(iii) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year end exchange rates of
monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the consolidated statement of
loss.
10 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
(d) Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three
months or less.
(e) Financial Instruments
The Company has adopted IFRS 9, Financial Instruments (“IFRS 9”) effective January 1, 2018 on a retrospective basis in accordance with the transitional
provisions of IFRS 9. As such, comparative figures have not been restated.
The adoption of IFRS 9 did not result in any change in the carrying values of any of the Company’s financial assets on the transition date; therefore
comparative figures have not been restated.
As detailed below, the Company has changed its accounting policy for financial instruments retrospectively, except where described below. The main
areas of change and corresponding transitional adjustments applied on January 1, 2018 are as follows:
Financial
Assets
IFRS 9 includes a revised model for classifying financial assets, which results in classification according to a financial instrument’s contractual cash flow
characteristics and the business models under which they are held. At initial recognition, financial assets are measured at fair value. Under the IFRS 9
model for classification of financial assets the Company has classified and measured its financial assets as described below:
·
·
Cash and cash equivalents are recorded at amortized cost using the effective interest method. Previously under IAS 39 these amounts were
classified differently. The change in classification did not impact the measurement of cash and cash equivalents.
Trade receivables are classified as financial assets at fair value through profit or loss and measured at fair value. Previously under IAS 39, trade
receivables were classified as loans and receivables measured at amortized cost except for the provisional pricing embedded derivative that was
measured at fair value through profit or loss.
Financial
Liabilities
Financial liabilities are recognized initially at fair value and in the case of financial liabilities not subsequently measured at fair value, net of directly
attributable transaction costs. Financial liabilities are derecognized when the obligation specified in the contract is discharged, canceled, or expired. For
financial liabilities, IFRS 9 retains most of the IAS 39 requirements and since the Company does not have any financial liabilities designated at fair value
through profit or loss, the adoption of IFRS 9 did not impact the Company’s accounting policies for financial liabilities. Accounts payable and accrued
liabilities, interest payable, and long-term debt are classified as financial liabilities to be subsequently measured at amortized cost.
Expected
Credit
Loss
Impairment
Model
IFRS 9 introduces a single expected credit loss impairment model, which is based on changes in credit quality since initial recognition. The adoption of
the expected credit loss impairment model did not have a significant impact on the Company’s financial statements, and did not result in a transitional
adjustment.
11 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
Financial
Instruments
The Company’s financial assets and liabilities (financial instruments) include cash and cash equivalents, trade receivables, accounts payable and accrued
liabilities and long-term debt. All financial instruments are recorded at fair value at recognition. Subsequent to initial recognition, financial instruments
classified as cash and cash equivalents, accounts payable and accrued liabilities, and long-term debt are measured at amortized cost using the effective interest
method. Other financial assets and liabilities are recorded at fair value subsequent to initial recognition.
(f) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating
decision-maker is responsible for allocating resources and assessing performance of the operating segments and has been identified as the President and
Chief Executive Officer of the Company.
(g) Inventories
Inventories consist of concentrates, ore stockpiles, supplies and spare parts. Concentrates include stockpiled concentrates at milling operations or at
warehouses. Stockpiled ore is comprised of in-process mineralized material awaiting processing at milling facilities and materials for use in milling
operations. Concentrates and stockpiled ore are valued at the lower of average production cost and net realizable value (“NRV”). Concentrates and
stockpiled ore inventory costs include all direct costs incurred in production including direct labor and materials, freight and amortization, and directly
attributable overhead costs. NRV is calculated as the estimated price at the time of sale based on prevailing metal market prices less estimated future costs
to convert the inventories into saleable form and estimated costs to sell. The supplies and spare parts inventories will be used for exploration and
production and are valued at the lower of average cost and net realizable value. Cost includes acquisition, freight and other directly attributable costs. If
the carrying value of inventory exceeds NRV, a write-down is recognized as production costs of sales in the consolidated statement of income (loss). If
there is a subsequent increase in the value of the inventory, the previous write-downs to NRV are reversed up to cost to the extent that the related
inventory has not been sold.
(h) Exploration and evaluation expenditure
Exploration and evaluation expenditures is comprised of costs that are directly attributable to:
·
·
·
·
Researching and analysing existing exploration data;
Conducting geological studies, exploratory drilling and sampling;
Examining and testing extraction and treatment methods; and /or
Compiling pre-feasibility and feasibility studies
Exploration expenditures are costs incurred in the search for resources suitable for commercial exploitation. Evaluation expenditures are costs incurred in
determining the technical feasibility and commercial viability of a mineral resource. Exploration and evaluation expenditures are capitalized when there is
a high degree of confidence in the project’s viability and thus it is probable that future economic benefits will flow to the Company. Any items of
property, plant and equipment used for exploration and evaluation are capitalised within property, plant and equipment.
12 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
Capitalized exploration and evaluation expenditures are considered to be tangible assets as they form part of the underlying mineral property and are
recorded within property, plant and equipment - exploration and evaluation expenditures.
(i) Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated depreciation and impairment losses. The cost of an item of property, plant and equipment
comprises its purchase price, any costs directly attributable to bringing the assets to the location and condition necessary for it to be capable of operating
in the manner intended by management and the estimated close down and restoration costs associated with the asset, and for qualifying assets, the
associated borrowing costs. Once a mining project has been established as commercially viable, expenditure other than on land, buildings, plant and
equipment is capitalized under ‘Mining properties’ together with any amount capitalized relating to that mining project from ‘Exploration and evaluation’.
Where an item of property, plant and equipment is comprised of major components with different useful lives, the components are accounted for as
separate items of property, plant and equipment and depreciated over their estimated useful lives.
Costs associated with commissioning new assets, in the period before they are capable of operating in the manner intended by management, are
capitalized. Revenue generated during the development stage from the sale of concentrate and related costs can be deducted from capitalized costs only if
the production of the saleable material is directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the
manner intended by management.
Development costs incurred after the commencement of production are capitalised to the extent they are expected to give rise to future economic benefits
and these costs can be measured reliably. Repairs and maintenance costs are charged to the consolidated statement of income (loss) during the period in
which they are incurred.
Property, plant and equipment is depreciated over its useful life, or over the remaining life of the mine if shorter. Depreciation commences when the asset
is available for use. Land is not depreciated. The major categories of property, plant and equipment are depreciated on a straight-line basis using the
following average estimated useful lives below:
Useful lives
Vehicles, furniture and other assets
Machinery and equipment
Bulidings and other constructions
Years
3 to 10
5 to 20
5 to 50
Mineral properties are depleted over the life of the mine using the units of production method. In applying the units of production method, depletion is
normally calculated using the quantity of material to be extracted in current and future periods based on proven and probable reserves or measured and
indicated resources. Such non-reserve material may be included in depletion calculations in limited circumstances and where there is a high degree of
confidence in its economic extraction.
The Company conducts an annual review of residual values, useful lives, depletion and depreciation methods used for property, plant and equipment.
Changes to estimated residual values or useful lives are accounted for prospectively.
13 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
(j)
Impairment of non-financial assets
Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is assessed at the level of cash generating units (‘CGUs’). The recoverable amount is the
higher of an asset’s fair value less costs to sell or value in use.
Fair value less costs to sell is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction. The best evidence
of fair value is the value obtained from an active market or binding sales agreement. Where this information is not available, fair value can be estimated
as the present value of future cash flows expected to be realized from the continued use of the asset including expansion projects. Value in use is
determined as the present value of expected future cash flows to be realized from the continued use of the asset in its present condition and from its
ultimate disposal.
Capitalized exploration expenditures are reviewed for indicators of impairment, which included a decision to discontinue activities in a specific area and
the existence of sufficient data indicating that the carrying amount of an exploration and evaluation asset is unlikely to be recovered from the development
or sale of the asset.
Non-financial assets that have suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances
indicate that the impairment may have reversed.
(k) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalized and included in the carrying
amounts of those assets until they are ready for their intended use. All other borrowing costs are recognized as an expense in the period incurred.
(l) Revenue recognition
The Company has adopted IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”) effective January 1, 2018 on a modified retrospective basis in
accordance with the transitional provisions of IFRS 15. Results for reporting periods beginning after January 1, 2018 are presented under IFRS 15, while
prior reporting period amounts have not been restated and continue to be reported under IAS 18 – Revenue (“IAS 18”) (accounting standard in effect for
those periods).
The Company has concluded that there are no significant differences between the point of transfer of risks and rewards for its metals under IAS 18 and
the point of transfer of control under IFRS 15. No adjustment has been recorded to the opening deficit balance at January 1, 2018.
The following policies applied in accounting for revenue for the year ended December 31, 2018. In the comparative period, revenue was accounted for in
accordance with the revenue recognition policy disclosed in the Company’s December 31, 2017 annual audited consolidated financial statements.
14 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
Metal
Concentrates
The Company sells concentrate from certain of its mines to third-party smelter customers. These concentrates predominantly contain zinc, lead, and copper,
along with quantities of gold and silver.
The Company recognizes revenue from these concentrate sales when control of the concentrate has transferred to the customer, which is the point in time that
the concentrate is delivered to the customer. Upon delivery, the customer has legal to, physical possession of, and the risks and rewards of ownership of the
concentrate. The customer is also committed to accept and pay for the concentrates once delivered; therefore, the customer is able to direct the use of and
obtain substantially all of the remaining benefits from the concentrate.
The final prices for metals contained in the concentrate are generally determined based on the prevailing spot market metal prices on a specific future date,
which is established on a date prior to the concentrate being delivered to the customer. Upon transfer of control at delivery, the Company measures revenue
under these contracts based on forward prices agreed upon with the customer at the time of delivery and the most recent determination of the quantity of
contained metals less smelting and refining charges charged by the customer. This reflects the best estimate of the transaction price expected to be received at
final settlement. The variability associated with the embedded derivative for changes in the metal prices is recognized at fair value. These changes in the fair
value of the receivable are adjusted through revenue from other sources at each subsequent financial statement date.
(m) Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issuance of the shares are recognized as a deduction from equity.
(n) Share-based payments
The fair value of the estimated number of stock options and restricted share units (“RSUs”) awarded to employees, officers and directors that will
eventually vest, determined as of the date of grant, is recognized as share-based compensation expense over the vesting period of the stock options and
RSUs, with a corresponding increase to equity. The fair value of each tranche is determined using the Black-Scholes option pricing model with market
related inputs as of the date of grant. The fair value of RSUs is the market value of the underlying shares as of the date of grant. The number of awards
expected to vest is reviewed at least annually, with any change in the estimate recognized immediately in share-based payments expense with a
corresponding adjustment to equity.
(o) Share repurchases
The Company deducts from contributed surplus any excess of consideration paid over book value where the Company has repurchased any of its own
common shares. Book value is calculated as the weighted average price of the shares issued and outstanding prior to the cancellation date.
15 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
(p) Earnings (loss) per share
Basic earnings (loss) per share (“EPS”) is calculated by dividing the net income (loss) for the period attributable to the shareholders of the Company by
the weighted average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares
included with respect to options, warrants and similar instruments is computed using the treasury stock method. The Company’s potentially dilutive
common shares comprise stock options granted to employees. In periods of loss, basic and diluted EPS are the same, as the effect of dilutive instruments
is anti-dilutive.
(q) Income taxes
Tax expense comprises current and deferred income and resource taxes. Current income, deferred income and resources taxes are recognized in profit or
loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the
reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or
liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to
investments in subsidiaries and jointly controlled entities to the extent that the parent is able to control the timing of the reversal of the temporary
difference and it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes
levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net
basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future
taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realized.
(r) Decommissioning and restoration liabilities
Decommissioning and restoration costs include the dismantling and demolition of infrastructure, the removal of residual materials and the remediation of
disturbed areas. These costs are a normal consequence of mining activity and the majority of these expenditures are expected to be incurred at the end of
the life of mine. Estimated decommissioning and restoration costs are provided in the accounting period when the obligation arising from the related
disturbance occurs, based on the net present value of the estimated future costs discounted using the credit adjusted risk free rate. This provision is
adjusted in each reporting period to reflect known developments, e.g. revisions to costs estimates and the timing of cash outflows.
16 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
2
Significant accounting policies (continued)
The initial decommissioning and restoration provision together with other movements resulting from changes in estimated cash flows or the credit
adjusted risk free rates is capitalized within property, plant and equipment and amortized over the life of the asset to which it relates except where it
relates to a closed mine where the expenses are recognized in the statement of loss. Provision is made for the estimated present value of costs of
environmental clean-up obligations outstanding as at the date of the statement of financial position, and these costs are charged to the income statement as
an operating cost.
The amortization or unwinding of the discount applied in establishing the net present value of provision is accreted to the income statement in each
accounting period with each interest charge included as a financing cost rather than as an operating cost.
3
Significant accounting estimates and judgments
In the application of the Company’s accounting policies, which are described in note 2, management is required to make judgements, estimates and
assumptions about the effects of uncertain future events on the carrying amounts of assets and liabilities. The estimates and associated assumptions are based
on management’s best knowledge of the relevant facts and circumstances and historical experience. Actual results may differ from these estimates, potentially
having a material future effect on the Company’s consolidated financial statements. The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of
the revision and future periods if the revision affects both current and future periods.
The following are the significant judgements that management has made in the process of applying the Company’s accounting policies and that have the most
significant effect on the amounts recognised in the consolidated financial statements:
(a) Impairment review of asset carrying values
In accordance with the Company’s accounting policy (note 2(j)), at every reporting period, the Company assesses whether there are any indicators that the
carrying value of its assets or Cash Generating Units (“CGUs”) may be impaired, which is a significant management judgment. Where there is an
indication that the carrying amount of an asset may not be recoverable, the Company prepares a formal estimate of the recoverable amount by analyzing
discounted cash flows. The resulting valuations are particularly sensitive to changes in estimates such as long-term commodity prices, exchange rates,
sales volume, operating costs, and discount rates. In the event of impairment, if there is a subsequent adverse change in any of the assumptions or
estimates used in the discounted cash flow model, this could result in a further impairment of the asset. Also, in accordance with the Company’s
accounting policy (note 2(h)), the Company capitalizes evaluation expenditures when there is a high degree of confidence that these costs are recoverable
and have a probable future benefit. As at December 31, 2018 the Company assessed the carrying value of its long-lived assets and exploration and
evaluation expenditures and determined that no impairment was required.
17 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
3
Significant accounting estimates and judgments (continued)
(b) Mineral reserves and resources
The Company estimates mineral reserves and resources based on information prepared by qualified persons as defined in accordance with the Canadian
Securities Administrators’ National Instrument (“NI”) 43-101. These estimates form the basis of the Company’s life of mine (“LOM”) plans, which are
used for a number of important and significant accounting purposes, including: the calculation of depletion expense and impairment charges, forecasting
the timing of the payment of decommissioning costs and future taxes. There are significant uncertainties inherent in the estimation of mineral reserves and
the assumptions used, including commodity prices, production costs, recovery rates and exchange rates. These assumptions may change significantly
when new information becomes available and could result in mineral reserves being revised, which in turn would impact depletion expense, asset carrying
values and the provision for decommissioning costs.
(c) Deferred tax assets and liabilities
The Company’s management makes significant estimates and judgments in determining the Company’s tax expense for the period and the deferred tax
assets and liabilities. Management interprets tax legislation in a variety of jurisdictions and makes estimates of the expected timing of the reversal of
deferred tax assets and liabilities. In addition, management makes estimates related to expectations of future taxable income based on cash flows from
operations and the application of existing tax laws in each jurisdiction. Assumptions used in the cash flow forecast are based on management’s estimates
of future production and sales volume, commodity prices, operating costs, capital expenditures, dividends, and decommissioning and reclamation
expenditures. These estimates are subject to risk and uncertainty and could result in an adjustment to the deferred tax provision and a corresponding credit
or charge to the statement of loss. The Company is subject to assessments by various tax authorities who may interpret the tax laws differently. These
differences may impact the final amount or the timing of the payment of taxes. The Company provides for such differences where known based on
management’s best estimates of the probable outcome of these matters.
(d) Decommissioning and restoration liabilities costs
The Company’s provision for decommissioning and restoration costs is based on management’s best estimate of the present value of the future cash
outflows required to settle the liability. In determining the liability, management makes estimates about the future costs, inflation, foreign exchange rates,
risks associated with the cash flows, and the applicable risk-free interest rates for discounting future cash flows. Changes in any of these estimates could
result in a change in the provision recognized by the Company. Also, the ultimate costs of environmental disturbance are uncertain and cost estimates can
vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other
mine sites.
Changes in decommissioning and restoration liabilities are recorded with a corresponding change to the carrying amounts of the assets to which they
relate. Adjustments made to the carrying amounts of the asset can result in a change to the depreciation charged in the consolidated statement of loss.
(e) Functional currency
The functional currency for each of the Company’s subsidiaries is the currency of the primary economic environment in which the entity operates. The
Company has determined that the functional currency of each entity is the U.S. dollar. Determination of functional currency may involve certain
judgements to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in
events and conditions which determined the primary economic environment.
18 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
4 Adoption of new accounting standards and future accounting changes
The Company adopted IFRS 9, Financial Instruments, and IFRS 15 – Revenue from Contracts with Customers effective January 1, 2018 on a modified
retrospective basis. Refer to Note 2 for the adoption of IFRS 9 and IFRS 15.
Future accounting changes
The following standards and amendments to existing standards have been published and are mandatory for annual periods beginning January 1, 2019, or later
periods:
IFRS
16,
Leases
(“IFRS
16”)
In January 2016, the IASB issued this standard which is effective for periods beginning on or after January 1, 2019, which replaces the current guidance in
IAS 17, Leases , and is to be applied either retrospectively or a modified retrospective approach. Early adoption is permitted, but only in conjunction with
IFRS 15, Revenue from Contracts with Customers . Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and
an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflective of future lease payments and a “right-of-use asset”
for virtually all lease contracts. The Company is in the process of determining the effect that the adoption of IFRS 16 will have on its consolidated financial
statements.
5
Trade and other receivables
Trade receivables
Sales tax receivables
Other receivables
6
Inventories
Stockpiles
Concentrates
Supplies and spare parts
December 31,
2018
$
December 31,
2017
$
19,199
6,718
90
26,007
20,613
7,210
53
27,876
December 31,
2018
$
December 31,
2017
$
1,074
4,476
16,436
21,986
1,554
3,839
15,406
20,799
Cost of sales are comprised of production costs of sales and depletion, depreciation and amortization, and represent the cost of inventories recognized as an
expense for the years ended December 31, 2018 and 2017 of $146,589 and $159,154, respectively. Supplies and spare parts inventory as at December 31, 2018
is stated net of a provision of $3,331 (2017 - $1,663) to write inventories down due to obsolescence or infrequent use. Supplies and spare parts inventory held
at NRV at December 31, 2018 was $8,602 (2017 - $9,045). During the year ended December 31, 2018, the Company wrote down stockpile and concentrate
inventory to its NRV, recording a charge of $1,110 (2017 - $2,106). Stockpile and concentrate inventory held at NRV as at December 31, 2018 was $168
(2017 - $794).
19 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
7
Property, plant and equipment
Cost
Plant and
equipment
Mining
properties
Assets under
construction
Exploration
and evaluation
expenditure
Total $
Balance as of January 1, 2017
202,687
425,203
26,206
44,974
699,070
Additions
Disposals
Transfers
Balance as of December 31, 2017
Additions
Change in estimate of decomissioning liability
Disposals
Transfers
Balance as of December 31, 2018
8,632
(1,038)
12,948
223,229
10,143
512
(1,115)
7,152
239,921
6,959
-
-
432,162
20,595
-
(12,948)
33,853
15,758
(9,417)
-
51,315
4,648
20,781
13,209
-
-
436,810
-
(7,152)
47,482
-
-
64,524
51,944
(10,455)
-
740,559
48,781
512
(1,115)
-
788,737
Balance as of January 1, 2017
122,204
281,997
Depletion, depreciation and amortization
Disposals
Balance as of December 31, 2017
Depletion, depreciation and amortization
Disposals
Balance as of December 31, 2018
20,799
(898)
142,105
14,562
(444)
156,223
37,176
-
319,173
16,787
-
335,960
-
-
-
-
-
-
-
Net Book Value - December 31, 2018
Net Book Value - December 31, 2017
Net Book Value - December 31, 2016
83,698
81,124
80,483
100,850
112,989
143,206
47,482
33,853
26,206
13,041
417,242
-
-
13,041
-
-
13,041
51,483
38,274
31,933
57,975
(898)
474,319
31,349
(444)
505,224
283,513
266,240
281,828
For the year ended December 31, 2018, depletion and depreciation expense of $31,349 (2017: $57,975) has been charged to depletion, depreciation and
amortization in property, plant, and equipment. Additionally, depletion and depreciation expense of $887 (2017: $1,133) has been capitalized to inventory.
During the year ended December 31, 2018, the Company has capitalized borrowing costs amounting to $116 (2017 – $349) on qualifying assets. Borrowing
costs were capitalized at the weighted average rate of 5.25%.
20 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
8 Accounts payable and accrued liabilities
Trade payables
Other payables and accrued liabilities
All accounts payable and accrued liabilities are expected to be settled within 12 months.
9 Current and deferred income tax liability
(a) Income and resource taxes
Current Tax Expense
Current income tax
Deferred Tax Recovery
Deferred Tax Expense (recovery)
Total tax expense
December 31,
December 31,
2018
$
2017
$
24,662
11,429
36,091
19,004
13,315
32,319
2018
$
2017
$
25,432
25,432
23,416
23,416
908
908
(13,068)
(13,068)
26,340
10,348
21 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
9 Current and deferred income tax liability (Continued)
(b) Tax rate reconciliation
A reconciliation between income tax expense and the product of loss before income taxes multiplied by the combined Canadian federal and provincial
income tax rate for the period ended December 31 is as follows:
Income (loss) before income taxes
Expected Tax Rate @ 26.50% (2017 - 26.50%)
Effect of tax rate differences
Stock based compensation costs
Other Non-deductible expenses
Unrealized foreign exchange income
Inflation Adjustment for Mexico tax purposes
Expired losses
Change in benefit of other temporary differences not recognized
Foreign exchange and other
Mining royalties and other
(c) Deferred tax asset and liability
Deferred tax assets have not been recognized in respect of the following temporary differences:
Non-capital and capital losses
Property, plant and equipment
Mineral properties
Other
2018
$
2017
$
52,180
13,828
1,672
395
347
84
(321)
381
572
2,555
6,827
26,340
2018
$
2017
$
37,696
9
2,128
(53)
39,780
9,488
2,555
(512)
258
449
148
(420)
-
2,280
(807)
6,397
10,348
35,512
60
2,445
(385)
37,632
The significant components and movements of the Company’s net deferred tax assets and liabilities are as follows:
Mining assets
Property, Plant, and equipment
Inventory
Provisions
Decommissioning liabilities
Mining royalties
Mining assets
Deferred revenue
Other items
Non-capital losses
Balance
January 1,
2017
$
Change in
2017
$
Balance
December 31,
2017
$
Change in
2018
$
Balance
December 31,
2018
$
-
(3,935)
(2,482)
(600)
4,094
878
(50,302)
1,471
919
6,674
(43,283)
-
2,139
1,020
1,267
(166)
363
8,261
(1,471)
613
1,374
13,400
-
(1,796)
(1,462)
667
3,928
1,241
(42,041)
-
1,532
8,048
(29,883)
-
130
(636)
2,089
(24)
223
76
-
(1,216)
(1,496)
(854)
-
(1,666)
(2,098)
2,756
3,904
1,464
(41,965)
-
316
6,552
(30,737)
22 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
9 Current and deferred income tax liability (continued)
(d) Tax losses
In Canada, the Company has aggregate tax losses not recognized of $25,605 (December 31, 2017 – $27,153) expiring in periods from 2026 to 2038.
Deferred tax assets have not been recognized in respect of these losses because it is not probable that future taxable profit will be available against which
the company can utilise the benefits there from.
Also, the Company has $8,578 of capital losses that are without expiry as at December 31, 2018 (December 31, 2017 - $8,578).
(e) Unrecognized deferred tax liabilities
As at December 31, 2018, the Company has taxable temporary difference of $52,396 (2017 - $21,542) relating to investments in subsidiaries that has not
been recognized because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.
10 Loans payable
Current
Acquisition loan with Banco de Credito del Peru (a)
Operating loan with Banco de Credito del Peru (b)
Revolving credit facility with Banco de Credito del Peru (c)
Notes payable to BBVA Banco Continental (d)
Loan with FIFOMI (e)
Non-current
Acquisition loan with Banco de Credito del Peru (a)
Loan with FIFOMI (e)
December 31,
December 31,
2018
$
2017
$
6,188
-
15,000
5,000
1,530
27,718
28,408
127
28,535
6,141
6,309
15,000
-
1,527
28,977
34,236
1,647
35,883
Total loans payable
56,253
64,860
23 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
10 Loans payable (continued)
(a) Corona Acquisition Loan with Banco de Credito del Peru S.A. (“BCP”)
On May 24, 2011, the Company’s wholly owned subsidiary Dia Bras Peru entered into a loan agreement with BCP amounting to $150,000. After
deducting financing costs of $3,750, the net proceeds were $146,250. The proceeds from this loan were used to fund a portion of the purchase
consideration for the acquisition of the Company’s 81.84% interest in Corona in Peru. The loan was repayable over 5 years ending on May 24, 2016 and
carried interest at a rate of 3M LIBOR plus 4.15% per annum, payable quarterly in arrears.
On August 7, 2015, Dia Bras Peru signed an amended agreement with BCP for the then outstanding debt balance of $48,000. The most significant
amendments to the agreement were:
·
·
·
The remaining $48M due on the facility was split into 2 tranches
Tranche 1, in the amount of $24M has quarterly principal repayments of $1.5M beginning in November 2016 and ending in August 2020
Tranche 2, in the amount of $24M has no quarterly principal repayments and to be repaid in full in August 2020
· One year principal repayment grace period
·
·
Reduced Interest rate equal to 3.65% plus 3M LIBOR vs previous rate of 4.15% plus 3M LIBOR
Term of the Facility extended for 5 Years
Principal repayments totalling $6,000 have been made for the year ended December 31, 2018 (2017 - $6,000).
The loan is recorded at amortized cost and is being accreted to face value over 5 years using an effective interest rate of 4.71%. An amortization expense
related to the transaction costs for $200 has been recorded for the year ended December 31, 2018 (2017 - $217). Interest payments totalling $2,177 have
been made for the year ended December 31, 2018 (2017 - $2,141).
The loan with BCP is secured by a pledge over Dia Bras Peru’s interest in Corona voting shares and is guaranteed by the Company. The Company is in
compliance with all financial covenants as at December 31, 2018.
(b) Corona Operating Loan with BCP
On October 17, 2013, the Company’s subsidiary Corona, in which the Company has an interest of 81.84%, entered into a credit facility with BCP for up
to $60,000. The credit facility is for a 5 year term and the funds can be drawn within the first 3 years in tranches of up to $40,000 during the first year, up
to $30,000 during the second year and up to $20,000 during the third year. The loan bears interest of LIBOR plus 4.5% and the loan principal and interest
are payable in quarterly installments over the term of the loan with the first payment due 15 months after the closing of the credit facility. The loan is
guaranteed by the collection rights and future cash flows generated from the sale of ore concentrates and other products. The loan contains certain
financial covenants, events of default and other provisions which are customary for a transaction of this nature. These covenants include maintaining an
equity balance at the Corona level higher than $30 million, maintaining a Debt Service Coverage ratio higher than 1.1x, and maintaining a Net Financial
Debt/EBITDA ratio lower than 2.0x.
24 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
10 Loans payable (continued)
On June 29, 2016, $5,000 was drawn from this facility bearing an interest rate of three months LIBOR plus 4.5%.
Principal repayments totalling $6,250 have been made for the year ended December 31, 2018 (2017 – $6,250). Interest payments totalling $341 have been
made for the year ended December 31, 2018 (2017 – $827).
The loan has been repaid in full during 2018.
(c) DBP Credit Facility with BCP
On August 9, 2017, the Company’s subsidiary DBP, entered into a credit facility with BCP for up to $15,000. The credit facility is for a 1-year term and is
being used to fund short term working capital requirements. On August 9, 2017, the Company drew $8,000 from this facility at an interest rate of LIBOR
plus 0.95%. On August 31, 2017, the Company drew the remaining $7,000 from this facility at an interest rate of LIBOR plus 1.05%. The credit facility
was repaid in full on the anniversary date of August 9 , 2018, while interest payments were made quarterly.
On August 9, 2018, the Company renewed the credit facility and drew $15,000 for another 1-year term to be used to fund short term working capital
requirements. The new facility has an interest rate of 3M LIBOR plus 1.04%, with interest payments due quarterly. The credit facility is guaranteed by the
common shares of DBP’s subsidiary Sociedad Minera Corona.
(d) Corona Notes payable with BBVA Banco Continental
In order to fund its short-term working capital needs, Corona repaid and drew down the following notes payable:
· On March 31, 2018 a $5,000 revolving credit facility with BBVA Banco Continental was obtained. The credit facility bears an interest rate of three-
month LIBOR plus 2.52%. The facility was renewed on September 25, 2018.
· On September 25, 2018, the Company renewed the $5,000 revolving credit facility with BBVA Banco Continental at an interest rate of 2.68%, with a
term of 90 days, and was repaid in full on December 24, 2018.
· On December 24, 2018, the Company renewed the revolving credit facility with BBVA Banco Continental, after repaying the $5,000 balance owed,
and drew $5,000 at an interest rate of 2.80%, with a term of 30 days, to be repaid in full by January 24, 2019. The Company repaid the $5,000 owing
on the revolving credit facility during January 2019.
25 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
10 Loans payable (continued)
(e) FIFOMI loan
· During January 2015, the Company’s Mexican Subsidiary, Dia Bras Mexicana S.A. de C.V, received a loan of MXP$120 million from Nacional
Financiera, Sociedad Fiduciaria del Fideicomiso de Fomento Minero (“FIFOMI”) to be used for working capital purposes and capital expenditures,
specifically the expansion of the Piedras Verdes Plant.
On February 2, 2015, DBM drew MXP$120 million (US$7,995). After deducting transaction costs of US$124, net proceeds were US$7,871.
Monthly principal repayments have taken place over four years beginning in January 2016 at an interest rate of TIIE + 3%. Interest payments began
in February 2015 and during the year ended December 31, 2018, DBM has made interest payments of $248 (MXP$4,772) (2017 – $366
(MXP$6,918)). Principal payments of $1,560 (MXP$30,000) (2017 - $1,588 (MXP$30,000) have been made during the year ended December 31,
2018.
11 Decommissioning liability
Balance, beginning of year
Liabilities settled during the year
Interest cost
Revisions and new estimated cash flows
Balance, end of year
Less: current portion
Long-term decommissioning liability
December 31,
December 31,
2018
$
2017
$
13,271
13,852
(1,293)
684
642
13,304
(2,038)
11,266
(1,424)
843
-
13,271
(1,372)
11,899
The Company’s decommissioning liability represents the present value of estimated costs for required future decommissioning and other site restoration
activities. The majority of the decommissioning and site restoration expenditures occur at the end of each operation’s life. During 2018 and 2017, the
decommissioning liability was calculated based on the following key assumptions:
Estimated undiscounted cash flows ($)
Discount rate (%)
Settlement period (years)
965
10.0
6
15,580
7.0
5-11
1,021
10.0
6
15,203
6.9
5-10
2018
2017
Mexico
Peru
Mexico
Peru
26 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
12 Other liabilities
Current
Profit-sharing and other employee related obligations (a)
Non-current
Other employee related obligations
(a) Profit sharing and other employee related obligations
December 31,
2018
$
December 31,
2017
$
8,908
8,579
1,081
1,113
As at December 31, 2018, there is a provision amounting to $5,965 for employee profit sharing in Peru and $2,943 for wages, salaries and other employee
benefits outstanding (December 31, 2017 - $5,487 and $3,092, respectively).
13 Share capital and share-based payments
(a) Authorized capital
The Company has an unlimited amount of authorized common shares with no par value.
(b) Restricted share units (“RSUs”)
The changes in RSU’s issued during the years ended December 31, 2018 and 2017 was as follows:
Outstanding, beginning of period
Granted
Exercised
Forfeited
Outstanding, end of period
December 31,
2018
December 31,
2017
1,316,314
679,627
(614,572)
(1,284)
1,380,085
1,771,877
1,126,254
(739,471)
(842,346)
1,316,314
27 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
13 Share capital and share-based payments (continued)
On June 29, 2012, the Company’s shareholders approved the RSU plan, whereby RSUs may be granted to directors, officers, consultants or employees at
the discretion of the Board of Directors. The RSU plan provides for the issuance of common shares from treasury upon the exercise of vested RSUs at no
additional consideration. There is no cash settlement related to the vesting of RSU’s as they are all settled with equity. The current maximum number of
common shares authorized for issue under the RSU plan is 8,000,000. The RSUs have vesting conditions determined by the Board of Directors, and the
vesting conditions are non-market conditions and are not performance based.
During the year ended December 31, 2018, the Company granted two tranches of RSU’s totalling 679,627 which had a fair value of C$3.28 based on the
closing share price at grant date. RSUs exercised during the year ended December 31, 2018 had a weighted average fair value of C$2.12 and the RSUs
forfeited had a weighted average fair value of C$1.52 (2017 – C$3.49 and C$2.43, respectively). As at December 31, 2018, the weighted average fair
value of the RSUs outstanding is C$3.01 (2017 – C$2.45).
The total RSU expense recognized during the year ended December 31, 2018 was $1,542 with a corresponding credit to other reserves (2017 - $1,198).
28 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
14 Non-controlling interest
Set out below is the summarized financial information of our subsidiary Corona which has a material non-controlling interest (note 2(b)). The information
below is before intercompany eliminations and after fair value adjustments on acquisition of the entity.
Summarized balance sheet
Current
Assets
Liabilities
Total current net assets
Non-current
Assets
Liabilities
Total non-current net assets
Net assets
Summarized income statement
Revenue
Income before income tax
Income tax expense
Total income
Total income attributable to non-controlling interests
Dividends paid to non-controlling interests
Summarized cash flows
Cash flows from operating activities
Cash generated from operating activities
Net changes in non cash working capital items
Decomissioning liabilities settled
Income taxes paid
Net cash generated from operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
December 31,
December 31,
2018
$
2017
$
78,207
(36,622)
41,585
162,733
(37,519)
125,214
166,799
67,867
(39,466)
28,401
155,259
(39,404)
115,855
144,256
For the year ended December 31,
2018
$
2017
$
168,657
62,735
(24,047)
38,688
7,026
(2,883)
154,153
30,855
(10,014)
20,841
3,785
(3,372)
For the year ended December 31,
2018
$
2017
$
83,178
875
(1,293)
(29,529)
53,231
(25,243)
(29,963)
(35)
(2,010)
19,908
17,898
76,269
(3,968)
(1,423)
(15,994)
54,884
(18,740)
(53,126)
13
(16,969)
36,877
19,908
29 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
15 Expenses by nature
Mining costs include mine production costs, milling and transport costs, royalty expenses, site administration costs but not the primary mine development
costs which are capitalized and depreciated over the specific useful life or reserves related to that development and ore included in depreciation and
amortization. The mining costs for the years ended December 31, 2018 and 2017 relate to the Yauricocha, Bolivar and Cusi Mines.
(a) Mining costs
Employee compensation and benefits
Third party and contractors costs
Depreciation
Consumables
Changes in inventory and other
(b) General and administrative expenses
Salaries and benefits
Consulting and professional fees
Other
Office expenses
Marketing and communication expenses
Share-based compensation expense
Listing and filing fees
Director expenses
Travelling expense
16 Other income (expenses)
Gain on sale of supplies and fixed assets
Interest income
Allowance for inventory obsolescence
Miscellaneous income (expenses)
2018
$
2017
$
27,458
46,599
31,409
34,655
6,468
146,589
23,046
43,041
58,175
27,659
7,233
159,154
2018
$
2017
$
7,333
3,987
1,462
1,507
805
1,542
344
1,312
627
18,919
2018
$
2017
$
85
36
(1,739)
330
(1,288)
6,405
6,583
1,581
1,604
925
1,162
390
1,168
521
20,339
58
36
-
724
818
30 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
17 Interest expense and other finance costs
Interest expense on BCP loan
Interest expense on other liabilities
Amortization of loan transaction costs
Interest cost on decommissioning liability
18 Segment reporting
2018
$
2017
$
2,903
10
37
684
3,634
2,370
4
46
843
3,263
The Company primarily manages its business on the basis of the geographical location of its operating mines. The Company’s operating segments are based
on the reports reviewed by the senior management group that are used to make strategic decisions. The Chief Executive Officer considers the business from a
geographic perspective considering the performance of the Company’s business units. The corporate division only earns income that is considered to be
incidental to the activities of the Company and thus it does not meet the definition of an operating segment; as such it has been included within “other
reconciling items.”
The reporting segments identified are the following:
·
Peru – Yauricocha Mine
· Mexico – Bolivar and Cusi Mines
The following is a summary of the reported amounts of net income (loss) and the carrying amounts of assets and liabilities by operating segment:
31 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
18 Segment reporting (continued)
Year ended December 31, 2018
$
$
$
Peru
Mexico
Mexico
Canada
Yauricocha Mine Bolivar Mine Cusi Mine Corporate
Total
$
Revenue (1)
168,657
52,451
11,263
-
232,371
Production cost of sales
Depletion of mineral property
Depreciation and amortization of property, plant and
equipment
Cost of sales
(74,731)
(13,229)
(33,168)
(2,918)
(4,626)
(92,586)
(8,197)
(44,283)
(7,281)
(640)
(1,799)
(9,720)
Gross profit from mining operations
76,071
8,168
1,543
-
-
-
-
-
Income (loss) from operations
Interest expense and other finance costs
Other income (expense)
Foreign currency exchange loss
Income (loss) before income tax
60,640
(2,637)
1,029
(26)
59,006
1,836
0
(1,967)
(1,694)
(1,825)
919
(997)
(347)
(299)
(724)
(5,083)
0
(3)
809
(4,277)
(115,180)
(16,787)
(14,622)
(146,589)
85,782
58,312
(3,634)
(1,288)
(1,210)
52,180
Income tax expense
(24,068)
(1,768)
(504)
-
(26,340)
Net income (loss) from operations
34,938
(3,593)
(1,228)
(4,277)
25,840
December 31, 2018
Peru
Mexico
Canada
Total assets
Non-current assets
Total liabilities
(1) Includes provisional pricing adjustments of: $1,289 for Yauricocha, $(190) for Bolivar, and $(45) for Cusi.
209,159
163,222
124,020
145,775
120,528
27,607
1,507
67
1,209
356,441
284,943
152,836
Year ended December 31, 2017
$
$
$
Peru
Mexico
Mexico
Canada
Yauricocha Mine Bolivar Mine Cusi Mine Corporate
Total
$
Revenue
154,153
44,949
6,016
-
205,118
Production cost of sales
Depletion of mineral property
Depreciation and amortization of property, plant and
equipment
Cost of sales
(67,542)
(31,448)
(27,418)
(3,163)
(12,783)
(111,773)
(8,275)
(38,856)
(6,019)
(690)
(1,816)
(8,525)
Gross profit (loss) from mining operations
42,380
6,093
(2,509)
-
-
-
-
-
Income (loss) from operations
Loss on spin out of Plexmar net assets
Interest expense and other finance costs
Other income (expense)
Foreign currency exchange loss
Income (loss) before income tax
29,428
-
(2,801)
1,156
222
28,005
(1,328)
-
-
(910)
(723)
(2,961)
(3,818)
-
(462)
(153)
(128)
(4,561)
(6,200)
(4,412)
-
725
(1,108)
(10,995)
(100,979)
(35,301)
(22,874)
(159,154)
45,964
18,082
(4,412)
(3,263)
818
(1,737)
9,488
Income tax expense
(10,047)
(269)
(32)
-
(10,348)
Net income (loss) from operations
17,958
(3,230)
(4,593)
(10,995)
(860)
December 31, 2017
Peru
Mexico
Canada
Total assets
Non-current assets
Total liabilities
205,233
155,401
134,323
132,826
111,212
24,086
2,542
85
1,514
340,601
266,698
159,923
32 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
18 Segment reporting (continued)
For the year ended December 31, 2018, 73% of the revenues ($168,657) were from two customers based in Peru and the remaining 27% of the revenues
($63,714) were from two customers based in Mexico. In Peru, the two customers accounted for 79% and 21% of the revenues. In Mexico, the two customers
accounted for 82% and 18% of the revenues.
For the year ended December 31, 2017, 75% of the revenues ($154,153) were from two customers based in Peru and the remaining 25% of the revenues
($50,965) were from two customers based in Mexico. In Peru, the two customers accounted for 73% and 27% of the revenues. In Mexico, the two customers
accounted for 88% and 12% of the revenues.
As at December 31, 2018, the trade receivable balance of $19,199 includes amounts outstanding of $3,995 and $15,204 from two customers in Mexico and
two customers in Peru, respectively.
33 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
19 Financial instruments and financial risk management
The Company’s financial instruments include cash and cash equivalents, trade receivables, financial assets, accounts payable and loans payable.
(a) Financial assets and liabilities by category
At December 31, 2018
Financial assets
Cash and cash equivalents
Trade receivables (1)
Total Financial assets
Financial liabilities
Accounts payable
Loans payable
Total Financial liabilities
At December 31, 2017
Financial assets
Cash and cash equivalents
Trade receivables (1)
Total Financial assets
Financial liabilities
Accounts payable
Loans payable
Total Financial liabilities
Amortized
Cost
$
FVTPL
$
Total
$
21,832
21,832
24,662
56,253
80,915
-
19,199
19,199
-
-
-
-
-
-
21,832
19,199
41,031
24,662
56,253
80,915
Total
$
23,878
20,613
44,491
19,004
64,860
83,864
Loans and
receivables
$
Other financial
liabilities
$
23,878
20,613
44,491
-
-
-
19,004
64,860
83,864
(1) Trade receivables exclude sales and income tax receivables.
(b) Fair value of financial instruments
As at December 31, 2018 and 2017, the fair value of the financial instruments approximates their carrying value.
(c) Fair value hierarchy
Financial instruments carried at fair value are categorized based on a three level valuation hierarchy that reflects the significance of inputs used in making
the fair value measurements as follows:
Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e.,
derived from prices)
34 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
19 Financial instruments and financial risk management (continued)
The Company’s metal concentrate sales are subject to provisional pricing with the selling prices adjusted at the end of the quotational period. The
Company’s trade receivables are marked-to-market at each reporting period based on quoted forward prices for which there exists an active commodity
market.
Level 3 – inputs for the asset or liability that are not based on observable market data.
At December 31, 2018 and 2017, the levels in the fair value hierarchy into which the Company’s financial assets and liabilities are measured and
recognized on the Consolidated Statement of Financial Position are categorized as follows:
Recurring measurements
Trade receivables (1)
December 31, 2018
December 31, 2017
Level 1
$
Level 2
$
19,199
19,199
-
-
Level 3
$
Total
$
19,199
19,199
-
-
Level 1
$
Level 2
$
20,613
20,613
-
-
Level 3
$
Total
$
20,613
20,613
-
-
(1) Trade receivables exclude sales and income tax receivables.
There were no transfers between level 1 and level 2 during the years ended December 31, 2018 and 2017.
(d) Financial risk management
The Company is exposed to financial risks, including credit risk, liquidity risk, currency risk, interest rate risk and price risk. The aim of the Company’s
overall risk management strategy is to reduce the potential adverse effect that these risks may have on the Company’s financial position and results. The
Company’s Board of Directors has overall responsibility and oversight of management’s risk management practices. Risk management is carried out
under policies approved by the Board of Directors. The Company may from time to time, use foreign exchange contracts and commodity price future and
forward contracts to manage its exposure to fluctuations in foreign currency and metals prices. The Company does not ordinarily enter into hedging
arrangements to cover long term commodity price risk unless it has the obligation to so under a credit facility, which would be approved of the Board of
Directors.
35 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
19 Financial instruments and financial risk management (continued)
i) Market Risk
(1) Currency risk
Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in foreign
exchange rates. The Company and its subsidiaries’ financial instruments are exposed to currency risk where those instruments are denominated in
currencies that are not the same as their functional currency; exchange gains and losses in these situations impact net income or loss. The Company’s
sales of silver, copper, lead and zinc are denominated in United States dollars and the Company’s costs are incurred in Canadian dollars, United
States dollars, Mexican pesos and Peruvian Nuevo Soles. The United States dollar is the functional currency of the Peruvian and Mexican entities.
The Canadian dollar is the functional currency of all other entities. The company also holds cash and cash equivalents, trade and other receivables
and accounts payable that are subject to currency risk.
The following are the most significant areas of exposure to currency risk:
December 31, 2018
CAN dollar
Mexican
Peso
Peruvian
Nuevo
Soles
Total $
Cash and cash equivalents
Income tax and other receivables
183
32
215
393
8,748
9,141
1,064
617
1,681
1,640
9,397
11,037
Accounts payable and other liabilities
(1,268)
(22,865)
(19,632)
(43,765)
Total
(1,053)
(13,724)
(17,951)
(32,728)
Cash and cash equivalents
Income tax and other receivables
CAN dollar
December 31, 2017
Mexican
Peso
Peruvian
Nuevo Soles
Total $
132
158
290
167
9,618
9,785
634
918
1,552
933
10,694
11,627
Accounts payable and other liabilities
(1,461)
(30,674)
(21,838)
(53,973)
Total
(1,171)
(20,889)
(20,286)
(42,346)
36 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
19 Financial instruments and financial risk management (continued)
The Company manages and monitors this risk with the objective of mitigating the potential adverse effect that fluctuations in currencies against the
Canadian dollar and US dollar could have on the Company’s Consolidated Statement of Financial Position and Consolidated Statement of income
(loss). As at December 31, 2018, the Company has not entered into any derivative contracts to mitigate this risk.
A 10% appreciation in the US dollar exchange rate against the Peruvian Nuevo Soles and the Mexican Peso based on the financial assets and
liabilities held at December 31, 2018, with all the other variables held constant, would have resulted in an increase to the Company’s net income of
$1,992 (increase in loss in 2017 of $4,118).
A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial assets and liabilities held at December 31, 2018
and 2017, with all the other variables held constant, would have resulted in a negligible impact to the Company’s net income (loss).
(2) Interest rate risk
Interest rate risk is the risk that the fair values or future cash flows of the Company will fluctuate because of changes in market interest rates. The
Company is exposed to interest rate risk on its loans payable (note 10). The Company monitors its exposure to interest rates closely and has not
entered into any derivative contracts to manage its risk. The weighted average interest rate paid by the Company during the year ended December 31,
2018 on its loans and notes payable in Peru was 4.26% (2017 – 4.31%). With all other variables unchanged a 1% increase in the interest rate would
have increased the Company’s net loss by $486 (2017 - $541). The interest rate paid by the Company during the year ended December 31, 2018 on
its loans payable in Mexico was 5.63% (2017 – 5.74%). With all other variables unchanged a 1% increase in the interest rate would have increased
the Company’s net income by $57 (2017 - $60).
(3) Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices
(other than those arising from interest risk or currency risk), whether those changes are caused by factors specific to the individual financial
instrument or its issuer, or factors affecting all similar financial instruments in the market.
As at December 31, 2018 and 2017, the Company had certain amounts related to the sales of concentrates that have only been provisionally priced.
Commodity price risk exists solely in Mexico as the Company fixes metal prices with the purchaser of its concentrates for specific sales for which
concentrates have been delivered. The Company’s exposure to commodity price risk is as follows:
Commodity
10% decrease in silver prices
10% decrease in copper prices
10% decrease in lead prices
10% decrease in gold prices
As at December 31, 2018 and 2017, the Company did not have any forward contracts outstanding.
2018
$
2017
$
(62)
(325)
(1)
(134)
(27)
(456)
(1)
(87)
37 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
19 Financial instruments and financial risk management (continued)
ii) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligation as they fall due. The Company has in place planning,
budgeting and forecasting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis
and its expansion and development plans. The Company tries to ensure that it has sufficient committed credit facilities to meet its short-term
operating needs, note 10.
In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following table
summarizes the remaining contractual maturities and undiscounted cash flows as at December 31, 2018 of the Company’s financial liabilities and
operating and capital commitments:
Within 1 year
$
1-2 years
$
2-5 years
$
After 5 years
$
Total
$
2018
$
As at December 31,
Accounts payable and accrued
liabilities
Loans payable
Interest on loans payable
Other liabilities
Total Commitments
36,092
27,520
198
8,908
72,718
-
6,000
127
1,081
7,208
-
22,733
250
-
22,983
-
-
-
-
-
36,092
56,253
575
9,989
102,909
36,092
56,253
575
9,989
102,909
In the opinion of management, the working capital at December 31, 2018, together with future cash flows from operations and available loan
facilities, is sufficient to support the Company’s commitments through 2019.
iii) Credit risk
Credit risk is the risk that the counterparty to a financial instrument might fail to discharge its obligations under the terms of a financial contract.
Credit risk is primarily associated with trade receivables; however, it also arises on cash and cash equivalents. The Company sells its concentrate to
large international organizations. The Company is exposed to significant concentration of credit risk given that all of its revenues from Peru and
Mexico were from two customers at each of the locations. There are no significant provisions recorded for expected credit losses as at December 31,
2018.
The Company’s policy is to keep its cash and cash equivalents only with highly rated financial institutions and to only invest in government
securities. The Company considers the risk of loss associated with cash and cash equivalents to be low. The counterparty to the financial asset is a
large international financial institution with strong credit ratings and thus the credit risk is considered to be low.
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Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
19 Financial instruments and financial risk management (continued)
The Company’s maximum exposure to credit risk is as follows:
Cash and cash equivalents
Trade receivables
20 Capital management
December 31,
2018
$
December 31,
2017
$
21,832
19,199
41,031
23,878
20,613
44,491
The Company’s objectives of capital management are to safeguard its ability to support the Company’s normal operating requirements on an ongoing basis;
continue the development and exploration of its mining properties and pursue strategic growth initiatives, while minimizing the cost of such capital; and to
provide an adequate return to its shareholders.
The capital of the Company consists of items included in equity attributable to owners of the Company and debt, net of cash and cash equivalents as follows:
Equity attributable to owners of the Company
Loans payable
Less: Cash and cash equivalents
December 31,
2018
$
December 31,
2017
$
173,355
56,253
229,608
(21,832)
207,776
154,571
64,860
219,431
(23,878)
195,553
In order to facilitate the management of capital requirements, annual budgets are prepared and updated as necessary based on various factors, many of which
are beyond the Company’s control. In assessing liquidity, the Company takes into account its expected cash flows from operations, including capital asset
expenditures, and its cash and cash equivalents. The Board of Directors reviews the annual and updated budgets.
The Company ensures that there are sufficient committed credit facilities to meet its short-term requirements. At December 31, 2018, the Company expects its
current capital resources to be sufficient to support its normal operating requirements on an ongoing basis and planned development and explorations
programs. At December 31, 2018, the Company was in compliance with the external capital requirements.
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Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
21 Related party transactions
(a) Related party transactions
During the year ended December 31, 2018, the Company recorded consulting fees of $200 (2017 - $200) to companies related by common directors or
officers. At December 31, 2018, accounts payable and accrued liabilities include $Nil (2017 – $Nil) with these related parties. Related party transactions
occurred in the normal course of business. As at December 31, 2018, the Company has accounts receivable outstanding from these related parties of $Nil
(2017 - $Nil).
(b) Compensation of directors and key management personnel
The remuneration of the Company’s directors, officers and other key management personnel during the years ended December 31, 2018 and 2017 are as
follows:
Salaries and other short term employment benefits
Share-based payments
Total compensation
22 Supplemental cash flow information
Changes in working capital
Trade and other receivables
Financial and other assets
Income tax receivable
Inventories
Accounts payable and accrued liabilities
Income taxes payable
Other liabilities
2018
$
2017
$
2,816
1,500
4,316
2,968
2,753
5,721
2018
$
2017
$
1,869
(401)
78
(2,917)
4,201
(311)
(72)
2,447
(10,092)
(427)
61
(1,624)
5,116
(339)
(594)
(7,899)
40 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
23 Revenues from mining operations
The Company has recognized the following amounts related to revenue in the consolidated statements of income:
Revenues from contracts with customers
Provisional pricing adjustments on concentrate sales
Total revenues
The following table sets out the disaggregation of revenue by metals and form of sale:
Revenues from contracts with customers:
Silver
Copper
Lead
Zinc
Gold
Total revenues from contracts with customers
Year Ended
December 31, 2018
$
231,373
998
232,371
Year Ended
December 31, 2018
$
32,890
84,838
24,862
82,441
6,342
231,373
41 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
24 Contingencies
The Company and its subsidiaries have been named as defendants in certain actions incurred in the normal course of business. In all cases the Company and its
subsidiaries will continue to vigorously defend the actions and an accrual has been made in the consolidated financial statements for matters that are probable
and can be reasonably estimated.
The contingencies outstanding associated with our Mexican subsidiaries are as follows:
a)
In October 2009, Polo y Ron Minerals, S.A. de C.V. (“P&R”) sued the Company and one of its subsidiaries, Dia Bras Mexicana S.A. de C.V. P&R
claimed damages for the cancellation of an option agreement (the “Option Agreement”) regarding the San Jose properties in Chihuahua, Mexico (the “San
Jose Properties”). The Company believes that it has complied with all of its obligations pertaining to the Option Agreement. In October 2011, the 8th
Civil Court of the Judicial District of Morelos in Chihuahua issued a resolution that absolved the Company from the claims brought against it by P&R on
the basis that P&R did not provide evidence to support any of its claims. P&R appealed this resolution to the State Court, which overruled the previous
resolution and ordered the Company to: (i) transfer to P&R 17 mining concessions from the Company’s Bolivar project, including the mining concessions
where both mine operations and mineral reserves estimates are located; and (ii) pay $422,674 to P&R. In February 2013, a Federal Court in the State of
Chihuahua granted the Company a temporary suspension of the adverse resolution issued by the State Court of Chihuahua, Mexico. On February 12, 2016
The Second Federal Collegiate Court of Civil and Labor Matters, of the Seventeenth circuit in the State of Chihuahua, ("the Federal Court") issued a new
judgment ruling that the State Court lacked jurisdiction to rule on issues concerning mining titles, and that no previous rulings by the State Court against
the Company shall stand. They ordered the cancellation of the previous adverse resolution by the state Court. The Company will continue to vigorously
defend this claim. Sierra Metals continues to believe that the original claim is without merit.
b)
In 2009, a personal action was filed in Mexico against DBM by an individual, Ambrosio Bencomo Muñoz as administrator of the intestate succession of
Ambrosio Bencomo Casavantes y Jesus Jose Bencomo Muñoz, claiming the annulment and revocation of the purchase agreement of two mining
concessions, Bolívar III and IV between Minera Senda de Plata S.A. de C.V. and Ambrosio Bencomo Casavantes, and with this, the nullity of purchase
agreement between DBM and Minera Senda de Plata S.A. de C.V. In June 2011, the Sixth Civil Court of Chihuahua, Mexico, ruled that the claim was
unfounded and dismissed the case, the plaintiff appealed to the State Court. The process is in the appealing court. The Company will continue to
vigorously defend this action and is confident that the claim is of no merit.
42 | Page
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(In thousands of United States dollars, unless otherwise stated)
25 Distribution of Cautivo Mining Inc. Shares
On August 8, 2017, the Company announced the completion of the previously announced distribution of Cautivo Mining Inc.’s (“Cautivo”) common
shares, issuance of rights pursuant to Cautivo’s rights offering, and listing of the Cautivo Shares and the Rights on the Canadian Securities Exchange (the
“CSE”).
The distribution was completed by distributing to holders of Sierra common shares (other than ineligible holders) of record on July 26, 2017 all of the
issued and outstanding Cautivo Shares, being 3,253,588 Cautivo Shares, as a return of capital, reducing Sierra’s shareholdings in Cautivo from 100% to
nil. The Cautivo Shares were distributed pursuant to a spin-off by Sierra and Sierra did not receive any proceeds from the distribution. Immediately
following this distribution, Cautivo issued 11,904,761 Rights pursuant to the Rights Offering, whereby holders of Sierra common shares received
3.6589638 Rights for every Sierra common share held. For every whole Right held, a holder is entitled to subscribe for one Cautivo Share at a price of
C$0.84 per share at any time from August 8, 2017 to August 29, 2017.
Effective August 8, 2017, the Cautivo Shares and the Rights commenced trading on the CSE under the trading symbols “CAI” and “CAI.RT”,
respectively.
On July 26, 2017, the company disposed of Plexmar Resources and Cautivo Mining Inc. to the shareholders of the company as a return of capital.
A total of 3,253,588 shares were issued, as well as rights to subscribe for up to 11,904,761 shares at $0.84 per share. As a result of this transaction the
Company realized a non-cash loss on distribution of the net assets of Plexmar of $4,412 and a distribution of capital of $2,700 to shareholders relating to
the fair value of the assets distributed.
26 Subsequent Events
Closing of New Senior Secured US$100 Million Corporate Credit Facility
On March 11, 2019, the Company entered into a new six-year senior secured corporate credit facility (“Corporate Facility”) with Banco de Credito del
Peru (“BCP”) that provides funding of up to US$100 million effective March 8, 2019. The Corporate Facility provides the Company with additional
liquidity and will provide the financial flexibility to fund future capital projects in Mexico as well as corporate working capital requirements. The
Company will also use the proceeds of the new facility to repay existing debt balances in the near term.
Repayment of FIFOMI Loan in Mexico
During February 2019, the Company repaid the remaining US$1,657 owed on Dia Bras Mexicana’s loan from FIFOMI. This repayment prior to the
loan’s maturity date did not result in any financial penalties and was within the terms of the agreement.
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