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Scottish Mortgage Investment Trust

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FY2018 Annual Report · Scottish Mortgage Investment Trust
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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.

3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

4

 
 
 
 
 
 
 
 
 
 
 
   
   
   
   
 
 
 
   
   
   
   
   
 
 
 
    
    
    
    
    
  
   
   
   
   
   
 
 
 
 
 
 
 
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.

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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.

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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.

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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:

·

·
·
·

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:
-
-
-
-

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%.

- 14 -

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

- 15 -

 
 
 
 
 
 
 
 
 
 
 
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.

- 16 -

 
 
 
 
 
 
 
 
 
 


 
 
 
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.

- 17 -

 
 
 
 
 
 
 
 
 
 
 
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.

- 39 -

 
 
 
 
 
 
 
 
 
 
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.

- 40 -

 
 
 
 
 
 
 
 
 
 
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.

- 41 -

 
 
 
 
 
 
 
 
 
 
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.

- 42 -

 
 
 
 
 
 
 
 
 
 
 
 
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.

- 43 -

 
 
 
 
 
 
 
 
 
 
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.

- 44 -

 
 
 
 
 
 
 
 
 
 
 
 
 
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.

- 45 -

 
 
 
 
 
 
 
 
 
 
 
 
 
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.

- 46 -

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

- 47 -

 
 
 
 
 
   
   
   
   
   
   
   
   
   
   
   
   
 
 
 
 
 
 
 
 
 
 
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

- 48 -

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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:

- 49 -

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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:

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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).

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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 

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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)

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 

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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)

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 

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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)

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.

38 | 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 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.

39 | 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)

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)

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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)

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 

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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)

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.

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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)

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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