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
☒
Annual Report Pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2021
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, (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
NYSE American
Title of each class
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:
☒ Annual information form
☒ 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: 163,428,150
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 ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such
files).
Yes ☒
No ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging growth company ☒
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
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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, 2021 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.
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AUDITOR ATTESTATION
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal year ended December 31, 2021, 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.
NOTICES PURSUANT TO REGULATION BTR
None.
IDENTIFICATION OF THE AUDIT COMMITTEE
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: Koko Yamamoto, Douglas Cater and
Oscar Cabrera.
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
Koko Yamamoto, Douglas Cater and Oscar Cabrera has been determined to be such an audit committee financial expert, within the meaning of
Item 407 of Regulation S-K. Each of Ms. Yamamoto, Mr. Cater and Mr. Cabrera is independent, as that term is defined by the listing standards of
the NYSE American, LLC (“NYSE American”) applicable to the Company. The Securities and Exchange Commission has indicated that the
designation of each of Ms. Yamamoto, Mr. Cater and Mr. Cabrera as an audit committee financial expert does not make Ms. Yamamoto, Mr.
Cater and Mr. Cabrera an “expert” for any purpose, impose any duties, obligations or liability on Ms. Yamamoto, Mr. Cater and Mr. Cabrera 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.
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NYSE AMERICAN CORPORATE GOVERNANCE
As a Canadian corporation listed on the NYSE American, we are not required to comply with certain NYSE American corporate governance
standards, so long as we comply with applicable Canadian and Toronto Stock Exchange corporate governance requirements. In order to claim
relief under these provisions, Section 110 of the NYSE American Company Guide requires us to provide written certification from independent
local counsel that the non-complying practice is not prohibited by home country law. A comparison of NYSE American governance rules
required to be followed by U.S. domestic issuers under NYSE American’s listing standards and our corporate governance practices (such
disclosure required by item 303A.11 of the NYSE American Listed Company Manual and section 110 of the NYSE American Company Guide)
is available on the Corporate Governance section of our website at:
https://s23.q4cdn.com/335191765/files/doc_downloads/corporate_governance/Sierra-Website- Disclosure-Governance.pdf.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers LLP acted as our independent registered public accounting firm for the fiscal years ended December 31, 2021 and 2020.
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.
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://s23.q4cdn.com/335191765/files/doc_downloads/corporate_governance/2020/01/Code_of_Busi ness_Conduct_and_Ethics_-
_Final_June_2019.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, 2021, 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.
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as defined in General Instruction B(11) to Form 40-F as of December 31, 2021.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The required information is provided in the section “FINANCIAL INSTRUMENTS AND RELATED RISKS” sub-section “Liquidity risk” - note
10 (b) in the MD&A, contained in Exhibit 99.2 to this Annual Report on Form 40-F and incorporated by reference herein.
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, 2021 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. In
particular, and without limiting the generality of the foregoing, the terms “inferred mineral resources,” “indicated mineral resources,” “measured
mineral resources” and “mineral resources” used or referenced in our AIF are Canadian mineral disclosure terms as defined in accordance with
National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in the 2014 Canadian
Institute of Mining, Metallurgy and Petroleum Standards for Mineral Resources and Mineral Reserves, Definitions and Guidelines, May 2014
(the “CIM Standards”). The CIM Standards differ significantly from the historic standards in the United States included in U.S. Securities and
Exchange Commission (the “SEC”) Industry Guide 7.
The SEC has adopted amendments to its disclosure rules to modernize the mineral property disclosure requirements for issuers whose securities
are registered with the SEC under the U.S. Securities Exchange Act of 1934, as amended. These amendments became effective February 25,
2019 (the “SEC Modernization Rules”) with compliance required for the first fiscal year beginning on or after January 1, 2021. Under the SEC
Modernization Rules, the historical property disclosure requirements for mining registrants included in SEC Industry Guide 7 will be rescinded
and replaced with disclosure requirements in subpart 1300 of SEC Regulation S-K. As an issuer that is eligible to file reports with the SEC
pursuant to the multi-jurisdictional disclosure system, the Company is not required to provide disclosure on its mineral properties under the SEC
Modernization Rules and will continue to provide disclosure under NI 43-101 and the CIM Definition Standards.
As a result of the adoption of the SEC Modernization Rules, the SEC will recognize estimates of “measured mineral resources”, “indicated
mineral resources” and “inferred mineral resources.” In addition, the SEC has amended its definitions of “proven mineral reserves” and “probable
mineral reserves” to be “substantially similar” to the corresponding definitions under the CIM Standards that are required under NI 43-101.
Accordingly, during the period leading up to the compliance date of the SEC Modernization Rules, information regarding mineral resources or
mineral reserves contained or referenced in our AIF may not be comparable to similar information made public by companies that report in
accordance with U.S. standards. While the above terms are “substantially similar” to CIM Definitions, there are
6
differences in the definitions under the SEC Modernization Rules and the CIM Definition Standards. Accordingly, there is no assurance any
mineral reserves or mineral resources that the Company may report as “proven mineral reserves”, “probable mineral reserves”, “measured mineral
resources”, “indicated mineral resources” and “inferred mineral resources” under NI 43-101 would be the same had the Company prepared the
reserve or resource estimates under the standards adopted under the SEC Modernization Rules.
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, 2021, 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 REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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, 2021. 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, 2021.
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.sierrametals.com.
Shareholders may also contact the Vice President, Investor Relations of the Company by phone at 1-(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.
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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.
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SIGNATURES
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.
SIERRA METALS INC.
By:/s/ Luis Marchese
Luis Marchese
Dated: March 16, 2022
Chief Executive Officer
9
EXHIBITS
The following documents are filed as exhibits to this Form 40-F:
Exhibit Number
Document
Certifications
13.1
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 dated March 16, 2022
13.2
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 dated March 16, 2022
Consents
23.1
Consent of PricewaterhouseCoopers LLP
23.2
Consent of Andre Deiss
23.3
Consent of Daniel H. Sepulveda
23.4
Consent of Carl Kottmeier
23.5
Consent of Cliff Revering
23.6
Consent of Jarek Jakubec
23.7
Consent of Giovanny J. Ortiz
23.8
Consent of Enrique Rubio
23.9
Consent of Americo Zuzunaga
Annual Information
99.1
Annual Information Form for the year ended December 31, 2021
99.2
Management’s Discussion and Analysis for the year ended December 31, 2021
99.3
Audited Consolidated Financial Statements for the years ended December 31, 2021 and 2020, including report of
Independent Registered Accounting Firm (PCAOB ID 271)
99.4
Interactive Data File
CERTIFICATION
PURSUANT TO SECTION 302
THE SARBANES-OXLEY ACT OF 2002
I, Luis Marchese, 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)
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;
(b)
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;
(c)
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
(d)
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)
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
(b)
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 16, 2022
/s/ Luis Marchese
Name: Luis Marchese
Title:
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)
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;
(b)
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;
(c)
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
(d)
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)
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
(b)
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 16, 2022
/s/ Ed Guimaraes
Name: Ed Guimaraes
Title:
Chief Financial Officer
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm We hereby consent to the inclusion in this Annual
Report on Form 40-F for the year ended December 31, 2021 of Sierra Metals Inc. (the Company) of our report
dated March 14, 2022 relating to the consolidated financial statements, which appears in this 40-F. Chartered
Professional Accountants, Licensed Public Accountants Toronto, Canada March 16, 2022
PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T:
+1 416 863 1133, F: +1 416 365 8215, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an
Ontario limited liability partnership.
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Yauricocha
Mine, Yauyos province, Peru” dated effective March 31, 2021 (the “Yauricocha PEA Technical Report”) 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 (iii) being named in, and the use of the Yauricocha PEA
Technical Report, 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 Technical Report or within my knowledge as
a result of the services I performed in connection with the Yauricocha PEA Technical Report. Dated: March 16,
2022 “original signed” Andre Deiss, B.Sc. (Hons). Pr.Sci.Nat., MSAIMM
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Yauricocha
Mine, Yauyos province, Peru” dated effective March 31, 2021 (the “Yauricocha PEA Technical Report”), the
summary section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment,
Bolivar Mine, Mexico” dated effective December 31, 2019 (the “Bolivar PEA Technical Report”), and the
summary section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment,
Cusi Mine, Chihuahua State, Mexico” dated effective August 31, 2020 (the “Cusi PEA Technical Report”) 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 (iii) being named in, and the use of the Yauricocha PEA
Technical Report, the Bolivar PEA Technical Report and the Cusi PEA Technical Report, 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 Technical Report, the Bolivar PEA Technical Report, or the Cusi PEA
Technical Report or within my knowledge as a result of the services I performed in connection with the
Yauricocha PEA Technical Report, the Bolivar PEA Technical Report or the Cusi PEA Technical Report. Dated:
March 16, 2022 “original signed” Daniel H. Sepulveda, BSc
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Yauricocha
Mine, Yauyos province, Peru” dated effective March 31, 2021 (the “Yauricocha PEA Technical Report”), the
summary section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment,
Bolivar Mine, Mexico” dated effective December 31, 2019 (the “Bolivar PEA Technical Report”), and the
summary section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment,
Cusi Mine, Chihuahua State, Mexico” dated effective August 31, 2020 (the “Cusi PEA Technical Report”) 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 (iii) being named in, and the use of the Yauricocha PEA
Technical Report, the Bolivar PEA Technical Report and the Cusi PEA Technical Report, 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 Technical Report, the Bolivar PEA Technical Report, or the Cusi PEA
Technical Report or within my knowledge as a result of the services I performed in connection with the
Yauricocha PEA Technical Report, the Bolivar PEA Technical Report or the Cusi PEA Technical Report. Dated:
March 16, 2022 “original signed” Carl Kottmeier, B.A.Sc., P. Eng., MBA
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Bolivar
Mine, Mexico” dated effective December 31, 2019 (the “Bolivar PEA Technical Report”) 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 (iii) being named in, and the use of the Bolivar PEA Technical Report 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 Bolivar PEA Technical Report or within my knowledge as a result of the
services I performed in connection with the Bolivar PEA Technical Report. Dated: March 16, 2022 “original
signed” Cliff Revering, P. Eng.
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Bolivar
Mine, Mexico” dated effective December 31, 2019 (the “Bolivar PEA Technical Report”) 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 (iii) being named in, and the use of the Bolivar PEA Technical Report 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 Bolivar PEA Technical Report or within my knowledge as a result of the
services I performed in connection with the Bolivar PEA Technical Report. Dated: March 16, 2022 “original
signed” Jarek Jakubec, C. Eng. FIMMM
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Cusi Mine,
Chihuahua State, Mexico” dated effective August 31, 2020 (the “Cusi PEA Technical Report”) 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 (iii) being named in, and the use of the Cusi PEA Technical Report, 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 Technical Report or within my knowledge as a result of the services I
performed in connection with the Cusi PEA Technical Report. Dated: March 16, 2022 “original signed” Giovanny
J. Ortiz, BSc Geology, FAusIMM
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Yauricocha
Mine, Yauyos province, Peru” dated effective March 31, 2021 (the “Yauricocha PEA Technical Report”) 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 (iii) being named in, and the use of the Yauricocha PEA
Technical Report, 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 Technical Report or within my knowledge as
a result of the services I performed in connection with the Yauricocha PEA Technical Report. [Signature page
follows] 1
Dated: March 16, 2022 “original signed” Enrique Rubio, Ph. D. 2
Exhibit 23.9
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, 2021 (the “AIF”), Annual Report on Form 40-F for the
Company’s fiscal year ended December 31, 2021 (File no. 1-38141) (the “Form 40-F”) Consent of Qualified
Person Reference is made to the AIF and to the Form 40-F. I hereby consent to the: (i) inclusion of the summary
section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment, Yauricocha
Mine, Yauyos province, Peru” dated effective March 31, 2021 (the “Yauricocha PEA Technical Report”), the
summary section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment,
Bolivar Mine, Mexico” dated effective December 31, 2019 (the “Bolivar PEA Technical Report”), and the
summary section of the report entitled “NI 43-101 Technical Report on the Preliminary Economic Assessment,
Cusi Mine, Chihuahua State, Mexico” dated effective August 31, 2020 (the “Cusi PEA Technical Report”) 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 (iii) being named in, and the use of the Yauricocha PEA
Technical Report, the Bolivar PEA Technical Report and the Cusi PEA Technical Report, 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 Technical Report or the Bolivar PEA Technical Report or within my
knowledge as a result of the services I performed in connection with the Yauricocha PEA Technical Report or the
Bolivar PEA Technical Report. Dated: March 16, 2022 “original signed” Americo Zuzunaga, MAusIMM CP
SIERRA METALS INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED DECEMBER 31, 2021
DATED: MARCH 16, 2022
Corporate Office:
161 Bay Street, Suite 4260
Toronto, Ontario
M5J 2S1
ii
TABLE OF CONTENTS
Preliminary Notes
1
Corporate Structure
3
General Development of the Business
4
Description of the Business
12
Material Mineral Properties
21
Updated Mineral Resource and Mineral Reserve Information
66
Risk Factors
68
Description of Capital Structure
80
Market for Securities
80
Escrowed Securities
81
Directors and Officers
81
Audit Committee Information
84
Legal Proceedings and Regulatory Actions
86
Interest of Management and Others in Material Transactions
87
Transfer Agent and Registrar
87
Material Contracts
87
Interest of Experts
87
Additional Information
88
Audit Committee Charter
A-1
1
ANNUAL INFORMATION FORM DATED MARCH 16, 2022
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 16, 2022. Except as otherwise indicated, the information contained herein is as at December 31,
2021.
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
Effective Date/
Period Ended
Date Filed on
SEDAR website
Document
Category on the
SEDAR Website
Preliminary Economic Assessment
(“PEA”), Yauricocha Mine, Yauyos
Province, Peru (the “Yauricocha PEA
Technical Report”).
March 31, 2021
March 3, 2022
Technical Report
Updated PEA, Bolivar Mine, Mexico (the
“Bolivar PEA Technical Report”)
December 31, 2019, updated:
September 21, 2021
September 29, 2021
Technical Report
PEA for the Cusi Mine, Chihuahua State,
Mexico (the “Cusi PEA Technical
Report”
August 31, 2020
January 5, 2021
Technical Report
Cautionary Statement – Forward Looking Information
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; the Strategic Process (as
defined herein); implementation of programs; effects of renegotiation and termination of contracts or sub-contracts; the effective date of treaties; and the
Company’s plans and expectations for its properties and operations.
2
Forward-looking statements or forward-looking information can be identified by the use of forward-looking terminology 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. Such forward-looking statements and forward-looking information are subject to a variety
of risks and uncertainties, which could cause actual events or results to differ from those reflected in such forward-looking statements and forward-looking
information, including, without limitation, risks with respect to: operating hazards and risks; precious metal and base metal price fluctuation; mining operations;
infrastructure; exploration and development; uncertainty of calculation of reserves and sources and metal recoveries; replacement of reserves and resources;
fluctuations in the price of consumed commodities; no defined mineral reserves at the Cusi Mine; risk of foreign operations; burden of government regulation and
permitting; risks relating to outstanding borrowings; uncertainty of title to assets; environmental risks; litigation risks; insurance risks; competitive risks;
volatility in the price of the common shares in the capital of the Company (the “Common Shares”); global financial risks; employee recruitment and retention;
reliance on key personnel and labour relations; potential conflict of interest; significant shareholders; third party reliance; differences in U.S. and Canadian
reporting of mineral reserves and resources; claim under U.S. securities laws; potential dilution of present and prospective shareholdings; currency risks; risks
related to cyclical business; liquidity risks; financial reporting standards; credit risks; climate change; and the coronavirus (COVID-19) (“COVID-19”). This list
is not exhaustive of the factors that may affect any of the Company’s forward-looking statements or 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 (“CIM”), 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 the U.S.
securities laws. In particular, and without limiting the generality of the foregoing, the terms “inferred mineral resources,” “indicated mineral resources,”
“measured mineral resources” and “mineral resources” used or referenced in this AIF are Canadian mineral disclosure terms as defined in accordance with
National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in the 2014 Canadian Institute of Mining,
Metallurgy and Petroleum Standards for Mineral Resources and Mineral Reserves, Definitions and Guidelines, May 2014 (the “CIM Standards”). The CIM
Standards differ significantly from the historic standards in the United States included in U.S. Securities and Exchange Commission (the “SEC”) Industry Guide
7.
The SEC has adopted amendments to its disclosure rules to modernize the mineral property disclosure requirements for issuers whose securities are registered
with the SEC under the U.S. Securities Exchange Act of 1934, as amended. These amendments became effective February 25, 2019 (the “SEC Modernization
Rules”) with compliance required for the first fiscal year beginning on or after January 1, 2021. Under the SEC Modernization Rules, the historical property
disclosure requirements for mining registrants included in SEC Industry Guide 7 will be rescinded and replaced with disclosure requirements in subpart 1300 of
SEC Regulation S-K. As an issuer that is eligible to file reports with the SEC pursuant to the multi-jurisdictional disclosure system, the Company is not required
to provide disclosure on its mineral properties under the SEC Modernization Rules and will continue to provide disclosure under NI 43-101 and the CIM
Definition Standards.
As a result of the adoption of the SEC Modernization Rules, the SEC will recognize estimates of “measured mineral resources”, “indicated mineral resources”
and “inferred mineral resources.” In addition, the SEC has amended its definitions of “proven mineral reserves” and “probable mineral reserves” to be
“substantially similar” to the corresponding definitions under the CIM Standards that
3
are required under NI 43-101. Accordingly, during the period leading up to the compliance date of the SEC Modernization Rules, information regarding mineral
resources or mineral reserves contained or referenced in this AIF may not be comparable to similar information made public by companies that report in
accordance with U.S. standards. While the above terms are “substantially similar” to CIM Definitions, there are differences in the definitions under the SEC
Modernization Rules and the CIM Definition Standards. Accordingly, there is no assurance any mineral reserves or mineral resources that the Company may
report as “proven mineral reserves”, “probable mineral reserves”, “measured mineral resources”, “indicated mineral resources” and “inferred mineral resources”
under NI 43-101 would be the same had the Company prepared the reserve or resource estimates under the standards adopted under the SEC Modernization
Rules.
Currency Information
All currency references in this AIF are in United States dollars unless otherwise indicated. References to “Canadian dollars” or the use of the symbol “C$” refers
to Canadian dollars.
CORPORATE STRUCTURE
Name, Address and Incorporation
The Company was incorporated under the Canada Business Corporations Act (the “CBCA”) on April 11, 1996 under the corporate name “Line Islands
Exploration Inc.”. The articles were amended by a certificate of amendment dated December 9, 1999 changing the corporate name to “Dia Bras Exploration Inc.”
The Company changed its name to “Sierra Metals Inc.” by a certificate of amendment dated December 5, 2012. On June 19, 2014, the Company’s articles were
further amended to provide that meetings of shareholders may be held in (i) Canada, (ii) the United States of America or (iii) any city, municipality or other
country in which the Company is doing business.
The registered principal office of Sierra Metals is located at 161 Bay Street, Suite 4260, Toronto, Ontario, Canada M5J 2S1. The head office of the Company’s
Mexican subsidiaries is located at Calle Blas Cano de los Rios No 500, Colonia San Felipe, C.P 31203, Chihuahua, Chihuahua, Mexico. The head office of the
Company’s Peruvian subsidiaries is located at Av. Pedro de Osma, 450 Barranco, Lima, Peru.
4
Intercorporate Relationships
The Company carries on a significant portion of its business through a number of direct and indirect subsidiaries, as follows:
GENERAL DEVELOPMENT OF THE BUSINESS
Three-Year History and Recent Developments
2019
Peru
On February 13, 2019, the Company announced that Sociedad Minera Corona, S.A. (“Minera Corona”), one of its Peruvian subsidiaries, received approval from
SENACE (National Environmental Certification Service), the agency responsible for the evaluation of natural resources and production projects in Peru, with
respect to its recent Environmental Impact Assessment (“EIA”) study for the expansion of the tailings deposition facility at the Yauricocha Mine. With this
approval for the EIA study, the Company submitted and received approval on May 19, 2019, for the construction and operation of the phase 5 that will allow to
dispose over 1Mm3 of tailings overall.
On March 21, 2019, the Company announced that employees who were members of the Union of the Mine and Metallurgical Workers of Minera Corona,
representing approximately 66% of the employees at the Yauricocha Mine, initiated a strike action in protest of contractor changes made as part of regular
operations at the Yauricocha Mine. The Company suspended all mining and milling activities for the safety of all employees as of March 19, 2019. The Peruvian
Ministry of Labour, upon receiving notification by the Union of its intent to strike, indicated that the strike could not proceed. Once the strike had materialized,
they deemed the strike as illegal under current legislation. On April 12, 2019, the Company announced the resolution of the strike action at the Yauricocha Mine.
On June 27, 2019, the Company announced the receipt of its permit to construct the expansion of the tailing dam facility as well as its permit for the surface
drilling program at the Yauricocha Mine.
5
On December 19, 2019, the Company announced an updated Mineral Reserve and Resource Estimate at the Yauricocha Mine.
Mexico
On January 9, 2019, the Company reported that its expansion plans were on track at the Bolivar Mine. In July 2018, the Company had announced the results of a
PEA at Bolivar to achieve a sustainable and staged increase in mine production and mill throughput from 3,000 tonnes per day (“tpd”) to 3,600 tpd in Q1-2019,
and to 5,000 tpd by mid-2020. 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 allowed for finer grind size optionality.
On April 3, 2019, the Company announced positive results from a drilling program designed to test the continuity and characteristics of geophysical anomalies
identified in a recent Titan 24 Geophysical Survey. The areas drilled had been deemed as high-value targets within the Bolivar West zone, located at the Bolivar
Mine. Drilling identified and defined a new zone named West Extension to the Bolivar West zone which is an extension of the Bolivar West structure and is
within close proximity to the Bolivar West zone with similar characteristics.
On June 3, 2019, the Company announced that it had agreed to repurchase a royalty on the Cusi Mine from Minera Cusi SA de CV, for US$4.0 million. The
royalty agreement required the Company to pay a 3% royalty on the net revenues generated by the mine, less transportation costs, for the life of the Cusi Mine.
The Company already paid US$2.5 million upon signing the repurchase contract on May 10, 2019 and is required to pay a further US$1.5 million on May 10,
2021.
On December 31, 2019, the Company announced an update to its Mineral Resource Estimate at the Bolivar Mine.
The Company released another update on this Mineral Resource and Reserve Estimate on March 31, 2020 (see “General Development of the Business – 2020 –
Mexico”) as detailed herein.
Financing and Corporate Activities
Repayment of Fideicomiso de Fomento Minero (“FIFOMI”) Loan in Mexico
During February 2019, the Company repaid the remaining US$1,657,000 owed on Dia Bras Mexicana S.A. de C.V. (“Dia Bras Mexicana”)’s loan from
FIFOMI. Dia Bras Mexicana is a wholly-owned subsidiary of Sierra Metals. This repayment, prior to the loan’s maturity date, did not result in any financial
penalties and was within the terms of the agreement.
Closing of New Senior Secured US$100 Million Corporate Credit Facility
The Company, together with Dia Bras Peru S.A.C. and Dia Bras Mexicana, as co-obligors, entered into a new six-year senior secured corporate credit facility
(“Corporate Facility”) dated March 8, 2019, as amended on July 12, 2019, with Banco de Credito del Peru, as lender, and Banco de Credito del Peru, as
administrative agent and agent of guarantees, that provides funding of up to US$100 million. 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 also
used a portion of the proceeds of the Corporate Facility to repay old debt balances.
The key 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.
6
Changes to the Board
On April 4, 2019, the Company announced the appointment of Ricardo Arrarte to the board of directors of the Company (the “Board”). Mr. Arrarte filled the
vacancy created by the resignation of Philip Renaud.
On July 15, 2019, the Company announced the appointment of Koko Yamamoto to the Board. Ms. Yamamoto was also appointed to the audit committee of the
Board (the “Audit Committee”) and would serve as its Chair.
Automatic Share Purchase Plan and NCIB Amendment
On April 15, 2019, the Company announced that, in connection with its normal course issuer bid (“NCIB”), it had entered into an automatic share purchase plan
(the “ASPP”) with CIBC Capital Markets (“CIBC”), the Company’s designated broker for the NCIB.
The ASPP permitted CIBC to purchase Common Shares at times when the Company ordinarily would not be active in the market due to insider trading rules and
its own internal trading blackout periods. Purchases were only to be made by CIBC based upon parameters set out by the Company prior to the commencement
of any such blackout period and in accordance with the terms of the ASPP. Outside of these blackout periods, Common Shares would continue to be purchased at
the Company’s discretion, subject to the rules of the TSX and applicable securities laws. The Company’s NCIB commenced on December 17, 2018 and remained
active until December 16, 2019.
On September 18, 2019, the Company announced its intention to amend the NCIB to increase the number of Common Shares which the Company was permitted
to repurchase for cancellation thereunder from 1,500,000 Common Shares to 2,500,000 Common Shares. Other than the increase to the maximum number of
Common Shares purchasable by the Company pursuant to the NCIB, no other amendments had been made to the NCIB. The Company purchased a total of
2,012,654 Common Shares under the NCIB.
Management Changes
On August 1, 2019, the Company announced the mutually agreed upon departure of Gordon Babcock, its Chief Operating Officer. Mr. Babcock’s responsibilities
were taken over by Alonso Lujan, Vice President Exploration and Country Manager Mexico, and James Leon, Country Manager Peru.
2020
Peru
On February 3, 2020, the Company filed a technical report with respect to the updated Resource and Reserves Estimates at the Yauricocha Mine effective as of
October 31, 2019.
On March 17, 2020, the Company announced that the Peruvian government had declared a 15-day state of emergency to contain the advancement of COVID-19,
which restricted travel within the country and required citizens to remain at home with the exception of grocery, banks and medical. On March 26, 2020, the
Peruvian government extended the state of emergency for an additional 13 days until April 12, 2020. As such, all mining activities and permitting submissions in
Peru were also halted, which in general resulted in a delay in all permits being issued. Pursuant to this declaration, the Company also ceased its mining operations
at the Yauricocha Mine, with the exception of emergency staff as permitted by the government. Due to the uncertainty of the effect that the COVID-19 pandemic
could have on the Company’s operations and financial condition, and due to rapidly changing developments, the Company started implementing proactive and
reactive mitigation measures to minimize any potential impacts that COVID-19 may have on its employees, communities, operations, supply chain and finances.
This also included preserving capital and deferring capital programs, where appropriate, in order to improve liquidity. The Company continued to maintain its
guidance due to the operating flexibility of its Yauricocha Mine and the current normal operation of its Mexican mines.
The state of emergency was extended twice subsequently, on April 9, 2020 until April 26, 2020 and on April 26, 2020 until May 10, 2020.
On May 25, 2020, the Company announced that the Peruvian Government had extended its state of emergency and a nationwide lockdown to fight the COVID-
19 pandemic until June 30, 2020. This extension came with the reopening of certain economic activities. Large open-pit mines and a select number of
underground mines in the country received permission to restart operations in phase one. It was anticipated that the second group of mining companies would be
included in phase two. This phase two of the economic recovery
7
plan was activated effective June 5, 2020, which allowed the Company to begin to recall required furloughed employees and contractors and to progressively
start ramping up the Yauricocha mine operations back up to full capacity.
In July 2020, the Company obtained from the Servicio Nationale de Certification - SENACE (National Service for Environmental Certification of Sustainable
Investments) the permit to dispose underground mine waste through a technical report, Informe Técnico Sustentatorio. In November 2020, the Company, as a
part of its permitting strategy, obtained the operation permit of the phase 5-1 to dispose tailings.
On November 18, 2020, the Company reported the results of a PEA completed for the Yauricocha Mine and also announced the large increase in the Mineral
Resource estimate for Yauricocha.
Mexico
On February 6, 2020, the Company announced the settlement of the P&R Litigation (as defined herein). The accord was executed in The Second District Court
(the “Court”) in the state of Chihuahua, Mexico. The declaration of the termination of P&R Litigation was issued by the Court on February 6, 2020. This
settlement ends all claims against and litigation against the Company and Dia Bras Mexicana from P&R. The impact of the settlement amount paid on the
Company’s financial condition and operating results was not significant.
On March 31, 2020, the Company announced an update to its Bolivar Mineral Resource and Reserves estimates, which included additional information for
drilling that took place between October and December 2019 of approximately 10,203 meters as well as results from a litho-structural model.
On April 1, 2020, the Company announced that the Mexican Federal Government had suspended all non-essential activities in Mexico for 30 days to contain the
advancement of COVID-19 virus. This suspension includes all mining activities from March 30, 2020 to April 30, 2020. As a result of this declaration, the
Company decided to maintain only an essential services crew at the Bolivar Mine site until April 30, 2020. The Cusi Mine site was placed into care and
maintenance during this period.
On April 26, 2020, the Mexican Federal Government announced the extension of the suspension until May 30, 2020, except for municipalities that present a low
or null transmission of COVID-19 as on May 18, 2020. Based on this announcement, the Company resumed its operations at the Bolivar Mine on May 18, 2020
because of its remote location. The Cusi Mine continued to remain in care and maintenance due to its proximity to urban communities.
On May 14, 2020, the Company filed a NI 43-101 Technical Report in support of the March 31, 2020 update on the Bolivar Resources and Reserves.
On May 14, 2020, the Mexican Federal Government issued a communication stating that the effective date for Mining to be deemed an essential service was
June 1, 2020. Following this announcement, the Company began recalling employees from the Bolivar Mine to begin a COVID-19 screening process, including a
quarantine period, allowing the Company to be ready to commence mining activities on June 1, 2020. The Cusi Mine continued to remain in care and
maintenance.
On June 18, 2020, the Company announced the discovery of a new high-grade silver zone with significant widths in an area called Northeast – Southwest System
of Epithermal Veins at its Cusi Mine. This new high-grade silver vein system was discovered as a consequence of a combination of mine development work in
recent months and confirmatory drilling, which included true widths of 17.45 meters of 428 g/t silver (464 g/t silver equivalent), 9.35 meters of 304 g/t silver
(327 g/t silver equivalent), 8.75 meters of 303 g/t silver (322 g/t silver equivalent) and 4.90 meters of 1,140 g/t silver (1,163 g/t silver equivalent). The Company
also announced its plans to drill an additional 1,000 meters to better understand the extension of the zone at depth and to Northeast.
With the June 18, 2020 announcement, the Company also provided an operational update for the Cusi Mine. This included the management team’s efforts to
complete an optimised view of the entire mine operation during the period of care and maintenance. The Company announced the following as part of the
optimization of Cusi’s operations:
●
Changes on the interpretation of the geological system made based on updated information from a stockwork tonnage system to a vein model system,
which is expected to help better control and improve head grades, dilution, and make better use of Cusi’s silver mineral resources.
●
The Company’s plan to use a sublevel stoping method for extraction, which is better suited to the rock/mineral environment.
8
●
Extension of the main access ramp to an opening of four meters by four meters, which will allow for the use of larger 30-ton capacity trucks into the
mine and improve the efficiency of ore haulage coming from the mine.
The operational update included announcement of restart of mine development work and possible commencement of operations once the development work was
complete. Production was anticipated to include ore from Santa Rosa de Lima zone, the Promontorio zone, as well as from a series of east-west vein systems
including the new zone announced as part of the press release. Additionally, major projects during the second half of the year would include studies on the
potential expansion of Cusi, a new tailings dam near the Mal Paso Mill, and infill drilling at the Santa Rosa de Lima, Promontorio, and San Nicolas zones to
improve and build on mineral resources at the mine.
On July 28, 2020, the Company announced the restarting of production at the Cusi Mine.
On October 20, 2020, the Company reported the results of a PEA for doubling its output at the Bolivar Mine to 10,000 tpd.
On November 5, 2020, the Company announced filing of the Bolivar PEA Technical Report for the results reported on October 19, 2020.
On November 18, 2020, the Company announced an update on the Cusi Mineral Resource Estimate, which was the result of drilling programs completed
between January 2018 and August 2020. The updated Resource Estimate incorporated new exploration drilling, sampling, and underground mapping information
into the geologic interpretation and grade estimations, thereby providing more refined resource models in the Santa Rosa de Lima and Northeast-Southwest
zones. The updated Mineral Resource Estimate disclosed the following:
●
Total Measured and Indicated Resources increased 18% to 5,356,000 tonnes from 4,557,000 tonnes previously reported; and Total Inferred Resources
increased 200% to 4,893,000 tonnes from 1,633,000 tonnes previously reported.
●
Total Measured Mineral Resources for Cusi are 850,000 tonnes averaging 213 g/t silver, 0.06 g/t gold, 0.26% lead and 0.30% zinc, and 231 g/t silver
equivalent.
●
Total Indicated Mineral Resources for Cusi are 4,506,000 tonnes averaging 176 g/t silver, 0.13 g/t gold, 0.54% lead, 0.63% zinc and 212 g/t silver
equivalent.
●
Total Inferred Mineral Resources for Cusi are 4,893,000 tonnes averaging 146 g/t silver, 0.18 g/t gold, 0.43% lead, 0.69% zinc and 183 g/t silver
equivalent.
On December 10, 2020, the Company reported the results of a PEA for doubling its output at the Cusi Mine to 2,400 tpd. Highlights of the PEA included:
●
After-tax Net Present Value (NPV): US$81 million at an 8% discount rate assuming a long-term silver price of $20/oz
●
Incremental benefit of increasing the production to 2,400 tpd from 1,200 tpd is estimated to have an after tax NPV (@8%) of US$28.1 million, and IRR
of 46.8%
●
Net After-tax Cash Flow: US$134 million
●
LOM & Sustaining Capital Cost: US$91 million
●
Total Operating Unit Cost: US$35.24/tonne and US$8.83/oz silver equivalent
●
Plant Processing Rate after expansion: 2,400 tpd
●
Average LOM Grades for Silver 127.2 g/t (4.1 oz/t), Gold 0.12 g/t, Zinc 0.48% and Lead 0.34%
●
Mine Life: 13 years based on existing Mineral Resource Estimate
●
LOM Silver Payable Production: 33.4 million ounces
On December 22, 2020, the Company announced the filing of a NI 43-101 technical report corresponding to the November 18, 2020 announcement of the
increase in mineral resources at Cusi Mine.
Financing and Corporate Activities
On January 8, 2020, the Company announced that, as a result of entering into a new phase as a generator of free cash flow, it was in a position to start returning
capital to its shareholders. In this regard, the Board approved a plan to return up to $30 million to shareholders in the coming year. In furtherance of this plan, the
Company announced its intention to launch a substantial issuer bid (the “SIB”) pursuant to which the Company would offer to repurchase for cancellation up to
$15 million in value of Common Shares from
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shareholders for cash. The SIB was intended to proceed by way of a modified Dutch auction and would be funded with available cash on hand.
In the first quarter of 2020, metal prices weakened due to the impact of COVID-19. Since the extent and duration of the impacts of COVID-19 on the metal
prices and the operations of the Company were still unknown at that time, the Company postponed the contemplated SIB.
On May 19, 2020, the Company announced the appointment of Luis C. Marchese as Chief Executive Officer, effective June 1, 2020. Mr. Marchese replaced
Sierra Metals’ then current President and Chief Executive Officer, Igor Gonzales, who resigned this position effective May 31, 2020 and his Board seat effective
May 19, 2020. Mr. Marchese joined the Board effective immediately.
On August 1, 2020, Gabriel Pinto Gregori started with the Company as Vice President, Sustainability and Corporate Affairs.
2021
Peru
On March 16, 2021 the Company announced receipt of its environmental permit for a 20% increase of throughput to 3,600 tpd at the Yauricocha Mine. This was
followed by the receipt of the Informe Tecnico Minero (ITM) permit from the Ministry of Energy and Mines that allowed for the construction and operation
capacity of 3,600 tpd effective June 16, 2021.
Mexico
On January 6, 2021, the Company announced the filing of the Cusi PEA Technical Report.
On April 16, 2021, the Company announced the approval by its Board for an investment of $28 million for the construction of a magnetite processing plant at the
Bolivar Mine. The plant is expected to produce approximately 500,000 tonnes of 62% iron ore fines concentrate each year.
On August 16, 2021, the Company released results of the updated 10,000 tpd PEA results to include the iron ore production at Bolivar. Highlights of this PEA
included:
●
Updated After-tax Net Present Value (NPV): US$361 million vs. US$283 million previously at an 8% discount rate
●
The incremental benefit includes iron ore production and increasing production to 10,000 tpd from 5,000 tpd is now estimated to have an after-tax NPV
(@8%) of US$78.2 million, an IRR of 69.0% vs. an NPV of US$57.4 million, and an IRR of 27.9% previously reported
●
Net After-tax Cash Flow: US$650 million vs. US$521 million previously
●
LOM & Sustaining Capital Cost: US$345 million
●
Total Operating Unit Cost: US$25.62/tonne and US$1.50/lb copper equivalent
●
Average LOM Copper Grade 0.72%
●
Average LOM Iron Ore Grade 13.5% from ROM ore, 15% from long term residues stockpile
●
Copper Price Assumption US$3.05/lb
●
Iron Ore Concentrate Price Assumption for 62% Fines US$75.90/DMT
●
MineLife: 14 years based on existing Mineral Resource Estimate
●
LOM Copper Payable Production: 551 million pounds
On September 29, 2021, the Company filed the Bolivar PEA Technical Report.
Corporate
On January 8, 2021, the Company announced that the Board, supported by its management team and with the full support of Arias Resource Capital Fund L.P.
("ARCF I"), Arias Resource Capital Fund II L.P. (the Company’s then two largest shareholders) and Arias Resource Capital Fund II (Mexico) L.P., had
commenced a process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value (the “Strategic Process”). The Company
engaged CIBC World Markets Inc. to assist the Board in its review of strategic alternatives.
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Jill Neff resigned as Corporate Secretary of the Company effective January 15, 2021 and Ed Guimaraes, Chief Financial Officer, assumed the responsibilities of
interim Corporate Secretary effective January 16, 2021.
On January 21, 2021, the Company, through a press release, made reference to the announcement made earlier that day by ARCF I regarding its distribution of an
aggregate of 52,721,964 Common Shares from ARCF I to its underlying limited partners which was made in connection with the winding-up and dissolution of
ARCF I. The Company confirmed that the Strategic Process continued to have the full support of the Board, management team, Arias Resource Capital Fund
II L.P. (now the Company’s largest shareholder) and Arias Resource Capital Fund II (Mexico) L.P.
On January 29, 2021, the Company announced the appointment of Jose Vizquerra Benavides as the Chairman of the Board, replacing Alberto Arias. Alberto
Arias continues to remain as a member of the Board.
Following the results of the voting at the Company’s Annual General Meeting held on June 30, 2021, Mr. Alberto Arias and Mr. Ricardo Arrarte resigned as
directors of the Company.
On October 7, 2021, Mr. Carlos E. Santa Cruz and Mr. Oscar Cabrera were appointed to the Board.
On October 7, 2021, the Company announced the completion of the Strategic Process. With this completion, the Company also indicated its continued focus on
growing its metal production, with increased focus on copper and steel-making products, and production of precious metals as a valuable cost-credit byproduct.
On October 7, 2021 the Company also announced that the Board approved an annual dividend of $5 million or $0.03 per Common Share. This dividend was
declared on November 5, 2021 and paid on December 7, 2021 to shareholders of record at the close of business on November 22, 2021.
2022
On January 20, 2022, the Company announced results of the Yauricocha PEA Technical Report, including the latest reported resources and revised pre-feasibility
study (“PFS”) level capex and opex estimations. Highlights of the Yauricocha PEA Technical Report included:
●
Updated Mine plan based on the last reported resource, prepared by SRK and dated March 31st, 2021
●
PFS level CAPEX and OPEX estimation for expansion
●
Mine plan includes updated mineral resources, including inferred resources
●
Expansion Development Capital (Years 1-3): US$102.2 Million
●
LOM after-tax Net Present Value (NPV): US$273.1 Million at an 8% discount rate
●
LOM Net After-tax Cash Flow: US$407.7 Million
●
LOM & Sustaining Capital Cost: US$312.1 Million
●
Average LOM Operating Unit Cost: US$44.01/tonne and US$1.30/lb copper equivalent
●
Mine Life: 11 years based on existing Mineralized material estimate of 17.4 Mt.
●
Average LOM Grades of Copper 1.2%, Zinc 1.4% Silver 31.12 g/t (1.00 oz/t), Lead 0.4% and Gold 0.398 g/t (0.013 oz/t)
●
LOM Payable Production: Copper 332.9 million pounds, Zinc 399.9 million pounds, Silver 10.9 million troy ounces, Lead 131.2 million pounds and
Gold 19.9 thousand troy ounces
●
Metal Price Assumptions: Copper US$3.39/lb, Zinc US$1.10/lb, Silver US$21.02/oz, Lead US$0.91/lb, Gold US$1,598/oz.
On January 27, 2022, the Company announced changes to its organizational structure, following the Strategic Review. In connection with the changes to the
organizational structure, the Company also announced the appointment of:
●
Mr. James Leon as Vice-President, Operation, effective February 1, 2022.
●
Mr. Alonso Lujan as Vice- President, Exploration effective February 1, 2022.
●
Mr. Alberto Calle as Vice-President, Human Resources effective November 1, 2021
●
Mr. Juan Jose Mostajo as Vice-President, Legal Affairs effective December 1, 2021.
On February 24, 2022, the Company announced the appointment of Dawn Whittaker to the Board, effective immediately.
11
DESCRIPTION OF THE BUSINESS
General
Summary
Sierra Metals is a diversified Canadian 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 zinc, copper and lead concentrates with gold and silver by-products from its polymetallic circuit at the Yauricocha Mine; copper
concentrates at the Bolivar Mine; and a silver-lead concentrate at the Cusi Mine. These concentrates are sold to international metal traders who in turn sell and
deliver these products to different clients around the world.
The breakdown of revenue from metals payable by product for 2021 and 2020 is as follows:
By Revenue (%)
2021
2020
Silver
24 %
23 %
Copper
35 %
39 %
Lead
10 %
9 %
Zinc
26 %
20 %
Gold
5 %
9 %
Peru – Yauricocha Mine
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.
Polymetallic ore is processed and treated in a polymetallic circuit.
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 rated at 5,000 tpd depending on the work index.
Mexico – Cusi Mine
Mining at the 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 three ball mills: (1) 8´ x 14´ mill, with capacity of 28 tph; (2) 8´ x 7´ mill, with capacity of 13
tph; and (3) 7´ x 10´ mill, with capacity of 9 tph. Total capacity between the three mills is 50 tph, or 1,200 tpd.
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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.
Cycles
The mining and exploration industry is cyclical in nature. The mining industry is subject to commodity pricing, which is in turn affected by other economic
indicators and worldwide cycles. The pricing cycles that the mining industry experiences affect the overall environment in which the Company conducts its
business. For example, if commodity pricing is low, Sierra’s access to capital may be restricted. Continuing periods of low commodity prices or economic stalls
could also affect the economic potential of the Company’s current properties and may affect its ability to, among other things: (i) capitalize on financing,
including equity financing, to fund its ongoing operations and exploration and development activities; and (ii) continue exploration or development activities on
its properties.
Furthermore, weather cycles may affect the Company’s ability to conduct exploration activities at its mines, including the Yauricocha Mine, Bolivar Mine and
Cusi Mine. More specifically, drilling and other exploration activities may be restricted during periods of adverse weather conditions or winter seasons as a result
of weather-related factors, including inclement weather, snow covering the ground, frozen ground and restricted access due to snow, ice, or other weather-related
factors.
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:
●
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;
13
●
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, 2020 were not material.
Employees
As at December 31, 2021, the Company and its subsidiaries had 625 employees in Peru, 809 employees in Mexico, and 6 employees in Canada.
Social or Environmental Policies
The Company works towards building 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. The Company has developed and in December 2020, approved the Sustainability Policy,
Environment Policy and Health and Safety Policy, which are currently under implementation.
Sustainability Policy
The Company’s vision is to achieve development that is shared with the communities around its operating locations, with the goal of mutual well-being of all
stakeholders for both the mid- and long-term.
In order to achieve this, the Sustainability Policy contemplates the Company:
●
Maintaining an open, transparent and collaborative relationship with those living in the surrounding communities, their organizations and government
entities. These relationships are based on mutual respect and maintaining an inclusive and cooperative dialogue.
●
Identifying, respecting and supporting the development aspirations of the people residing in surrounding communities, establishing shared activities that
support the development of those aspirations within a suitable time frame.
●
Complying with all commitments made to the surrounding communities. The Company understands that this is a collaborative effort and so it
encourages the participation of third parties when defining and fulfilling commitments.
●
Providing opportunities for the inhabitants of the surrounding communities to provide goods and services for the Company’s activities when required.
●
Ensuring the development of and access to mechanisms that allow those residing in the surrounding communities to express their concerns, and also
addressing those concerns preemptively and ensuring they are answered.
●
Fighting corruption. In order to do this, the Sustainability Policy contemplates compliance with all anti-bribery and anti-corruption laws and regulations
that may apply when conducting business and activities, as established in the company’s policies.
Environmental Policy
The Company envisions itself as a leading company when it comes to minimizing impacts on the environment and the active prevention of environmental
pollution in underground polymetallic mining.
The Environmental Policy contemplates the Company:
●
Ensuring compliance with the legislation in the countries in which it operates, and also complying with its commitments.
14
●
Ensuring that potential environmental impacts caused by the Company’s activities are identified ahead of time, and that control measures are
implemented to eliminate or minimize these impacts.
●
Ensuring the development, implementation and maintenance of an Environmental Management System that makes it possible to manage environmental
aspects of and impacts on all its operations.
●
Putting in the necessary effort to implement the best possible industry practices, when technologically possible and economically viable, including the
use of clean energy.
●
Establishing environmental performance objectives and goals in its operations, as well as measuring their performance and framing them within a
process of continuous improvement.
●
Encouraging responsible and efficient water use in its operations.
●
Promoting a culture of environmental responsibility among its employees and contractors, as well as with its stakeholders.
●
Ensuring that its employees and contractors clearly understand their responsibility to maintain proper environmental management in their activities.
●
Communicating the Environmental Policy to all its employees and contractors, as well as stakeholders upon request.
Health and Safety Policy
The Company is aware that in order to achieve its vision of being a leading polymetallic production company with a world-class reputation in all aspects of its
operations, it has the responsibility to maintain safe and healthy workplaces for all its employees and partners. As such, the Health and Safety Policy
contemplates the Company:
●
Complying with legislation in the countries in which it operates, and with proper industry standards.
●
Promoting a culture of safety throughout the organization that supports its vision and values as a company. In order to do this, the Company will
establish clearly defined objectives framed within a culture of ongoing improvement, which will be periodically communicated and evaluated.
●
Ensuring that dangers and risks that could cause death or severely damage the health of its employees and contractors are identified and mitigated in
advance, through the implementation of a Health and Safety Management system within its operations.
●
Providing the leadership and resources necessary to develop, implement and maintain its Health and Safety Management systems.
●
Ensuring that all its employees and contractors have the training and knowledge necessary to carry out their activities safely, and that they clearly
understand their responsibilities regarding health and safety.
●
Maintaining open and transparent communication and consultation with its employees about decision-making processes related to health and safety,
using the appropriate channels.
●
Communicating the Health and Safety policy to all its employees and contractors, as well as making it available to stakeholders.
The Sustainability Policy, Environmental Policy and Health and Safety Policy are applicable to all employees of Sierra Metals and its subsidiaries, as well as
companies that are contracted for Sierra Metals 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.
15
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 EIA, 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); 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%.
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. This rate applies to dividends that correspond to profits generated since January 1, 2017.
Profits generated up to December 31, 2014 are subject to a withholding tax rate of 4.1%, and profits generated between January 1, 2015 and December 31, 2016
are subject to a withholding tax at a rate of 6.8%, even if the relevant profits are distributed in future years.
Peru’s transfer-pricing rules apply to cross-border and domestic transactions between related parties and to all transactions with residents in tax-haven
jurisdictions. The transfer-pricing rules also apply to transactions with residents in non-cooperating jurisdictions, as well as transactions with residents whose
revenue or income is subject to a preferential tax regime.
In Peru, the Board will be responsible for approving the entity’s tax planning. This obligation cannot be delegated.
Peru has entered into double tax treaties with Brazil, Canada, Chile, Korea (South), Mexico, Portugal Switzerland and Japan. This last treaty will become
effective as from January 1, 2022, but provisions concerning the exchange of information and the assistance in the collection of taxes entered into force on
January 29, 2021. It has also entered into an agreement to avoid double taxation with the other members of the “Comunidad Andina” (Bolivia, Colombia and
Ecuador).
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.
16
The mining industry in Mexico is controlled by the Secretaría de Economía through the Dirección General de Minas, which is officially located and administered
from Chihuahua City, with offices in 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. Federal, 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.
Concessionaires must perform work each year that begins within ninety days of the concession being granted. Concessionaires must file proof of the work
performed every year by the end of 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:
●
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 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.
●
Additional mining fee:
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.
●
Extraordinary 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.
On April 20, 2021, the Mexican Government enacted labor and tax laws that prohibit outsourcing of workers. Following these reforms, employers in Mexico can
only hire outsourced workers for specialized services when the activities they perform are not part of the company’s corporate purpose and its principal economic
activities. Companies with specialized service providers, such as administrative
17
support, catering staff, cleaning crews, maintenance, security services and specialized engineering worker, are not subject to these restrictions. For the specialized
services, the labor reforms require individuals or entities providing services to be registered with the Secretariat of Labor and Social Welfare and that such
registration be approved every three years.
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 and implemented by the Company’s senior management. The relevant
features of these systems are set forth below.
The Company’s corporate structure has been designed to ensure that the Company controls, and/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 International Financial Reporting Standards (“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 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.
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, Dionisio Romero (Director), Jose Vizquerra Benavides (Director), Oscar
Cabrera (Director), Carlos Santa Cruz (Director), Luis Marchese (Chief Executive Officer), Ed Guimaraes (Chief Financial Officer), Alonso Lujan (Vice
President,
18
Exploration), Americo Zuzunaga (Vice President Corporate Planning), James Leon (Vice President Operations), Gabriel Pinto (Vice President Sustainability and
Corporate Affairs), Juan Jose Mostajo (Vice President Legal Affairs), Alberto Calle (Vice President Human Resources) and Rajesh Vyas (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 Minera Corona, which in turn owns 100% of the Yauricocha Mine.
Yaurocicha PEA Technical Report
The following is the summary section of the Yaurocicha PEA Technical Report, prepared by SRK Consulting (Canada) Inc. (“SRK”), and signed by Qualified
Persons Américo Zuzunaga Cardich, Sierra Metals Inc., Vice President Corporate Planning, Andre Deiss, BSc. (Hons), Pr. Sci. Nat., SRK Principal Consultant
(Resource Geology), Carl Kottmeier, B.A.Sc., P. Eng., MBA, SRK Principal Consultant (Mining) Daniel H. Sepulveda, BSc., SME-RM, SRK Associate
Consultant (Metallurgy) and Mr. Enrique Rubio, Ph.D., Executive Director, Redco Global Peru S.A.C. (Reserves, Mining). The full text of the Yaurocicha PEA
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 Yaurocicha PEA Technical Report.
“1 EXECUTIVE SUMMARY
The purpose of this Preliminary Economic Assessment (PEA) is to present an update on Resources by SRK Consulting (Canada), Inc. (SRK) for Sierra
Metals, Inc. (Sierra Metals or the Company) on the Yauricocha Mine (Yauricocha or Project), which is located in the eastern part of the Department of Lima,
Peru. Sierra 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 to 5,500 tpd (2.0 Mt/y) in 2024.
This PEA report provides a Mineral Resource Estimate and a classification of resources prepared in accordance with the Canadian Institute of Mining,
Metallurgy and Petroleum Standards on Mineral Resources and Reserves: Definitions and Guidelines, May 10, 2014 (CIM).
This PEA report is not a wholly independent report as some sections have been prepared and signed off by qualified personnel (QP) from SRK, Sierra Metals, the
project owner, and Redco Global Peru S.A.C. (Redco), a Chilean mining consulting firm, with the term QP used here as it is defined under Canadian Securities
Administrator’s National 43-101 (43-101) guidelines. The QPs responsible for this report are listed in Sections 2.1, 2.2 and 2.3.
1.1
PROPERTY DESCRIPTION AND OWNERSHIP
The Yauricocha Mine is 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 12.3105⁰ S and 75.7219⁰ 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
(Gustavson, 2015).
The current operation is an underground polymetallic sulfide and oxide operation, providing material for the nearby Chumpe process facility. The mine has been
operating continuously under Sociedad Minera Corona S.A. (Minera Corona) ownership since 2002 and has operated historically since 1948. Sierra purchased
82% of Minera Corona in 2011.
1.2
GEOLOGY AND MINERALIZATION
The Yauricocha mine features several mineralized zones which have been emplaced along structural trends, with the mineralization itself related to replacement
of limestones by hydrothermal fluids related to nearby intrusions. The mineralization varies widely in
19
morphology from large, relatively wide, tabular manto-style deposits, to narrow, sub-vertical chimneys. The mineralization features economic grades of Ag, Cu,
Pb and Zn, with local Au to a lesser degree. The majority of the mineralization is related to the regional high-angle NW-trending Yauricocha fault, or the NE-
trending and less well-defined Cachi-Cachi structural trend. The mineralization generally presents as polymetallic sulfides but is locally oxidized to significant
depths or related to more Cu-rich mineralization.
1.3
STATUS OF EXPLORATION, DEVELOPMENT AND OPERATIONS
The mine is concurrently undertaking surface and underground exploration, development, and operations. Exploration is ongoing near the mine along the
regional geological and structural mineralized trends and is supported predominantly by drilling and exploration drifting. The mine is also producing several
types of metal concentrates from the underground mine areas.
1.4
MINERAL PROCESSING AND METALLURGICAL TESTING
Yauricocha is consistently producing commercial quality copper concentrate, zinc concentrate, and lead concentrate. Due to the small tonnage and/or lower
grades, the lead concentrate, when produced in the oxide plant, is blended in the plant with the concentrate produced from the polymetallic circuit to generate a
lead concentrate of commercial quality.
The plant has been subject to continuous improvements in recent years to improve recovery and deportment of metals. Recent improvements to the processing
facilities include:
●
Addition of one OK-50 flotation cell to add capacity to the Cu-Pb bulk flotation stage.
●
Installation of x-ray slurry analyzer for six streams: flotation feed, middling Zn feed, copper final concentrate, lead final concentrate, zinc final
concentrate and final tailings.
●
Mechanical rod feeder for primary rod mill grinding for improved safety and production.
●
Installation of 5 DR-180 cells in the Second Zn Cleaning Flotation Stage; 4 DR-180 cells in the Third Zn Cleaning Flotation Stage to improve the
Zn concentrate grade.
●
Installation of 10 DR-180 cells in the Bulk Cleaning Flotation Stage arranged in three banks to increase flotation retention time from 9 minutes to
17 minutes:
●
First Cleaning Flotation Stage (comprising 5 cells)
●
Second Cleaning Flotation Stage (comprising 3 cells)
●
Third Cleaning Flotation Stage (comprising 2 cells)
Table 1-1 shows the mill’s feed tonnages and head grades for the period of January 2019 to March 2021. In this period, there was no treatment of any oxide
mineralized material. Table 1-2 shows the plant’s performance from January 2013 to March 2021.
20
Table 1-1: Mill Tonnage and Head Grades, January 2019 to March 2021
Head Grade
Mineralized Material
Au
Ag
Pb
Cu
Zn
As
Period
(tonnes)
(g/t)
(g/t)
(%)
(%)
(%)
(%)
2021 Mar
111,007
0.47
55.36
1.1
0.6
3.3
0.13
2021 Feb
101,203
0.43
53.19
1.3
0.5
3.6
0.13
2021 Jan
110,273
0.42
53.81
1.6
0.5
4.2
0.15
2020 Dec
92,351
0.47
45.10
0.9
0.8
3.2
0.17
2020 Nov
114,503
0.53
49.45
1.0
1.0
3.6
0.15
2020 Oct
105,092
0.63
60.03
1.6
0.7
3.9
0.16
2020 Sep
100,989
0.49
56.30
1.5
0.8
4.0
0.18
2020 Aug
110,286
0.58
63.45
1.4
1.1
3.9
0.19
2020 Jul
103,000
0.58
65.94
1.7
1.1
4.2
0.18
2020 Jun
78,080*
0.63
60.96
1.5
1.0
3.7
0.18
2020 May
64,364*
0.68
69.65
2.0
1.1
3.9
0.17
2020 Apr
60,090*
0.53
69.69
1.4
1.6
2.7
0.29
2020 Mar
78,553*
0.63
70.85
1.6
1.2
3.9
0.21
2020 Feb
103,764
0.66
66.01
1.6
1.1
3.8
0.19
2020 Jan
102,908
0.75
61.89
1.5
1.1
4.1
0.18
2019 Dec
110,939
0.70
59.33
1.5
1.2
4.0
0.20
2019 Nov
101,862
0.55
58.74
1.7
0.9
4.1
0.16
2019 Oct
108,900
0.56
62.27
1.5
1.0
4.1
0.16
2019 Sep
100,030
0.51
63.02
1.5
1.1
3.6
0.17
2019 Aug
106,988
0.59
66.77
1.8
1.1
3.9
0.22
2019 Jul
100,221
0.64
69.25
1.7
1.1
3.9
0.25
2019 Jun
99,588
0.55
68.84
1.8
1.1
3.6
0.21
2019 May
101,502
0.65
59.55
1.5
0.9
3.3
0.19
2019 Apr**
53,075
0.61
59.25
1.3
1.1
3.0
0.18
2019 Mar**
51,707
0.59
64.91
1.5
1.2
3.3
0.20
2019 Feb
88,010
0.59
63.08
1.3
1.1
3.6
0.20
2019 Jan
94,097
0.50
63.15
1.6
0.9
3.7
0.20
Averages
94,570
0.57
61.48
1.5
1.0
3.7
0.19
Source: Sierra Metals, 2021
*
Production was affected by the Covid-19 pandemic.
**Production was affected by a strike at the mine.
21
Table 1-2: Yauricocha Metallurgical Performance, 2013 to 2021
Tonnes/day
Concentrate Grade
Metal Recovery
Period
Stream
Tonne
(@ 365 d/y) Au (g/t)
Ag (g/t)
Pb (%)
Cu (%)
Zn (%)
Au (%)
Ag (%)
Pb (%)
Cu (%)
Zn (%)
2013
Mineralized Material
641,268
1,757
83
1.5
0.7
4.1
100
100
100
100
Cu Con.
12,728
35
1,058
2.8
23.2
6.4
25.2
3.7
70.6
3.1
Pb Con.
14,258
39
1,300
53.4
1.8
5.9
34.7
80
6.3
3.2
Zn Con.
45,412
124.4
122
0.6
1
50.8
10.4
3
10.8
88.7
2014
Mineralized Material
703,713
1,928
84
1.8
0.7
4
100
100
100
100
Cu Con.
12,782
35
1,115
2.1
26.4
6.8
24.2
2.1
68
3.1
Pb Con.
18,055
49
1,398
58.6
1.5
4.9
42.8
83.9
5.3
3.2
Zn Con.
48,657
133
115
0.8
1.4
50.6
9.5
3.1
13.2
88.5
2015
Mineralized Material
618,460
1,694
79
1.6
0.6
3.4
100
100
100
100
Cu Con.
8,145
22
1,278
2.3
27.8
4.1
21.4
1.8
65.3
1.6
Pb Con.
14,463
40
1,656
59.5
1.1
4.3
49.3
85.7
4.7
2.9
Zn Con.
37,587
103
91
0.6
1.2
50.7
7.1
2.1
13.4
90.1
2016
Mineralized Material
698,872
1,915
0.5
80.3
1.8
0.6
3.9
100
100
100
100
100
Cu Con.
9,068
25
3.1
1,362.6
2.1
26.3
6.8
8.1
22.0
1.5
61.3
2.3
Pb Con.
18,014
49
1.7
1,470.8
59
1.2
4.8
9.1
47.2
86.3
5.6
3.1
Zn Con.
47,573
130
0.4
95.2
0.7
1.2
51.5
4.9
8.1
2.6
14.2
88.9
2017
Mineralized Material
966,138
2,647
0.6
66
1.5
0.7
3.9
100
100
100
100
100
Cu Con.
16,412
45
2.7
920.5
2.4
26.9
7.6
8.4
23.7
2.8
67.3
3.3
Pb Con.
21,731
60
1.8
1,242.3
56.8
2.5
5.5
7.4
42.3
86.9
8.4
3.2
Zn Con.
65,671
180
0.4
110.8
0.9
1.4
51.4
5.3
11.4
4.0
14.2
89.4
2018
Mineralized Material
985,679
2,700
0.6
58.4
1.3
0.9
3.8
100
100
100
100
100
Cu Con.
21,940
60
2.2
677.4
2.3
28.1
7.5
8.4
25.8
3.8
70.1
4.4
Pb Con.
20,146
55
2.2
1,087.5
56.1
3.3
5.7
7.6
38.1
85.8
7.5
3
Zn Con.
65,823
180
0.5
101.4
0.8
1.8
50.9
5.2
11.6
4.1
13.4
88.7
2019
Mineralized Material 1,092,410
2,993
0.6
63.9
1.6
1.1
3.7
100
100
100
100
100
Cu Con.
30,931
85
2.3
593.9
1.8
29.4
6
11
26.3
3.2
76.9
4.6
Pb Con.
26,574
73
2.1
1,131.6
57.6
2.4
5.5
8.4
43.1
88.8
5.4
3.6
Zn Con.
69,863
191
0.5
90.6
0.6
1.7
51
4.9
9.1
2.6
10.1
88
2020
Mineralized Material 1,109,730
3,040
0.6
61.0
1.5
1.0
3.8
100
100
100
100
100
Cu Con.
29,235
80
2.25
558.43
2.0 %
29.8 %
7.6 %
9.9 %
27.0 %
3.9 %
74.8 %
5.5 %
Pb Con.
24,777
68
2.41
1,069.00
57.2 %
2.1 %
5.1 %
9.1 %
43.6 %
87.8 %
4.6 %
3.1 %
Zn Con.
73,583
202
0.51
84.42
0.6 %
1.9 %
49.9 %
5.7 %
10.2 %
2.9 %
12.4 %
87.6 %
Mineralized
Material
322,483
3,534
0.44
54.1
1.3 %
0.6 %
3.7 %
100
100
100
100
100
2021*
Cu Con.
4,723
52
2.84
643.9
2.1 %
25.2 %
8.5 %
9.6 %
19.6 %
2.4 %
66.3 %
3.7 %
Pb Con.
6,884
75
1.93
1,136.8
56.4 %
1.4 %
5.7 %
9.5 %
49.6 %
89.8 %
5.5 %
3.3 %
Zn Con.
20,964
230
0.41
77.55
0.5 %
1.6 %
50.9 %
6.2 %
10.3 %
2.4 %
19.0 %
89.6 %
Source: Sierra Metals, 2021
*
January to March 2021
22
The fresh feed profile is shown in Figure 1-1. In terms of head grade, except for zinc, all other metals (Pb, Cu, Au, Ag) in the mill feed show a downward trend.
As shown in Table 1-2, the polymetallic circuit operated at an average of 3,040 tonnes per day of fresh feed in 2020 (assuming operation of 365 days per year)
and in Q1 2021, the average processing rate increased to 3,534 tonnes per day.
Source: SRK, 2021
Figure 1-1: Yauricocha Mill Feed – January 2019 to March 2021
Yauricocha’s concentrate production included lead concentrate, copper concentrate, and zinc concentrate as shown in Figure 1-2. Total production totalled
287,535 tonnes of combined concentrate or 11.4% mass pull. Zinc concentrate accounted for 6.5% of the total mass pull, copper concentrate reached 2.6% and
2.3% for lead concentrate.
Global recovery to concentrates reached 24.8% gold, 80.2% silver, 95.7% lead, 92.8% copper, and 96.4% zinc.
Source: SRK, 2021
Figure 1-2: Yauricocha, Global Concentrate Production – January 2019 to March 2021
23
In 2020, silver is preferably recovered with the lead sulfide concentrate and accounts for approximately 43.6% of the total silver recovered at Yauricocha. Copper
concentrate recovers approximately 27% of the silver, and zinc concentrate recovers 10.2%. The overall silver recovery at Yauricocha totaled 80.9% in 2020 and
79.5% during the first three months of 2021.
Yauricocha’s metallurgical laboratory has been testing samples from multiple sources, including polymetallic material from Esperanza, Cuerpo Contacto
Occidental, from Mina Mario among others. In most of the cases the metallurgical test results show good amenability to conventional processing and potential to
achieve commercial quality concentrates. Some samples show arsenic presence, while others achieve lower concentrate grades because of their higher oxides
content. In all cases, laboratory personnel are continuously investigating improved process conditions for treating the new sources of mineralized material.
1.5
MINERAL RESOURCE ESTIMATE
CIM Definition Standards for Mineral Resources and Mineral Reserves (May 2014) defines a Mineral Resource as follows:
“A Mineral Resource is a concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade or quality and quantity
that there are reasonable prospects for eventual economic extraction. The location, quantity, grade or quality, continuity and other geological characteristics of a
Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge, including sampling”.
The “reasonable prospects for economic extraction” requirement generally implies that the quantity and grade estimates meet certain economic thresholds and
that the Mineral Resources are reported at an appropriate cut-off value, taking into account extraction scenarios and processing recoveries. To assess this at
Yauricocha, the QP has calculated an economic value for each block in terms of US dollars based on the grade of contained metal in the block, multiplied by the
assumed recovery for each metal, multiplied by pricing established by Sierra Metals for each commodity. Costs for mining and processing are taken from data
provided by Sierra for their current underground mining operation.
The QP is of the opinion that the mineral resource estimations are suitable for public reporting and are a fair representation of the in-situ contained metal for the
Yauricocha deposit.
The March 31, 2021, consolidated Mineral Resource statement for the Yauricocha Mine is presented in Table 1-3. The detailed, individual tables for the various
Yauricocha mining areas are presented in Section 14 of this report.
24
Table 1-3: Consolidated Yauricocha Mine Mineral Resource Statement as of March 31, 2021 – SRK Consulting (Canada), Inc. (1) (2) (3) (4) (5) (6) (7) (8) (9)
Volume Tonnes Density
Ag
Au Cu
Pb
Zn
As
Fe
NSR
Ag
Au
Cu
Pb
Zn
As
Fe
Classification
(m3) '000
(K t)
(t/m3)
(g/t)
(g/t)
(%)
(%)
(%)
(%)
(%)
(USD/t)
(M oz)
(K oz)
(M lb)
(M lb)
(M lb)
(K t)
(M t)
Measured
1,262
4,241
3.36 59.41 0.58 1.08 0.92 2.62 0.19 25.02
131
8.1
79.3 100.8
86.2
245.3
7.9
1.1
Indicated
2,929
10,069
3.44 37.07 0.50 1.17 0.51 1.88 0.13 25.89
109
12.0 161.1 259.9
113.0
417.2
12.9
2.6
Measured +
Indicated
4,191
14,310
3.41 43.69 0.52 1.14 0.63 2.10 0.15 25.86
116
20.1 240.4 360.7
199.2
662.5
20.8
3.7
Inferred
3,337
11,566
3.47 29.04 0.44 1.40 0.32 1.03 0.07 26.38
103
10.8 161.8 358.1
82.7
261.9
8.3
3.1
Source: SRK, 2021
Notes
(1) Mineral Resources have been classified in accordance with the Canadian Institute of Mining, Metallurgy and Petroleum ("CIM")
Definition Standards on Mineral Resources and Mineral Reserves, whose definitions are incorporated by reference into NI 43-101.
(2) Mineral Resources are reported inclusive of Mineral Reserves. Mineral Resources are not Mineral Reserves and do not have
demonstrated economic viability. All figures are rounded to reflect the relative accuracy of the estimates. Silver, gold, copper, lead, zinc,
arsenic (deleterious) and iron assays were capped / cut where appropriate.
(3) The consolidated Yauricocha Resource Estimate is comprised of Measured, Indicated, and Inferred material in the Mina Central,
Cuerpos Pequeños, Cuye, Mascota, Esperanza and Cachi-Cachi mining areas.
(4) Polymetallic Mineral Resources are reported at Cut-Off values (COV) based on 2021 actual metallurgical recoveries and 2021 smelter
contracts.
(5) Metal price assumptions used for polymetallic feed considered CIBC November 2021 long term consensus pricing (Gold
(US$1,598/oz), Silver (US$21.02/oz), Copper (US$3.39/lb), Lead (US$0.91/lb), and Zinc (US$1.10/lb).
(6) Lead Oxide Mineral Resources are reported at COVs based on 2021 actual metallurgical recoveries and 2021 smelter contracts.
(7) Metal price assumptions used for lead oxide feed considered July 2021 long term consensus pricing (Gold (US$1,598/oz), Silver
(US$21.02/oz) and Lead (US$0.91/lb).
(8) The mining costs are based on 2021 actual costs and are variable by mining method.
(9) The unit value COVs are variable by mining area and proposed mining method. The marginal (incremental) COV ranges from US$31.7
to US$36.7 for a 5,500t/d operation.
1.6
MINERAL RESERVE ESTIMATE
A Mineral Reserve is the economically mineable part of a Measured and/or Indicated Resource. It includes diluting material and allowances for losses, which
may occur when the material is mined or extracted and is defined by studies at Prefeasibility or Feasibility level as appropriate that include the application of
Modifying Factors.
A Mineral Reserve has not been estimated for the Project as part of this PEA.
The PEA includes Inferred Mineral Resources that are considered too speculative geologically to have the economic considerations applied to them that would
enable them to be categorized as Mineral Reserves.
1.7
MINING METHODS
1.7.1
Mining
The Yauricocha Mine is a producing operation with a long production history. Most of the mining is executed through mechanized sub-level caving with a
relatively small portion of the mining using overhand cut and fill. The mine uses well-established, proven mining methods and is planning to increase the
production rate to 5,500 tpd (2.0 Mt/y) in 2024.
Polymetallic sulfide mineralized material accounts for more than 99% of the material mined at Yauricocha. Material classified as lead oxide can also be
encountered, but it is a minor component of the overall tonnage in the mineralized zones currently being mined.
25
The mine is accessed by two shafts, Central shaft and Mascota shaft, and the Klepetko and Yauricocha tunnels. Mineralized material and waste are transported
via the Klepetko tunnel at the 720 level (elevation 4,165 masl) which runs east-northeast from the mine towards the mill and concentrator, and the 4.7 km
Yauricocha tunnel, commissioned in 2018, that also accesses the mine at the 720 level. The Yauricocha tunnel was added to increase haulage capacity and serves
as a ventilation conduit. The Yauricocha shaft, currently under construction, will provide access down to 1270 level and is expected to be in production in 2025.
1.7.2
Geotechnical
The level plans and accompanying development profile and installation procedures are well developed and appropriate for operational application. Also, the
understanding of in-situ and induced stress for the current mining areas is satisfactory, but for the deeper planned mining areas, site specific stress measurements
and stress modeling were needed. Following these observations, Sierra and Redco jointly developed a mining study designed to support a growth scenario for the
Yauricocha mine. Preliminary 3D geomechanical and numerical models were constructed, and a geotechnical data collection campaign was established, with a
focus on deeper areas of the mine, to support future studies and estimations.
Based on the proposed campaign to strengthen the geomechanical information database, a field information collection program was conducted in the second half
of 2021 which consisted of logging diamond drill core and geomechanical mapping of the rock mass. The program sought to validate the geotechnical quality of
the rock through Bieniawski’s "RMR" and Barton’s "Q" classifications, as well as the measurement of in-situ efforts through acoustic emissions, all carried out in
the areas of Mina Central and Esperanza.
A total of 4,770 meters (accumulated) of geomechanical logging was conducted in drill holes for already drilled resources and included 30 UCS tests and 15 TX
tests (cumulative). In addition to this, 850 meters (cumulative) of logging of geomechanical drilling with oriented core was undertaken to determine the
orientation of the discontinuities (measurement of angles α and β), rock mass characterization (RMR, Q, GSI) and obtain samples for laboratory tests and
acoustic emissions. Finally, different stations were mapped to identify the arrangement of discontinuities and joints in each domain.
The current understanding of the conditions leading to a mud rush and the mitigation measures put in place are reasonable; however, the potential occurrence of a
mud rush event is an ever-present risk, particularly when entering new mining areas. Dewatering practices need to be maintained, existing drawpoints monitored,
and new areas investigated prior to being developed.
1.7.3
Hydrogeology
Past effort has been made to control or reduce water inflows. A large amount of data is available that could be used to understand the source of water, but the data
is not compiled in a manner that would permit this to be easily done.
In the past, drainage tunnels and exploratory test drill holes have been completed to control or reduce water inflows. Drain holes were completed in the 920 and
870 levels in Antacaca Sur, 920 level in Antacaca, 920 and 970 levels in Catas, and 870 and 920 levels in Rosaura. All these water management features were
oriented into the granodiorite to intercept water flows before reaching the subsidence zone. Some of drillholes were later cemented to reduce inflows into mining
zones.
During drilling, inflows were observed to decrease on the 820 and 870 levels, and post drilling, decreasing inflows were observed on the 920 level. Inflows in
Antacaca Sur and Rosaura have been reduced over time, but inflows appear to be increasing in Catas and Esperanza.
The Yauricocha mine has developed a conceptual hydrogeological-structural model that has allowed the mine to better understand the regional movement of
groundwater and to understand how water enters the mineralized bodies. This model has made it possible to understand the dynamics of the groundwater flow, as
correlated with the geological, structural and subsidence information produced. In addition, the execution of two drainage chambers at the extremes of Central
Mine. Esperanza (Phase III) and Antacaca Sur (phase I) mineralized zone is planned for 2022 to support ongoing data collection. This additional data will permit
refinements to the conceptual hydrogeological-structural model.
In conclusion, the mine has been able to manage water inflows sufficiently well to allow mining to safely proceed. As the mine expands, water inflows should be
expected to increase. Mitigation efforts should continue to be assessed and tested, but operational management plans should continue to assume that inflows and
mud rush potential will increase until such a time that the effectiveness of mitigation efforts can be proven, or decisions are made to address water-related risks
through other management plans.
26
1.8
PROJECT INFRASTRUCTURE
The Project is a mature producing mine and mill and all required infrastructure is fully functional. The Project has highway access with two routes to support the
Project’s needs, and the regional capital Huancayo (population 340,000) is within 100 km. Personnel travel by bus to the site and are accommodated in four
camps. There are currently approximately 1,460 personnel on-site with 400 employees and 1,060 contractors.
The on-site facilities include the processing plant, mine surface facilities, underground mine facilities, tailings storage facility (TSF), and support facilities. The
processing facility includes unit processes such as crushing, grinding, flotation, dewatering and concentrate separation, concentrate storage, and thickening and
tailings discharge lines to the TSF.
The underground mine and surface facilities include headframes, hoist houses, shafts and winzes, ventilation structures, mine access tunnels, waste storage
facilities, powder and detonator magazines, underground shops, and diesel fuel and lubrication storage. The support facilities include four accommodation camps
where personnel live while on site, a laboratory, change houses and showers, cafeterias, medical facility, engineering and administrative buildings, and
miscellaneous equipment and electrical shops to support the operations.
The site has existing water systems to manage the Project’s water needs. Water is sourced from Acococha Lagoon, Mishquipuquio and Huacuypacha Spring,
Klepetko tunnel and recycle/overflow water from the TSF, depending on end use. Water treatment systems treat the raw water for use as potable water or for
service water in the plant. Additional systems treat the wastewater for further consumption or discharge.
Energy for the site is available through electric power, compressed air, and diesel. The electric power is supplied by contract over an existing 69 kV line to the
site substation. The power is distributed for use in the underground or at the processing facility. The current power load is 10.92 MVA with approximately 70%
of this being used at the mine and the remainder at the plant and other facilities. The power system is planned to be expanded to approximately 14 MVA by the
end of 2023. A compressed air system is used underground with an additional 149 kW compressor system being added, and diesel fuel is used in the mobile
equipment and in the 895-kW backup electrical generator.
The site has permitted systems for the handling of waste including a TSF, waste rock storage facility, and systems to handle other miscellaneous wastes. The TSF
was expanded in 2021 with another lift to provide one more year of capacity. Two additional lift stages in total will provide the Project with approximately
4.5 years of additional capacity.
The site has an existing communications system that includes a fiber optic backbone with internet, telephone, and paging systems. The security on-site is
managed through checkpoints at the main access road, processing plant, and at the camp entrances.
Logistics to the site are primarily by truck with the three primary concentrate products being shipped by 30 t to 40 t trucks to other customer locations in Peru.
Materials and supplies needed for Project operation are procured in Lima and delivered by truck.
The infrastructure is well developed and functioning as would be expected for a mature operation. The TSF continues to develop and will require ongoing
monitoring to assure the construction of the next lift is timely to support the operation. Ongoing monitoring of the stability of the embankment and operations
practices is recommended to conform to industry best practices.
1.9
ENVIRONMENTAL STUDIES AND PERMITTING
Sierra has all relevant permits required for the current mining and metallurgical operations. Sierra also has a Community Relations Plan that includes annual
assessment, records, minutes, contracts and agreements. An Environmental Impact Assessment (EIA) was obtained on February 11, 2019.
1.10
CAPITAL AND OPERATING COSTS
The capital and operating costs presented here are for a production rate of approximately 3,800 tpd in Q2-Q4 2021 and 2022, reaching 5,500 tpd in 2024. Capital
and operating cost estimates are shown in Section 21. Capital and operating costs are based upon forward-looking information. This forward-looking information
includes forecasts with material uncertainty which could cause actual results to differ materially from those presented herein.
27
Table 1-4 and Table 1-5 show the capital and growth capital cost (capex) summaries. Table 1-6 shows the operating cost (opex) summary.
Table 1-4: Estimated Sustaining Capital Costs
Total
Estimated Sustaining Capital
(US$000)
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Exploration & Development
Exploration
$
4,825
1,513
712
500
—
350
350
350
350
350
350
—
Development
$
5,464
4,454
223
649
—
138
—
—
—
—
—
—
Equipment
$
13,142
4,014
373
3,871
242
473
231
231
3,245
231
231
—
Facilities
$
2,683
608
266
201
201
201
201
201
201
201
201
201
Mine Support Areas
$
3,115
—
3
862
8
227
702
190
3
862
51
207
Projects
Central Shaft Rehab
$
1,700
729
971
—
—
—
—
—
—
—
—
—
Mine Camp
$
6,759
5,190
1,299
30
30
30
30
30
30
30
30
30
Mascota Shaft
$
892
57
335
250
250
—
—
—
—
—
—
—
Concentrator Plant
$
4,836
1,131
405
300
—
1,000
500
—
—
—
1,000
500
Shotcrete Plant
$
3,389
89
—
—
—
1,000
2,300
—
—
—
—
—
Drainage System
$
3,358
1,210
532
239
116
132
176
532
173
116
132
—
Ventilation
$
4,845
3,235
289
42
92
31
578
—
—
578
—
—
Personal transportation
$
770
—
—
770
—
—
—
—
—
—
—
—
Water Plant Treatment
$
2,300
—
10
10
10
1,010
1,210
10
10
10
10
10
Environmental
$
345
—
45
50
50
50
50
50
50
—
—
—
Fuel Distribution System
$
350
—
5
5
5
305
5
5
5
5
5
5
TDR Cable Installation
$
350
—
350
—
—
—
—
—
—
—
—
—
Tailing Dam
$
0
—
—
—
—
—
—
—
—
—
—
—
Closure
$
11,607
—
—
—
—
—
277
277
277
277
277 10,222
Total Estimated Sustaining
Capital
$
70,730 22,229
5,819
7,779
1,003
4,948
6,611
1,876
4,345
2,660
2,287 11,174
Source: Sierra Metals, Redco, 2021
Note: Totals do not necessarily equal the sum of the components due to rounding.
28
Table 1-5: Estimated Growth Capital Costs
Estimated Growth Capital
Total (US$ 000)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
Exploration & Development
Drilling Exploration
$
4,221
—
1,031
700
—
700
700
700
130
130
130
—
Regional Exploration
$
4,720
1,577
366
300
—
300
300
300
—
—
—
1,577
Development
$
39,620
—
8,479
8,077
5,081
8,233
3,861
1,393
2,269
1,403
824
—
Cross-Cut 500
$
3,590
1,795
—
—
—
—
—
—
—
—
—
1,795
Equipment
$
17,787
—
1,662
3,021
3,719
1,467
202
1,265
1,265
3,719 1,467
—
Projects
Yauricocha Shaft
$
24,413
3,987
4,403
4,696
2,840
4,500
—
—
—
—
—
3,987
Integration Access to Yauricocha
Shaft CX0545
$
7,595
2,122
2,271
—
—
1,080
—
—
—
—
—
2,122
Tailing Dam
$
81,490
8,401
4,995
5,871
8,935
7,427 11,303
7,427
7,427 11,303
—
8,401
New Road, Access
$
7,000
—
—
—
—
—
3,500
3,500
—
—
—
—
Comedor Esperanza
$
118
59
—
—
—
—
—
—
—
—
—
59
Mine Camp
$
5,940
—
140
1,500
2,800
1,500
—
—
—
—
—
—
Concentrator Plant to increase prod.
$
47,423
— 18,969 28,454
—
—
—
—
—
—
—
—
Ventilation
$
853
—
141
—
288
—
424
—
—
—
—
—
Studies (trade off, SAG, Met, Auto,
Permits)
$
6,999
1,977
2,067
978
—
—
—
—
—
—
—
1,977
1592 Mascota - Esperanza Ramp
$
—
—
—
—
—
—
—
—
—
—
—
—
Waste Dump
$
6,488
—
—
—
—
3,244
—
3,244
—
—
—
—
Total Estimated Growth Capital
258,258 19,919 44,522 53,597 23,663 28,451 20,290 17,829 11,092 16,555 2,422 19,918
Source: Sierra Metals, Redco, 2021
Note: Totals do not necessarily equal the sum of the components due to rounding.
29
Table 1-6: Estimated Operating Costs (LoM)
Opex Total
Total (US$ 000)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
Mine
521,400
36,068
45,838
44,635
59,367
57,277
62,504
57,989
51,258
50,023
43,922
12,518
Plant
151,816
9,598
12,804
9,683
19,493
18,160
19,223
18,356
17,892
11,731
10,475
4,399
G&A
93,688
6,132
8,111
7,954
10,210
9,776
10,123
9,841
9,688
9,636
8,604
3,613
Total
766,904
51,799
66,753
62,272
89,069
85,213
91,851
86,186
78,839
71,389
63,002
20,531
Source: Sierra Metals, Redco, 2021
Note: Totals do not necessarily equal the sum of the components due to rounding.
30
1.11
ECONOMIC ANALYSIS
The 5,500 tpd (2024) proposed mine plan has a capital requirement (initial and sustaining) of US$ 312.1 M over the 11-year LOM; efficiencies associated with
higher throughputs are expected drive a reduction in operating costs on a per tonne basis. This PEA indicates an after-tax NPV (8%) at 5,500 tpd (in 2024) of
US$ 273.1 M. Total operating cost for the LOM is US$ 766.9 M, equating to a total operating cost of US$ 44.01 per tonne milled and US$ 1.30 per pound copper
equivalent.
Economic estimates are based upon forward-looking information. This forward-looking information includes forecasts with material uncertainty which could
cause actual results to differ materially from those presented herein.
The PEA is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have the economic considerations
applied to them that would enable them to be categorized as mineral reserves. Mineral resources that are not mineral reserves do not have demonstrated economic
viability. There is no certainty that inferred resources can be converted to indicated or measured resources or mineral reserves and, as such, there is no certainty
that the results of the PEA will be realised.
Instances of the word ‘economic’ are intended to be conceptual only, and prospects for economic extraction have not been demonstrated. The proposed mine plan
is conceptual in nature and would benefit from further, more definitive, investigation.
1.12
CONCLUSIONS AND RECOMMENDATIONS
1.12.1 Geology and Mineral Resources Estimation
The QP has the following recommendations for the geology and Mineral Resources at Yauricocha:
●
Standardize and document the transformation between the UTM Zone 18S WGS84 datum used for exploration, and the Local
mine grid used for underground geology, mineral resources, and mining coordinate systems. There are currently several sightly
different transformations, which could be related to different coordinate systems historically used by the mine and exploration
staff.
●
Construct and compile a single reliable secure drilling and sampling database for the entire mine area, which can be easily
verified, audited, and shared internally. This can be accomplished through commercially available SQL database management
tools.
●
Long-term exploration should be focused on areas such as the possible intersection of the Yauricocha fault and the Cachi-Cachi
structural trend, where recent geophysical data are currently being generated to assist in targeting.
●
Exploration should continue underground in the Esperanza area which is locally open along strike and at depth.
●
Channel samples should be collected on a representative basis and collected across the entire exposed thickness of a mineralized
zone. In addition, they should be weighed for each sample to ensure that appropriate quantities of material are sampled from
both the harder, more difficult material, and the higher-grade, softer material.
●
Reviewing the performance of the QA/QC program as soon as batches of results are returned. If any failures occur, investigation
and re-analysis of these samples and +/- five adjacent samples on either side of the respective failure should be completed as
soon as possible to prevent any sample preparation or laboratory issues.
●
Select several duplicates to be analyzed by an umpire laboratory for analytical results completed between July 2020 to
March 2021, to establish whether there are any material issues and biases with respect to the analytical results received and not
QA/QC’ed.
31
●
Umpire coarse and pulp reject duplicates sampling be implemented as standard practice. No umpire duplicates have been
submitted since 2019.
●
Density measurements of drillhole core to be implemented as a standard practice, to improve density relationships in
mineralized and non-mineralized rock.
●
Exploration, mine geology and mining should be supported by a detailed litho-stratigraphic and structural model for the area,
based on all the available information, to aid in exploration targeting for surface and underground, to improve the mineral
resource domaining and to provide structural detail that can be used for geotechnical engineering studies.
●
A standardized workflow is applied to the geological modelling to prevent significant changes in mineralized shape forms with
minor additions of drillhole information. The integration of structure, stratigraphy and mineralized zone into a global model is
essential in developing a comprehensive exploration and mining model. This will prevent inconsistencies and overlap between
mineralized zones modelled.
●
Developing and documenting internal standards and procedures for geological interpretation, modelling, estimation and
reporting of Mineral Resources, especially since there has been a significant staff turnover during in 2021.
●
Modelling variogram anisotropy for each of the mineralized domains can be improved by considering relevant transformation,
e.g., gaussian or log transforms of the composites before producing the experimental variograms. Ideally, modelled variograms
should be back transformed, before the grade estimation is done. Certain commercially available software can complete this
process seamlessly.
●
Local and global grade anisotropy occur within the larger mineralized bodies. The sensitivity of utilizing a local anisotropy in
highly informed data areas, whereas utilizing a global trend in poorly informed areas, should be investigated.
●
Minera Corona implement short term grade control models to track and reconcile with the resource models and mine
production.
1.12.2 Mineral Processing and Metallurgical Testing
SRK makes the following conclusions and recommendations for the mineral processing at Yauricocha:
●
Yauricocha’s processing facility is reasonably well operated and shows flexibility to treat multiple mineralized material sources.
The metallurgical performance, i.e., metal recovery and concentrate grade has been consistent throughout the period evaluated
allowing the mine to produce commercial quality copper concentrate, lead concentrate, and zinc concentrate.
●
The spare capacity in their oxide circuit is an opportunity to source material from third-party mines located in the vicinity.
●
The presence of arsenic is being well managed by blending mineralized material in order to control arsenic concentration in the
final concentrates.
●
Gold deportment seems an opportunity that Yauricocha may want to investigate, particularly by evaluating gravity
concentration in the grinding stage, or alternatively in the final tails, or both.
32
1.12.3 Mining
Redco makes the following conclusions and recommendations for the mining at Yauricocha:
●
Standardize the operational practices of sublevel caving (SLC), considering a traditional exploitation in a fan pattern (radial
drilling), drilling the entire crown, and extracting in reverse, modifying the current form of operation based on extraction by
lateral “pockets”. To guarantee this, field tests must be carried out and a robust design for the initial slot must be considered to
ensure the initial swelling and flow of the broken material.
●
Evaluate the increase in mining dimensions for the SLC, this would mean a significant reduction in development and
preparation, considering an opportunity to achieve column heights close to 25 meters and spacing between extraction galleries
of 9 meters according to preliminary analysis. To support this, it is suggested to carry out more detailed studies at a numerical
and operational level, accompanied by pilot tests to guarantee the safety and operational feasibility of mining.
●
The ramp-up to 5,500 tpd needs to be studied in an operative point of view, considering the capacity of the whole haulage
system and operational philosophy. Simulation modelling could be developed to evaluated different scenarios and strategies to
reach the final production rate.
●
Evaluate the application of new mining methods in mineralized bodies of greater width, as is the case of shrinkage caving for
the Esperanza mineralized body, which would improve operational performance, reduce costs by minimizing the number of
preparations and mining developments, and deliver greater productivity to the Yauricocha mine. This must be numerically
evaluated at the geomechanical level and complemented with gravitational flow models which must be calibrated with pilot
tests.
●
The current fleet of load and haul equipment is of 2.5 yd3 size and it is recommended to migrate to larger capacity equipment (4
yd3 or more) to reduce the quantity of equipment inside the mine, avoid saturation of production levels, and achieve the increase
in extraction rates. This must be accompanied by a standardization of the loading points in sublevels so that these locations have
adequate work dimensions.
●
One of the main challenges Yauricocha currently faces is related to the construction of the production galleries in the sublevel
caving method. Given the poor quality of the rock (low RMR), the production galleries require the use of steel arches, and this
imposes greater construction times and costs. It is recommended to study alternatives that allow mechanizing the advancement
of the sublevel caving production tunnels to improve the safety of mine personnel and to increase the production rates at each
face.
●
Analyze alternatives for haulage to surface for deeper sectors of the mine in order to make the extraction of materialized and
waste material viable at the anticipated levels in the case of the 5,500 tpd production rate; doing so will allow decongesting the
shafts which are expected to be near maximum capacity during the peak years of mining 5,500 tpd.
●
For future studies and reporting, it is recommended that the Yauricocha mine standardize the support of the modifying factors
used in the mining planning processes for its different mining methods. For this, volumetric and mine/plant reconciliation
processes should be considered to verify the operational behavior between what is planned and what is extracted, in addition to
accompanying it with gravitational SLC flow models calibrated with operational data, in order to deliver a robust recovery and
dilution factors per zone.
●
The New Yauricocha shaft project should be monitored closely to ensure timely access to mineralized zones below 1070 level.
33
●
A consolidated infill drilling plan needs to be developed accord in the deeper areas of the mine to support the LoM plan
execution.
●
For the application of operational improvements incorporating new mining methods and technologies, it is necessary to have an
established culture of operational discipline with standards that integrate the information from the different areas within the
short-, medium- and long-term plans.
●
Further technical-economic evaluations of the production rate expansion options should be undertaken.
1.12.4 Geotechnical and Hydrogeological
Redco makes the following geotechnical conclusions and recommendations:
●
Regarding the new data campaign conducted in 2021, update the 3D geomechanical and numerical preliminary models to verify
the quality of the rock mass projected in deeper areas of the mine. Use this updated information to support improvements with
the mining methods, production sequencing, and rock support estimation for different stress modeling scenarios.
●
Develop gravity flow 3D models for the different areas/condition of sublevel caving to support the dilution and recovery
planned per zone and per level. This work could be expanded upon to simulate possible mud rushes or determine critical areas.
●
Continue collecting geotechnical characterization data from mined drifts and exploration drillholes.
●
Maintain a central geotechnical database.
●
Continue the program of stress measurement in the deeper planned mining areas.
●
Conduct numerical stress analyses of mining-induced stress effects on planned mining.
Redco makes the following hydrogeological conclusions and recommendations:
●
Continue a short-term to long-term dewatering programs with drainage systems.
●
Continue to actively dewater ahead of production mining and monitor for conditions that could lead to mud rushes.
●
Update the current conceptual hydrogeological model considering the new data collection campaign.
●
3D Hydrogeological-structural modelling should be considered for further stages of mine development.
●
Develop studies to apply new methodologies to reduce the water inflows to the current and future mining zones.
●
Revisit the current ground control management plans to check that they are appropriate for the deeper mining areas.
1.12.5 Infrastructure
Ongoing monitoring of the stability of the TSF embankment and operations practices is recommended to conform to global industry best practices.
34
1.12.6 Recovery Methods
SRK recommends that Yauricocha improve its control of plant operations by installing more instrumentation and an automation control system. Doing so could
lead to more consistent plant operation, reduced electrical energy and reagent consumption, and ultimately initiate a continuous improvement of the plant’s unit
operations and overall performance.
1.12.7 Environmental Studies and Permitting
Social and environmental activities are currently of high importance in Peru; therefore, SRK recommends that the company’s commitments and agreements be
fulfilled in detail and in a timely manner. Reputational and legal risks can arise due to this issue.
1.13
RECOMMENDED WORK PROGRAM COSTS
Table 1-7 lists the estimated costs for the recommended work that is not considered to be covered by on-going operating expenditures.
Table 1-7: Summary of Costs for Recommended Work
Category
Work
Units
Cost US$
Geology and Resources
Infill Drilling (1)
13,000 m
1,300,000
Exploration Drilling - Yauricocha Expansion (1)
25,000 m
2,500,000
Structural and litho-stratigraphic model
1
100,000
Training
1
10,000
QA/QC and re-analysis
500
12,500
Geotechnical
Annual data collection and laboratory analysis
N/A
120,000
Integrated Gravity Flow Model
1
150,000
Sublevel Caving (25m) Pilot Test
1
400,000
Shrinkage Caving Pilot Test
1
500,000
Hydrogeological
3D hydrogeological-structural numerical model & study
1
275,000
Production Rate Increases Pre-feasibility (2) & Feasibility studies
1
2,000,000
Total
7,367,500
Source: Sierra, Redco, SRK, 2021
(1)
Drilling costs assume US$100/m drilling costs.
Bolivar Mine, Mexico
The Company owns 100% of the Bolivar Mine.
Bolivar PEA Technical Report
The following is the summary section of the Bolivar PEA Technical Report, prepared by SRK and reviewed by Qualified Persons Américo Zuzunaga Cardich,
Sierra Metals Inc., Vice President Corporate Planning, Cliff Revering, P. Eng., SRK Principal Consultant (Resource Geology), Carl Kottmeier, B.A.Sc., P. Eng.,
MBA, SRK Principal Consultant (Mining), Daniel H. Sepulveda, BSc, SME-RM, SRK Associate Consultant (Metallurgy) and Jarek Jakubec, C. Eng. FIMMM,
SRK Practice Leader/Principal Consultant (Mining, Geotechnical). The full text of the Bolivar PEA 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 PEA Technical Report.
“1 EXECUTIVE SUMMARY
Sierra Metals Inc. (Sierra Metals) 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 km southwest of the city of Chihuahua. The Property consists of 14 mineral concessions totalling
6,800 ha.
35
This updated report is based on a Preliminary Economic Assessment (PEA) that was previously prepared for the Bolivar Mine with a report date of October 19,
2020. This amended PEA report is unchanged from the original PEA report except to include language with regards to the potential recovery and sale of
magnetite. More specifically, changes were made to relevant portions of Sections 1, 25 and 26 summarized therefrom changes to Section 2 - Introduction, and
where relevant, updates regarding the recovery and sale of magnetite were made to the following sections: Section 13 - Mineral Processing and Metallurgical
Testing, Section 17 - Recovery Methods, Section 18 - Infrastructure, Section 21 - Capital and Operating Costs, and Section 22 - Economic Analysis.
This Preliminary Economic Assessment (PEA) report was prepared in accordance with the Canadian Institute of Mining, Metallurgy and Petroleum Standards on
Mineral Resources and Reserves: Definitions and Guidelines, May 10, 2014 (CIM, 2014).
The reader is reminded that PEA studies are indicative and not definitive and that the resources used in the proposed mine plan include Inferred Resources that
are too speculative to be used in an economic analysis, except as allowed for by the Canadian Securities Administrators (CSA) National Instrument 43-101 (NI
43-101) in PEA studies. Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability. There is no certainty that Inferred
Resources can be converted to Indicated or Measured Resources or Mineral Reserves, and as such, there is no certainty that the results of this PEA will be
realized.
This PEA report is not a wholly independent report as some sections have been prepared and signed off by qualified persons (QPs) from Sierra Metals, the
project owner and producing issuer. The terms ‘QP’ and ‘producing issuer’ used here are as defined under NI43-101 Standards of Disclosure for Mineral
Projects. The QPs responsible for this report are listed in Sections 2.1 and 2.2.
1.1
PROPERTY DESCRIPTION AND OWNERSHIP
The Bolivar Property is owned by Sierra Metals. The Property consists of 14 mineral concessions (approximately 6,800 ha) in the northern Mexican state of
Chihuahua. The Property is in the Piedras Verdes mining district, 400 km south by road from the city of Chihuahua (population 4.8 million as of 2010) and
roughly 10 km southwest of the town of Urique (population 1,102 as of 2010). The Property includes the Bolivar Mine, an historic Cu-Zn skarn deposit that has
been actively mined by Sierra Metals since November 2011, as well as the Piedras Verdes processing plant, which is situated approximately 5 km by road from
the mine.
1.2
GEOLOGY AND MINERALIZATION
The Bolivar deposit is a Cu-Zn skarn and is one of many precious and base metal deposits of the Sierra Madre belt, which trends north-northwest across the states
of Chihuahua, Durango and Sonora in northwestern Mexico (Meinert, 2007). The deposit is located within the Guerrero composite terrane, which makes up the
bulk of western Mexico and is one of the largest accreted terranes in the North American Cordillera. The Guerrero terrane, proposed to have accreted to the
margin of nuclear Mexico in the Late Cretaceous, consists of submarine and lesser subaerial volcanic and sedimentary sequences ranging from Upper Jurassic to
middle Upper Cretaceous in age. These sequences rest unconformably on deformed and partially metamorphosed early Mesozoic oceanic sequences.
The Piedras Verdes district is made up of Cretaceous andesitic to basaltic flows and tuffs intercalated with greywacke, limestone, and shale beds. Cu-Zn skarn
mineralization is in carbonate rocks adjacent to the Piedras Verde granodiorite. Mineralization exhibits strong stratigraphic control and two stratigraphic horizons
host the bulk of the mineralization: an upper calcic horizon, which predominantly hosts Zn-rich mineralization, and a lower dolomitic horizon, which
predominantly hosts Cu-rich mineralization. In both cases, the highest grades are developed where structures and associated breccia zones cross these favorable
horizons near skarn-marble contacts.
1.3
STATUS OF EXPLORATION, DEVELOPMENT AND OPERATIONS
The Bolivar Mine is currently an operational project. During 2019, the Piedras Verdes processing plant consistently produced copper concentrate of commercial
quality with copper grade ranging between 21.7% Cu to 28% Cu, silver content in concentrate ranging from 392 g/t to 677 g/t, and gold content in concentrate
ranging from 3.2 g/t to 7.9 g/t. Metal recovery for copper, silver, and gold averaged monthly 82.9%, 78.3% and 62.3%, respectively. The mined material is
transported 5 km to the Piedras Verdes mill which currently operates at 3,500 tonnes of mineralized material per day (tpd).
1.4
MINERAL PROCESSING AND METALLURGICAL TESTING
Various development and test mining have occurred at the Bolivar Mine under Sierra Metal’s ownership since 2005. Prior to late 2011, no processing facilities
were available on site, and the mineralized material was trucked to the Cusi Mine’s Malpaso mill located 270 km by road. Bolivar’s Piedras Verdes processing
facilities started operating in November 2011 at 1,000 tpd of nominal throughput. The
36
mineralized material processing capacity was expanded to 2,000 tpd in mid-2013. The mill has been upgraded since and the current nominal throughput capacity
is 3,500 tpd.
1.5
MINERAL RESOURCE ESTIMATE
CIM Definition Standards for Mineral Resources and Mineral Reserves (May 2014) defines a Mineral Resource as follows:
“A Mineral Resource is a concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade or quality and quantity
that there are reasonable prospects for eventual economic extraction. The location, quantity, grade or quality, continuity and other geological characteristics of a
Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge, including sampling”.
The “reasonable prospects for economic extraction” requirement generally implies that the quantity and grade estimates meet certain economic thresholds and
that the Mineral Resources are reported at an appropriate cut-off grade (CoG) taking into account extraction scenarios and processing recoveries. To assess this at
Bolivar, SRK has calculated an economic value for each block in terms of US dollars based on the grade of contained metal in the block, multiplied by the
assumed recovery for each metal, multiplied by pricing established by Sierra Metals for each commodity. Costs for mining and processing are taken from data
provided by Sierra Metals for their current underground mining operation.
The December 31, 2019, consolidated Mineral Resource statement for the Bolivar Mine is presented in Table 1-1.
Table 1-8: Consolidated Bolivar Mine Mineral Resource Statement as of December 31, 2019 – SRK Consulting (Canada), Inc. (1)(2)(3)(4)(5)
Category
Tonnes (Mt)
Ag (g/t)
Au (g/t)
Fe (%)
Cu (%)
Ag (M oz)
Au (k oz)
Cu (t)
Indicated
19.4
15.1
0.21
13.8
0.77
9.4
127.8
149,116
Inferred
21.4
14.2
0.21
13.5
0.78
9.8
145.6
167,077
Source: SRK, 2020
(1)
Mineral resources are reported inclusive of ore reserves.
(2)
Mineral resources are not ore reserves and do not have demonstrated economic viability.
(3)
All figures are rounded to reflect the relative accuracy of the estimates.
(4)
Mineral resources are reported at a value per tonne cut-off of US$24.25/t using the following metal prices and recoveries; Cu at US$3.08/t and 88%
recovery; Ag at US$17.82/oz and 78.6% recovery, Au at US$1,354/oz and 62.9% recovery.
(5)
Total Fe does not represent an estimate of magnetite content nor should be used as a proxy for a recoverable magnetite product.
1.6
MINERAL RESERVE ESTIMATE
A Mineral Reserve is the economically mineable part of a Measured and/or Indicated Resource. It includes diluting material and allowances for losses, which
may occur when the material is mined or extracted and is defined by studies at Pre-feasibility or Feasibility level as appropriate that include the application of
Modifying Factors.
A Mineral Reserve has not been estimated for the project as part of this PEA.
The PEA includes Inferred Mineral Resources that are considered too speculative geologically to have the economic considerations applied to them that would
enable them to be categorized as Mineral Reserves.
1.7
MINING METHODS
Bolivar Mine is a producing operation. The primary mining method is underground room and pillar mining. Previous mining at Bolivar has sometimes used
lower cost and more productive longhole stope mining in areas where the mineralized zones have a steeper dip angle, and the mine plans to undertake a
geotechnical assessment program in 2020/2021 to expand the use of longhole stope mining.
Current mineralized material production is from the El Gallo Inferior, Chimenea 1 and 2, and the Bolivar West mineralized zones.
37
The PEA evaluated seven different possible production rates for the Bolivar Mine:
●
5,000 tpd (base case)
●
7,000 tpd in 2024
●
10,000 tpd in 2024
●
10,000 tpd in 2026
●
12,000 tpd in 2024
●
12,000 tpd in 2026
●
15,000 tpd in 2024
An economic analysis of these production rates is provided in Section 22.
Development waste rock is primarily stored underground in historic mine openings. Mineralized material is hauled to the surface using one of several adits or
declines accessing the mineralized material, and then dumped onto small surface storage pads outside the portals. The mineralized material is then loaded into
rigid-frame, over-the-road trucks and hauled on a gravel road approximately 5 km south to the Piedras Verdes mill. As explained in more detail in Section 18, the
mine is constructing an underground tunnel that will enable mineralized material to be delivered via underground truck transport to a portal adjacent to the mill.
This development will eliminate the impact of bad weather on the current surface truck haulage system and will provide a lower cost and more reliable method of
delivering mineralized material to the plant.
Mine production at Bolivar in 2019 averaged approximately 3,500 tpd, but frequently surpassed 4,000 tpd and achieved rates of 5,000 tpd in early 2020.
1.8
RECOVERY METHODS
Sierra Metals operates a conventional concentration plant consisting of crushing, grinding, flotation, thickening, and filtration of the final concentrate. Flotation
tails are disposed of in a conventional tailings facility and future tailings (mid-2020) will be deposited as dry-stack tailings. Run of mine mineralized material
feed in 2019 totaled 1,269,697 t, equivalent to an average of 105,000 tonnes per month (t/m), or 3,500 tpd. The plant has repeatedly demonstrated that it can
process 5,000 tpd and is doing so in 2020.
During 2019, production of copper concentrate consistently ranged between approximately 2,370 t/m and 3,850 t/m, equivalent to roughly a 2.9% mass pull.
The monthly average concentrate consistently reached commercial quality with copper grade averaging 24.1% Cu and credit metals content in concentrate
averaging 531.6 g/t silver and 5.57 g/t gold. Average monthly metal recovery for copper, silver, and gold was 82.9%, 78.3% and 62.3%, respectively.
1.9
PROJECT INFRASTRUCTURE
The project has fully developed infrastructure including access roads, a man-camp capable of supporting 329 persons that includes a cafeteria, laundry facilities,
maintenance facilities for the underground and surface mobile equipment, electrical shop, guard house, fuel storage, laboratories, warehousing, storage yards,
administrative offices, plant offices, truck scales, explosives storage, processing plant and associated facilities, tailings storage facility (TSF), and water storage
reservoir and water tanks.
The site has fully developed and functioning electric power from the Mexican power grid, backup diesel generators and heating from site propane tanks.
The project has developed waste handling and storage facilities. The site has minimal waste rock requirements but does have a small, permitted area to dispose of
waste rock. The tailings management plan at the Bolivar Mine includes placement of tails in several locations in and around the TSF that has been in operation
since late 2011. The existing TSF has five locations to store tailings (TSF1 through TSF5).
A new dry-stack TSF (herein referred to as “New TSF”) is to be located just to the west of the existing facility and has an expected life through 2025. The site is
also installing an additional thickener and filter presses to allow additional water recovery. Thickened tails (60% solids) are being placed currently. After the
filter presses are constructed, dry-stack tailings will be placed in the TSF starting in the latter part of 2020.
38
This PEA considers the use of tailings as backfill and has included the capital and operating costs for a backfill plant. Storing some of the tailings underground
would increase the life of the TSF, and potentially permit the removal of mineralized material pillars that are currently unrecoverable.
The overall Project infrastructure exists already and is functioning and adequate for the purpose of the supporting the mine and mill.
1.10
ENVIRONMENTAL STUDIES AND PERMITTING
Sierra Metals intends to build additional tailings capacity concurrent with mine operations, and the permitting associated with the TSF expansion has been
completed.
Geochemical characterization results for 2014 and 2015, provided to SRK, indicate low metals leaching potential and either uncertain or non-acid generating
potential. The 2016 ABA results (NP = 52.5 kg CaCO3/ton; AP = 141 kg CaCO3/ton), however, suggest that some of the more recent material may be potentially
acid generating: NP/AP = 0.372. Additional investigation of the current materials being deposited into the tailings impoundment may be warranted; however,
given the dryness of the Chihuahuan Desert, this may not necessarily be a material issue for the project.
The required permits for continued operation at the Bolivar Mine, including exploration of the site, have been obtained. SRK has not conducted an investigation
as to the current status of all the required permits. At this time, SRK is not aware of any outstanding permits or any non-compliance at the project or nearby
exploration sites.
In February 2017, Treviño Asociados Consultores presented to Sierra Metals a work breakdown of the anticipated tasks for closure and reclamation of the
Bolivar Mine. The closure costs were estimated to be MX$9,259,318 (~US$475,324 based on the exchange rate at February 2020). SRK’s scope of work did not
include an assessment of the veracity of this closure cost estimate, but, based on projects of similar nature and size within Mexico, the estimate appears low in
comparison.
1.11
CAPITAL AND OPERATING COSTS
Based on a planned production rate of 10,000 tpd (2024), the yearly capital expenditure by area is summarized in Table 1 2.
Table 1-9: Capital Cost Summary (not including magnetite recovery project)
Description
Total [US$000s]
Development sustaining capital
89,940
Ventilation sustaining capital
4,588
Development expansion capital
5,852
Equipment sustaining capital
41,200
Exploration sustaining capital
18,800
Exploration capital
35,897
Backfill plant capital
24,884
Plant sustaining capital
13,940
Plant expansion capital
67,500
Tailings storage facility capital
5,369
Tailings storage facility sustaining capital
1,380
Additional studies capital
2,274
Closure capital
5,000
Total Capital
316,624
Source: Sierra Metals, 2020
39
The addition of the proposed magnetite recovery project adds capital expenditure and is shown in Table 1 3 for the 10,000 tpd (2024) production case.
Table 1-10: Capital Cost Summary (including magnetite recovery project)
Description
Total [US$000s]
Development sustaining capital
89,940
Ventilation sustaining capital
4,588
Development expansion capital
5,852
Equipment sustaining capital
41,200
Exploration sustaining capital
18,800
Exploration capital
35,897
Backfill plant capital
24,884
Plant sustaining capital
13,940
Plant expansion capital
67,500
Tailings storage facility capital
5,369
Tailings storage facility sustaining capital
1,380
Magnetite recovery project
28,172
Additional studies capital
2,274
Closure capital
5,000
Total Capital
344,796
Source: Sierra Metals, 2021
The operating cost estimate is based on site specific data and has been factored to account for an expansion to 10,000 tpd (2024). Table 1 4 provides a summary
of total operating costs and unit operating costs.
Table 1-11: Operating Cost Summary (not including magnetite recovery project)
Life of Mine
Life of Mine
Life of Mine
(US$/t mineralized
(US$/Cu
Description
(US$000’s)
material)
equivalent lb)
Underground Mining
433,099
10.36
0.61
Process
225,578
5.40
0.32
G&A
55,409
1.33
0.08
Backfill plant
112,383
2.69
0.16
Total Operating
826,469
19.77
1.16
Source: Sierra Metals, 2020
Note: numbers may not add up due to rounding
The addition of the proposed magnetite recovery project adds operating expenditure and is shown in Table 1 5 for the 10,000 tpd (2024) production case. The
LOM US$/Cu equivalent lb data is shown in two ways, with and without the magnetite sales revenue included.
40
Table 1-12: Operating Cost Summary (including magnetite recovery project)
LOM US$/Cu lb
LOM US$/Cu lb
LOM
equivalent (without
equivalent (with
LOM
(US$/t mineralized
magnetite sales
magnetite sales
Description
(US$000s)
material)
revenue)
revenue)
Underground Mining
433,099
10.36
0.61
0.51
Process
225,578
5.37
0.32
0.27
G&A
55,409
1.33
0.08
0.07
Magnetite recovery
290,958
6.96
0.41
0.34
Backfill plant
112,383
2.69
0.16
0.13
Total Operating
1,117,427
26.73
1.56
1.32
Source: Sierra Metals, 2021
Note: numbers may not add up due to rounding
1.12
ECONOMIC ANALYSIS
The economic analysis for this PEA was prepared by Sierra Metals and reviewed by SRK. The analysis is based on Mineral Resources only and includes Inferred
Mineral Resources. Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability and must be supported at least by a pre-
feasibility study. This PEA is preliminary in nature and there is no certainty that the results of the PEA will be realized.
The economic results shown in subsection 1.12 do not include the magnetite recovery project. Subsection 1.13 is an update to this PEA report and describes the
economic analysis of the magnetite recovery project.
The commodity prices, and their sources, used in the economic analysis are described in Section 19 and are shown in Table 1 6.
Table 1-13: Commodity Price Forecast by Year
Long Term
Metal
Unit
2020
2021
2022
2023
(LT)
Au
$
/oz
1,755
1,907
1,782
1,737
1,541
Ag
$
/oz
19.83
24.12
22.22
22.47
20.0
Cu
$
/lb
2.65
2.86
2.89
2.93
3.05
Pb
$
/lb
0.82
0.87
0.89
0.90
0.91
Zn
$
/lb
0.94
0.99
1.04
1.04
1.07
Source: Sierra Metals, 2020
In addition to the prices listed above in Table 1-6, the NSR factors in Table 1-7 and the economic factors in Table 1-8 were also used in the economic analysis.
41
Table 1-14: NSR Factors
Process Recoveries*
Cu
%
88
Ag
%
78.7
Au
%
62.43
Concentrate Grades
Cu
%
25
Ag
g/t
570
Au
g/t
6.8
Moisture content
%
8
Freight, Insurance and Marketing
Transport losses
%
0.5
Transportation
US$/wmt
42
Port
US$/wmt
9
Load
US$/wmt
40
Marketing
US$/dmt
10
Insurances
US$/wmt
10
Total
US$/dmt
102.92
Smelter Terms
Cu payable
%
96
Ag payable
%
90
Au payable
%
92
Cu minimum deduction
%
1
Ag minimum deduction
oz/t
0
Au minimum deduction
oz/t
0
Treatment Charges/Refining Charges (TC/RC)
Cu Concentrate TC
US$/dmt
69.00
Cu Refining charge
US$/lb Cu
0.069
Cu Refining cost
US$/t Cu
152.12
Cu Price Participation
US$/dmt
0
Average Penalties
US$/dmt
10
Ag Refining charge
US$/oz
0.35
Au Refining charge
US$/oz
6
Total treatment cost
US$/t Cu
727.68
Total cost of sales
US$/t Cu
879.80
Net Smelter Return Factors
Cu
US$/t/%
48.8171
Ag
US$/t/g/t
0.4444
Au
US$/t/g/t
28.1940
Source: Sierra Metals, 2020
*
NI 43-101 Technical Report (SRK Consulting (Canada) Inc. May 8, 2020)
42
Other economic factors and assumptions used in the economic analysis include:
Table 1-15: Economic Factors
Measure
Unit
Value
Discount Rate
%
8
LOM Average grade - Au
g/t
0.19
LOM Average grade – Ag
g/t
13.56
LOM Average grade - Cu
%
0.72
Ordinary Mining Entitled Royalty
US$/year
220,000
Extraordinary Mining Entitled Royalty (applied to precious metals)
%
0.5
Variable Special Mining Royalty
US$/year
Depends on operating margin
Tax Rate
%
30
Source: Sierra Metals, 2020
Numbers are presented on a 100% ownership basis and do not include financing costs.
The economic analysis is based on mine schedule, CAPEX and OPEX estimation, and price assumptions detailed above. Table 1-9 shows the results of the
economic evaluations for the production rates evaluated in this PEA using the metal prices in Table 1-6. The production rate option of 15,000 tpd (2024) has the
highest post tax NPV with respect to the other options and both the 10,000 tpd (2024) and 12,000 tpd (2024) options have better returns than their 2026
counterparts.
43
Table 1-16: Summary Economic Evaluation
Summary Economic Evaluation
Description
Units
5 KTPD
7 KTPD
10 KTPD
10 KTPD
12 KTPD
12 KTPD
15 KTPD
2024
2024
2026
2024
2026
2024
Life of mine
Years
24
18
14
15
13
13
11
Market Prices (Long Term)
Gold
$/oz
1,541
1,541
1,541
1,541
1,541
1,541
1,541
Silver
$/oz
20
20
20
20
20
20
20
Copper
$/lb
3.05
3.05
3.05
3.05
3.05
3.05
3.05
Net Sales
Gold
k$
233,617
233,617
233,617
233,617
233,617
233,617
233,617
Silver
k$
265,316
265,316
265,316
265,316
265,316
265,316
265,316
Copper
k$
1,680,297
1,680,297
1,680,297
1,680,297
1,680,297
1,680,297
1,680,297
Gross Revenue
k$
2,179,230
2,179,230
2,179,230
2,179,230
2,179,230
2,179,230
2,179,230
Charges for treatment, refining,
impurities
k$
172,461
172,461
172,461
172,461
172,461
172,461
172,461
Gross Revenue After Selling and
Treatment Costs
k$
2,006,769
2,006,769
2,006,769
2,006,769
2,006,769
2,006,769
2,006,769
Royalties and Mining Permits
k$
83,539
88,233
94,097
93,335
96,937
95,509
99,936
Gross Revenue After All Costs
k$
1,923,230
1,918,536
1,912,672
1,913,435
1,909,832
1,911,260
1,906,833
Operating Costs
Mine
k$
512,790
472,036
433,099
438,771
414,747
423,093
393,612
Plant
k$
259,792
242,443
225,578
228,035
217,521
221,151
208,147
G&A
k$
78,009
73,397
55,409
58,030
48,414
52,053
41,419
Back Fill
k$
145,984
128,510
112,383
114,732
104,987
108,413
96,638
Total Operating
k$
996,574
916,385
826,469
839,567
785,669
804,711
739,815
EBITDA
k$
926,656
1,002,151
1,086,203
1,073,867
1,124,163
1,106,550
1,167,018
LoM Capital + Sustaining Capital
k$
244,825
268,624
316,624
319,854
355,105
357,639
408,345
Working Capital
k$
18,849
18,276
18,146
18,696
18,950
17,566
18,146
Income Taxes
k$
(209,021)
(220,058)
(230,874)
(230,410)
(242,044)
(224,673)
(230,807)
Cash flow before Taxes
k$
662,982
715,251
751,433
735,317
750,108
731,344
740,527
Cash flow after Taxes
k$
453,961
495,193
520,559
504,908
508,064
506,671
509,720
Post Tax NPV @ 5%
k$
282,882
320,898
350,787
334,178
349,978
336,798
354,455
Post Tax NPV @ 8%
k$
225,191
256,236
282,546
267,228
284,080
268,832
288,105
Post Tax NPV @ 10%
k$
197,271
223,529
246,605
232,484
248,693
233,214
252,002
Source: Sierra Metals, 2020
44
A sensitivity analysis of the Post Tax NPV vs Tonnes Per Day throughput is shown in Figure 1-1.
Source: Sierra Metals, 2020
Note: 5,000 tpd (base case), 7,000 tpd, 10,000 tpd (2024), 12,000 tpd (2024), 15,000 tpd are shown
45
Figure 1-3: Sensitivity Analysis – NPV vs TPD
Table 1-17: Incremental Post Tax NPV and Post Tax IRR
Production Rates
Post Tax NPV US$
Post Tax IRR %
7ktpd - 5ktpd
31,044,119
29.21
%
10ktpd (2024) - 5ktpd
57,354,818
27.87
%
10ktpd (2024) - 7ktpd
26,310,699
26.83
%
12ktpd (2024) - 5ktpd
58,888,188
26.63
%
12ktpd (2024) - 7ktpd
27,844,069
25.20
%
12ktpd (2024) - 10ktpd (2024)
1,533,370
5.75
%
15ktpd - 5ktpd
62,914,037
24.84
%
15ktpd - 7ktpd
31,869,917
23.03
%
15ktpd - 10ktpd (2024)
5,559,219
18.31
%
15ktpd - 12ktpd (2024)
4,025,848
16.84
%
Source: Sierra Metals, 2020
As seen in Table 1-10, the incremental benefit generated by increasing the production rate from 5,000 tpd to 10,000 tpd is very significant with an incremental
post tax NPV of US$ 57.4 M and an incremental post tax IRR of 28%. However, the incremental benefit generated by increasing the production rate to 12,000
tpd or 15,000 tpd is far less significant and given that trebling the production rate can potentially present significant operational challenges, Sierra Metals has
therefore selected the 10,000 tpd (2024) production rate as the preferred option.
The 10,000 tpd (2024) proposed mine plan requires a capital requirement (initial and sustaining) of US$ 317 M over the life of mine; efficiencies associated with
higher throughputs are expected to drive a reduction in operating costs on a per tonne basis. This PEA indicates a post-tax NPV (8%) at 10,000 tpd (in 2024) of
US$ 283 M. Total operating cost for the life of mine is US$ 827 M, equating to a total operating cost of US$ 19.77 per tonne milled and US$ 1.16 per pound
copper equivalent.
The proposed mine plan is conceptual in nature and would benefit from further, more definitive, investigation. The Piedras Verdes processing plant can be
adapted to process 10,000 tpd and would require:
●
Temporary shutdown to overhaul equipment.
●
Purchase of mobile jaw and cone crushers.
●
Overhaul and reintroduction of idle equipment.
The availability of tailings storage capacity is a risk to the proposed mine plan, but it is noted that there is ample underground storage that could be utilized for
the storage of tailings and the financial analysis has allowed for capital and operating costs for the operation of a tailings backfill plant.
1.13
MAGNETITE RECOVERY PROJECT
The magnetite recovery project was evaluated as an incremental addition to the Bolivar mine project. In this section, an economic evaluation of the magnetite
recovery project is provided and is based on the 10,000 tonnes/day (10,000 tpd in 2024) case.
The commodity price forecast is shown in Table 1-11. The modified Fe price forecast values used in the financial model are provided in Section 19 in Table 19-2.
46
Table 1-18: Commodity Price Forecast by Year
Metal
Unit
2020
2021
2022
2023
Long Term (LT)
Au
$/oz
1,755
1,907
1,782
1,737
1,541
Ag
$/oz
19.83
24.12
22.22
22.47
20.0
Cu
$/lb
2.65
2.86
2.89
2.93
3.05
Pb
$/lb
0.82
0.87
0.89
0.90
0.91
Zn
$/lb
0.94
0.99
1.04
1.04
1.07
Fe
$/tonne
N/A
153.00
125.00
100.00
80.00
Source: CIBC, Sierra Metals, 2021 (except Fe, Jeffries, June 2021)
The economic analysis of the Bolivar mine, including the incremental addition of the magnetite recovery project, indicates an after tax NPV of US$361 million
(using a discount rate of 8%) at 10,000 tonnes/day (10,000 tpd in 2024). Total operating cost for the life of mine is US$1,117 million, equating to a total
operating cost of US$26.73 per tonne milled and US$1.56 per pound copper equivalent not including the revenue from magnetite, and US$1.32 per pound copper
equivalent including the magnetite revenue.
Highlights of the economic analysis are provided in Table 1-12.
Table 1-19: Economic analysis of project including magnetite recovery project
Measure
Unit
Value
Net Present Value (After Tax 8% Discount Rate)
US$M
361
LOM Mill Feed (ROM ore)
Tonnes (Mt)
41.8
LOM Mill Feed (tailings)
Tonnes (Mt)
6.0
Mining Production Rate
t/year
3,600,000
LOM Project Operating Period
Years
14
Total Life of Mine (LoM) Capital Costs
US$M
345
Total Life of Mine (LoM) Operating Costs
US$M
1,117
Net After – Tax Cashflow
US$M
650
EBITDA
US$M
1,299
Total Operating Unit Costs
US$/t
26.73
LOM Copper Production (Payable)
Mt
0.25
LOM Gold Production (Payable)
Moz
0.15
LOM Silver Production (Payable)
Moz
12.9
LOM Iron Concentrate Production, 62% Fe (Payable)
Mt
5.7
Source: Sierra Metals, 2021
The magnetite recovery project is also expected to provide additional benefits that have not been accounted for in the PEA report’s economic evaluation:
1.
Reduction of overall tailings management costs (less tailings to be handled and stored, reduced tailings storage development capital).
2.
Reduction in future closure costs.
1.14
CONCLUSIONS AND RECOMMENDATIONS
1.14.1 Geology and Mineral Resources
SRK is of the opinion that the MRE has been conducted in a manner consistent with industry standards and that the data and information supporting the stated
Mineral Resources are sufficient for declaration of Indicated and Inferred classifications of resources. SRK has not classified any of the resources in the
Measured category due to some uncertainties regarding the data supporting the MRE.
47
General deficiencies related to the Geology and Mineral Resources of Bolivar include:
●
No QA/QC program was conducted prior to 2016. This has been addressed by a limited resampling campaign of historical drill core and a more
recent QA/QC program that was implemented in 2016. Continuation of the current QA/QC program will be required in order to achieve Measured
Resources which generally are supported by high resolution drilling and sampling data that feature consistently implemented and monitored
QA/QC.
●
There is limited to no downhole deviation survey data for the historic drilling. The survey data obtained to date show significant deviations from
planned orientations as well as local downhole deviations that influence the exact position of mineralized intervals.
●
There is currently insufficient density sampling and analysis to adequately define this characteristic for the different lithological units and
mineralization types in the various areas of the project. Correlation of density to mineralization characteristics is important for this type of deposit
and therefore additional density sampling and analysis will be required for all future drilling.
●
There is inadequate detailed structural geology data collection from drill core to support interpretation of local mineralization controls and
geotechnical characteristics.
●
A significant portion of the current sample database is missing gold analysis and therefore the current Mineral Resources may not accurately reflect
the true value of Bolivar mineralization locally.
●
Bolivar currently does not have an adequate production reconciliation system to allow for robust comparison of mill production to mine forecasts.
SRK recommends the following action items for Bolivar:
●
Complete downhole surveys for all future exploration and delineation drill holes using a non-magnetic downhole survey instrument.
●
Continue to improve upon the current sample assay QA/QC program and monitor progress of the program over time to identify trends in the
preparation and analytical phases of sample analysis.
●
Complement the QA/QC protocol using additional controls including coarse blanks, twin samples, fine and coarse duplicates, and a second lab
control using a certified laboratory to control the different phases of the preparation and chemical analysis process.
●
Document the failures in the quality control protocol and the correction measurements taken.
●
Implement a consistent density testing program including the representative selection of drill core from the different lithological units and
mineralization types for the various areas of Bolivar and La Sidra. Multiple density samples should be collected from every drill hole so that local
density fluctuations can be assessed.
●
Density samples should be submitted for geochemical analysis to allow for correlation of density to mineralization type and extent.
●
Density check samples (approximately 5 to 10% of total) should be submitted to a third-party independent laboratory such as ALS Minerals for
testing using ASTM standards as part of the QA/QC program. These samples should also be analyzed using the current methods employed by
Sierra and reviewed to ensure that the mine site analytical performance is reasonable.
●
Drill core samples previously not analyzed for gold content should be re-analyzed for gold content. Current Mineral Resources may not reflect the
true value of the mineralization and metal content due to missing gold analysis. All future drill core samples should be summitted for the full suite
of geochemical analyses.
48
●
Delineation and infill drilling are recommended in areas of Inferred Mineral Resources to facilitate upgrading to higher confidence resource
categories (i.e. Indicated or Measured Mineral Resource) to support life of mine planning activities. A drill hole spacing study should be completed
to provide guidance on drill hole density requirements.
●
Detailed structural geology data collection (i.e. oriented drill core) should be implemented for all future drill holes to allow for more detailed
analysis of mineralization controls and geotechnical assessments to support mine design.
●
Continue to develop a site wide litho-structural model to support exploration, Mineral Resource delineation and mine design activities.
●
Implement a production reconciliation system to allow for proper reconciliation of mill production to mine forecasts. This should include the
development of a dynamic grade control model to support short- and long-term mine planning activities.
●
Undertake a backfill study to determine the suitability of using tailings as backfill in stopes.
1.14.2 Recovery Methods
There is a high level of month-to-month variability for both tonnes and head grade input to processing. Better integration between geology, mine planning and
processing can significantly reduce this variability. Additional work is also needed in the processing facilities to stabilize the operation. Improvements include
the implementation of a preventive maintenance program and training programs to improve operators’ skill, with the ultimate objective of improving metal
recovery and lowering operating cost, while maintaining or improving concentrate quality.
Regarding the recovery of magnetite from both newly produced tailings from the run-of-mine ore and from the old (legacy) tailings, a 70% recovery figure is
deemed to be reasonable based on the preliminary testwork done to date. The following conclusions are made regarding the recovery of magnetite:
●
It is necessary to evaluate the installation of regrinding mill ahead of the magnetic concentration stage. The regrind mill would
likely improve liberation of the iron, as well as impurities, therefore allowing the multi-stage magnetic separation to produce a
commercial quality iron concentrates in terms of iron grade and impurities content.
●
Additional testwork is necessary to narrow down the target regrind P80. The available data suggests that achieving a grind size
of 100% less than 100 micrometres should achieve the desired iron recovery and impurities content.
●
The magnetic concentration plant needs a multi-stage circuit with a minimum of three stages: a rougher stage followed by two
cleaning stages, with tails from the cleaning stages being recirculated back to the rougher stage.
●
Bolivar needs to execute further magnetic separation tests on head grade variability for old tailings and “new” tailings from the
future processing of ore. All these tests need to be carried out under a standard flowsheet as described previously.
1.14.3 Tailings Management
As part of the overall tailings management plan, Bolivar is moving to filtered tailings (also known as dry-stack tailings). Expansion in the immediate area of the
currently operating facility will occur as the site was first moved to thickened tailings in mid-2017 and will move to filtered tailings in mid-2020. An analysis of
utilizing tailings as backfill in the mine should be carried out, and a trade-off study should be completed to determine if the size of the New TSF can be reduced.
Based on the 2016 geochemical characterization data, a more robust and comprehensive closure program for the tailings should be undertaken with an emphasis
on closure of the existing facilities in such a manner as to not pose a risk to local groundwater resources.
49
1.14.4 Environmental, Permitting, and Social
It does not appear that there are currently any known environmental issues that could materially impact the extraction and beneficiation of Mineral Resources at
Bolivar Mine.
Ongoing management of dust on surface roadways between the mine and the plant location should be actively performed to protect Sierra Metals’s social license
and avoid regulatory compliance violations.
More recent geochemical characterization data suggest that some of the material from the underground mine may be potentially acid generating. Additional
investigation of the current materials being deposited into the tailings impoundment may be warranted; however, given the dryness of the Chihuahuan Desert,
this may not necessarily be a material issue for the project.
The required permits for continued operation at the Bolivar Mine, including exploration of the site, have been obtained based on information provided by Sierra
Metals. Currently, SRK is not aware of any outstanding permits or any non-compliance at the project or nearby exploration sites.
SRK’s scope of work did not include an assessment of the veracity of the closure cost estimate completed in 2017 by Treviño Asociados Consultores, but, based
on projects of similar nature and size within Mexico, the estimate appears low in comparison.
SRK has the following recommendations regarding environment, permitting, and social or community impact at Bolivar:
●
The issue of surface road fugitive dust emissions should be addressed as soon as possible to avoid jeopardizing the mine’s social license and
incurring compliance violation from the regulatory authorities.
●
SRK recommends that Sierra Metals contract an independent, outside review of the closure cost estimate, with an emphasis on benchmarking
against other projects in northern Mexico. This may require a site investigation and the preparation of a more comprehensive and detailed closure
and reclamation plan before a closure specialist evaluates the overall closure approach and costs.
In 2017, FLOPAC Ingenieria signed a contract to conduct geophysics, geotechnical and hydrological studies. Based on the results of these studies, a new tailings
dam was designed.”
Cusi Mine, Mexico
The Company owns 100% of the Cusi Mine.
Cusi PEA
The following is the summary section of the Cusi PEA Technical Report, prepared by SRK and reviewed by Qualified Persons: Américo Zuzunaga Cardich,
Sierra Metals Inc., Vice President Corporate Planning, Giovanny Ortiz, B.Sc., PGeo., SRK Principal Consultant (Resource Geology), Carl Kottmeier, B.A.Sc., P.
Eng., MBA, SRK Principal Consultant (Mining) and Daniel H. Sepulveda, BSc, SME-RM, SRK Associate Consultant (Metallurgy). The full text of the Cusi
PEA 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 PEA Technical Report.
“1
EXECUTIVE SUMMARY
This PEA report was prepared as a Canadian National Instrument 43-101 (NI 43-101) Technical Report (Technical Report) for an updated Mineral Resource
estimate prepared for Sierra Metals Inc. (Sierra), on the Cusi Mine (Cusi or Project), which is located within the Abasolo Mineral District in the municipality of
Cusihuiriachi, state of Chihuahua, Mexico. Sierra 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.
Sierra Metals prepared life of mine (LOM) production and development plans based on four production rate options ranging from the base case of 1,200 tonnes
per day (tpd) to 3,500 tpd.
50
Table 1-1: LOM Production Rates
Tonnes/Day
Tonnes/Year
Comments
1,200 (base case)
432,000
Constant production rate through LOM
2,400
864,000
Increases from 1,200 tpd to 2,400 tpd gradually
3,000
1.1 M
3,000 tpd in 2024
3,500
1.3 M
3,500 tpd in 2024
Source: Sierra Metals, Redco, 2020
This Preliminary Economic Assessment (PEA) report was prepared in accordance with the Canadian Institute of Mining, Metallurgy and Petroleum Standards on
Mineral Resources and Reserves: Definitions and Guidelines, May 10, 2014 (CIM, 2014).
The reader is reminded that PEA studies are indicative and not definitive and that the resources used in the proposed mine plan include Inferred Resources as
allowed for by the Canadian Securities Administrators (CSA) NI 43-101 in PEA studies. The PEA is preliminary in nature; it includes Inferred Mineral
Resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as
Mineral Reserves, and there is no certainty that the results of the PEA will be realized.
This PEA report is not a wholly independent report as some sections have been prepared and signed off by qualified persons (QPs) from Sierra Metals, the
project owner and producing issuer. The terms ‘QP’ and ‘producing issuer’ are used here as defined under NI 43-101 Standards of Disclosure for Mineral
Projects. Additionally, Sierra is a producing issuer as defined in the NI 43-101 guidelines.
1.1 PROPERTY DESCRIPTION AND OWNERSHIP
The Cusi property is held by Sierra Metals, formerly known as Dia Bras Exploration, Inc. It is located within the Abasolo Mineral District in the municipality of
Cusihuiriachi, state of Chihuahua, Mexico. The property is 135 km from Chihuahua city by car and consists of 75 mineral concessions wholly owned by Sierra
Metals. Included in these concessions are six historic Ag-Pb producers developed on several vein structures: San Miguel, La Bamba open pit, La India, Santa
Eduwiges, San Marina, and Promontorio, as well as exploration concessions around the historic mine areas.
1.2 GEOLOGY AND MINERALIZATION
The Cusi Project is located within the Sierra Madre Occidental, a 1,200 km by 300 km northwest-trending mountain system featuring a long volcanic plateau
within a broad anticlinal uplift. The region is dominated by large-volume rhyolitic ash flow tuffs related to Oligocene (35 Ma to 27 Ma) calderas considered to be
the Upper Volcanic Series. These volcanic rocks comprise calc-alkalic rhyolitic ignimbrites with subordinate andesite, dacite, and basalt with a cumulative
thickness of up to a kilometer.
The property lies within a possible caldera that contains a prominent rhyolite body interpreted as a resurgent dome. The rhyolite dome trends northwest-southeast
with an exposure of roughly 7 km by 3 km and hosts mineralization. It is bounded (cut) on the east side by strands of the NW-trending Cusi fault and on the west
by the Border fault. The Cusi fault has both normal and right-lateral strike-slip senses of shear. Strands of the Cusi fault are intersected by NE-trending faults,
some of which indicate left-lateral strike-slip shear. NE-trending veins associated with these faults dip steeply either NW or SE. High-grade and wide alteration
and mineralization zones exist in the areas of intersection of NW and NE structures. The property tectonically formed during dextral transtension associated with
oblique subduction of the Farallon plate beneath the North American plate. Strike-slip and normal faults related to this transtension controlled igneous and
hydrothermal activity in the region. Regional NW-trending faults like Cusi are generally right-lateral strike-slip faults with a normal slip component. NE-trending
faults are commonly left-lateral strike slip faults which were antithetic Riedel shears in the overall dextral transtensional tectonic regime.
Numerous epithermal mineralized veins exist on the property. Typically, these are moderately to steeply dipping to the southeast, southwest, and north, ranging
from less than 0.5 m to 2 m thick, and extend 100 m to 200 m along strike and up to 400 m down-dip. There are at least seven major mineralized areas within the
Cusi area. Small open pits were typically developed at vein intersections. Mineralization mainly occurs in silicified faults, epithermal veins, breccias, and
fractures ranging from 1 meter to 10 metres thick.
Low-grade mineralized areas exist adjacent to major structures, and they show intense fracturing and are commonly laced with quartz veinlets forming a
stockwork mineralized halo around more discrete structures. The country rock in these zones is variably silicified. Pyrite and other sulfide minerals are
disseminated in the silicified country rock and are also clustered in the quartz veinlets. A well-
51
developed mineralized stockwork zone is in the Promontorio area, especially proximal to the Cusi fault. These stockwork zones are the current targets for
expansion and infill drilling, and their importance to the greater Cusi area is being studied in greater detail as a part of current exploration efforts.
1.3 STATUS OF EXPLORATION, DEVELOPMENT AND OPERATIONS
The mine is concurrently undertaking exploration, development and operations. Exploration is ongoing near the mine and is supported predominantly by drilling
and exploration drifting. The mine is also producing several types of metal concentrates from the underground mine areas.
1.4 MINERAL PROCESSING AND METALLURGICAL TESTING
Sierra reports that the Cusi mining operation is capable of producing as much as 1,100 t of mineralized material and 420 t of waste per day. The average
production of mineralized material in 2019 was 780 tpd. As of the effective date of the Technical Report, further optimization is being done to both the mining
and milling operation.
Cusi’s Malpaso processing facility consists of a conventional concentration plant including crushing, grinding, flotation, dewatering of final concentrate, and a
tailings disposal facility. It is located in the outskirts of Cuauhtemoc City, approximately 50 km by road from Cusi operations. Dump trucks, each hauling
approximately 20 t of mineralized material, delivered 285,236 t in 2019 and 117,320 t in the first eight months of 2020. It should be noted however that
production in 2020 was disrupted by Covid-19 and no run of mine mineralized material was processed in April, May or June.
Table 1-2 shows the Metallurgical Balance (grades, recoveries and metal production) for previous years and for the period of January to August 2020.
52
Table 1-2: Recent Cusi Metallurgical Balance (2018 to August 2020)
2018
2019
2020*
Mill Feed (tonnes)
186,889
285,236
117,320
Head Grades
Ag (g/t)
140.17
129.06
138.20
Pb
0.39 %
0.19 %
0.29 %
Zn
0.43 %
0.21 %
0.33 %
Au (g/t)
0.16
0.15
0.18
Metallurgical Recoveries
Pb concentrate
Ag recovery
83 %
79 %
90 %**
Pb recovery
80 %
75 %
92 %**
Pb grade in concentrate %
9 %
5 %
9 %**
Au recovery
39 %
36 %
50 %**
Zn concentrate
Ag recovery
0.1 %
N/A
N/A
Zn recovery
4 %
N/A
N/A
Zn grade in concentrate %
45 %
N/A
N/A
Metal Production (combined in concentrates)
Ag (oz)
699,007
936,071
466,892
Zn (t)
32
N/A
N/A
Pb (t)
582
411
316
Au (oz)
372
493
331
Source: Sierra Metals, 2020
*
January to August 31, 2020
**
During April, May and June 2020, no mineralized material was received at the Malpaso plant due to the stoppage caused by Covid-19, but the mineralized
material within the circuit was treated, which generated an increase in fines which positively impacted the recovery of metals.
1.5 MINERAL RESERVE ESTIMATE
CIM Definition Standards for Mineral Resources and Mineral Reserves (May 10, 2014) defines a Mineral Resource as: “A Mineral Resource is a concentration
or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade or quality and quantity that there are reasonable prospects for
eventual economic extraction. The location, quantity, grade or quality, continuity and other geological characteristics of a Mineral Resource are known,
estimated or interpreted from specific geological evidence and knowledge, including sampling.”
The “reasonable prospects for economic extraction” requirement generally implies that the quantity and grade estimates meet certain economic thresholds and
that the Mineral Resources are reported at an appropriate cut-off grade (CoG) taking into account extraction scenarios and processing recoveries. To assess this at
Cusi, SRK has calculated an economic value for each block in terms of US dollars based on the grade of contained metal in the block, multiplied by the assumed
recovery for each metal, multiplied by pricing established by Sierra Metals for each commodity. Costs for mining and processing are taken from data provided by
Sierra for their current underground mining operation.
SRK is of the opinion that the resource estimations are suitable for public reporting and are a fair representation of the in-situ contained metal for the Cusi
deposit.
The August 31, 2020 consolidated mineral resource statement for the Cusi area is presented in Table 1-3.
53
Table 1-3: Consolidated Cusi Mine Mineral Resource Estimate as of August 31, 2020 –
SRK Consulting (U.S.), Inc. (1)(2)(3)(4)(5)(6)
AgEq
Ag
Au
Pb
Zn
Tonnes
Source
Class
(g/t)
(g/t)
(g/t)
(%)
(%)
(000's)
SRL
Measured
231
213
0.06
0.26
0.3
850
Total Measured
231
213
0.06
0.26
0.3
850
Promontorio
199
168
0.1
0.45
0.6
1,790
Eduwiges
270
194
0.17
1.3
1.27
828
SRL
231
198
0.16
0.42
0.54
644
San Nicolas
190
167
0.14
0.28
0.32
657
San Juan
179
165
0.11
0.14
0.17
179
Minerva
198
178
0.3
0.1
0.05
59
Candelaria
176
157
0.1
0.19
0.42
131
Durana
168
160
0.05
0.1
0.08
168
San Ignacio
149
113
0.05
0.33
1.1
49
Total Indicated
212
176
0.13
0.54
0.63
4,506
Measured + Indicated
Indicated
215
182
0.12
0.49
0.58
5,356
Promontorio
174
141
0.15
0.33
0.71
384
Eduwiges
186
117
0.18
1.16
1.1
549
SRL
222
188
0.19
0.37
0.59
1,579
San Nicolas
156
124
0.18
0.28
0.66
2,020
San Juan
Inferred
171
160
0.05
0.13
0.22
102
Minerva
169
162
0.08
0.08
0.05
4
Candelaria
191
139
0.12
0.73
1.09
202
Durana
102
99
0.05
—
0.01
1
San Ignacio
118
96
0.13
0.27
0.29
53
Total Inferred
183
146
0.18
0.43
0.69
4,893
(1)
Mineral Resources have been classified in accordance with the Canadian Institute of Mining, Metallurgy and Petroleum ("CIM") Definition Standards on Mineral Resources and Mineral
Reserves, whose definitions are incorporated by reference into NI 43-101.
(2)
Mineral resources are not ore reserves and do not have demonstrated economic viability. All figures rounded to reflect the relative accuracy of the estimates. Gold, silver, lead and zinc
assays were capped where appropriate.
(3)
Mineral resources are reported at a single cut-off grade of 95 g/t AgEq based on metal price assumptions*, metallurgical recovery assumptions, personnel costs (US$10.56/t), mine
operation, transport and maintenance costs (US$24.86/t), processing operation and maintenance (US$11.86/t), and general and administrative and other costs (US$3.20/t).
(4)
Metal price assumptions considered for the calculation of the cut-off grade and equivalency are: Silver (Ag): US$/oz 20.0, Lead (US$/lb. 0.91), Zinc (US$/lb. 1.07) and Gold (US$/oz
1,541.00). CIBC, Consensus Forecast, September 30, 2020
(5)
The resources were estimated by SRK. Giovanny Ortiz, B.Sc., PGeo, FAusIMM #304612 of SRK, a Qualified Person, performed the resource estimation for the Cusi Mine.
(6)
Based on the historical production information of Cusi, the metallurgical recovery assumptions are: 87% Ag, 57% Au, 86% Pb, 51% Zn.
1.6 MINERAL RESERVE ESTIMATE
A Mineral Reserve is the economically mineable part of a Measured and/or Indicated Resource. It includes diluting material and allowances for losses, which
may occur when the material is mined or extracted and is defined by studies at Prefeasibility or Feasibility level as appropriate that include the application of
Modifying Factors.
A Mineral Reserve has not been estimated for the Project as part of this PEA.
The PEA includes Inferred Mineral Resources that are considered too speculative geologically to have the economic considerations applied to them that would
enable them to be categorized as Mineral Reserves.
54
1.7 MINING METHODS
Bench and fill mining method is currently used in the main areas of the mine and to a lesser extent, room and pillar mining is also used. The mining method used
varies depending on geotechnical constraints, mineralization trends, dimensions, and mine production targets.
Using the updated Mineral Resource estimate, Sierra Metals performed an expansion analysis to determine how the Cusi mine could achieve higher sustainable
production rates. The analysis indicated that higher production rates are achievable through the massification of the bench and fill mining method in the new
production areas, which will allow the sustainability of the operation.
Current production at Cusi comes from the Promontorio and Santa Rosa de Lima mineralized zones. Mineralized material is currently hauled to the surface using
one of several adits or declines accessing the mineralized zones, and is then dumped onto small pads outside of the portals.
The mining sequence through this method is of a descending type, that is, the upper levels are mined, while in the lower ones the necessary preparations are made
to start mining once the mineralized material has been extracted from the upper stopes. Within a sublevel, mining is carried out in retreat, starting at the ends of
the stope and retreating towards the entrance.
The extracted mineral is taken to the Malpaso processing plant located 36 km from the mine, where lead and zinc concentrates are produced.
1.8 PROJECT INFRASTRUCTURE
The Project has fully developed infrastructure including access roads, an exploration camp, administrative offices, a processing plant and associated facilities,
tailings storage facility, a core logging shed, water storage reservoir and water tanks.
The site has electric power from the Mexican power grid, backup diesel generators, and heating from site propane tanks. The overall Project infrastructure is built
out and functioning and adequate for the purpose of the planned mine and mill.
Electrical power at the Cusi Mine and Malpaso Mill is provided by the Mexican Electricity Federal Commission (Comisión Federal de Electricidad). At the Cusi
mine, electricity is conveyed by a 33 kV power line. At the Malpaso Mill, electricity is delivered on a 1,290-kilowatt power line. Existing electricity supply is
expected to be adequate for foreseeable mining operations.
Details regarding energy consumption of the operation have been provided by Sierra. In 2019, for example, average monthly usage was about 557,279 kWh at a
cost of approximately MXN$2.09/kWh.
Waste from the Promontorio and Santa Eduwiges mines is stored near the entry portals and ramps of these mines. Waste is used as backfill for the mine, and thus
requirements for waste storage are minimal. Waste disposal areas are expected to be sufficient for expected future operations.
Construction of the La Colorada tailings storage facility (TSF) is based on a cut and fill method and presently consists of two cells at 4 construction stages and
Cell 1 is currently under construction in the first stage, with a capacity of 356,262 t and during 2021, the construction of the second stage will begin with a
capacity of 946,489 t. Cell 2 will have a total capacity of 1,875,677 t. Tailings management is conducted with specialized slurry pumps working at no more than
80% of capacity. The equipment used has a capacity of 1,200 tpd.
1.9 ENVIRONMENTAL STUDIES AND PERMITTING
Sierra has all relevant permits required for the current mining and metallurgical operations. Sierra also has a Community Relations Plan that includes annual
assessment, records, minutes, contracts and agreements.
1.10 CAPITAL AND OPERATING COSTS
The capital and operating costs presented here are for the base case production rate of 1,200 tpd. Capital and operating cost estimates for the higher production
rates of 2,400 tpd, 3,000 tpd and 3,500 tpd are included in the analysis. Capital and operating costs are based upon forward-looking information. This forward-
looking information includes forecasts with material uncertainty which could cause actual results to differ materially from those presented herein. Table 1-4 and
Table 1-5 show the capital and growth capital cost (capex) summaries for the base case of 1,200 tpd respectively. Table 1-6 shows the operating cost (opex)
summary for the base case of 1,200 tpd.
55
56
Table 1-4: Sustaining Capex Forecast 1,200 tpd
Total
Sustaining Capex
($000s)
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Exploration &
Development
Development
27,811 1,854 1,854 1,854 1,854 1,853 1,855 1,854 1,854 1,853 1,852 1,856 1,854 1,854 1,853 1,855
Equipment
10,143
570 2,823 2,403
—
—
285 1,412 1,202
—
—
143
706
601
—
—
Projects
Personnel
transportation
600
200
—
—
—
—
—
200
—
—
—
—
200
—
—
—
Ventilation
5,808
465
465
465
465
465
465
465
465
465
465
465
465
232
—
—
Environmental
1,165
82
82
83
83
83
83
83
83
83
83
83
83
83
83
—
Seismograph
Study and
Instrumentation
250
150
50
50
—
—
—
—
—
—
—
—
—
—
—
—
Geomechanical
Model Study
500
—
250
—
—
250
—
—
—
—
—
—
—
—
—
—
Fuel Distribution
System
300
300
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
46,576 3,621 5,524 4,855 2,402 2,651 2,688 4,013 3,604 2,401 2,400 2,547 3,308 2,771 1,937 1,855
Source: Sierra Metals, Redco, 2020
57
Table 1-5: Growth Capex Forecast 1,200 tpd
Total
Growth Capex
($000s)
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Projects
Tailing Dam
11,042 1,104
2,208
2,208 460 460 460
460
460
460
460
460
460
460
460
460
Ventilation and
Services
3,872
310
310
310 310 310 310
310
310
310
310
310
310
155
—
—
Studies (Increase
production)
500
250
250
—
—
—
—
—
—
—
—
—
—
—
—
—
Studies
(geometallurgical)
450
150
150
150
—
—
—
—
—
—
—
—
—
—
—
—
Closure
1,729
—
—
—
—
—
—
—
—
—
—
346
346
346
345
346
Total
17,593 1,814
2,918
2,668 770 770 770
770
770
770
770
1,116
1,116
961
806
806
Source: Sierra Metals, Redco, 2020
Table 1.6: Opex Forecast 1,200 tpd
Total
Opex
Total
($000s)
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036
Mine
181,398
12,715 12,714 11,159 11,162 11,158 11,163 11,160 11,161 11,158 11,152 11,168 11,161 11,161 11,156 11,165 10,884
Plant
116,141
7,270
7,270
7,269
7,271
7,269
7,272
7,270
7,270
7,268
7,265
7,275
7,271
7,270
7,267
7,273
7,090
G&A
16,464
1,031
1,031
1,031
1,031
1,031
1,031
1,031
1,031
1,031
1,030
1,031
1,031
1,031
1,030
1,031
1,005
Total
314,003
21,016 21,015 19,460 19,464 19,457 19,465 19,460 19,462 19,457 19,448 19,474 19,463 19,462 19,453 19,469 18,979
Source: Sierra Metals, Redco, 2020
1.11 ECONOMIC ANALYSIS
The PEA considered four different production rates for the Cusi Mine:
1,200 tpd (base case);
2,400 tpd;
3,000 tpd; and
58
3,500 tpd.
The four production rate options were evaluated financially, and the 2,400 tpd production rate had the highest incremental net present value and IRR. Based on
this, the 2,400 tpd option is the recommended case for the prefeasibility study.
The 2,400 tpd (2024) proposed mine plan has a capital requirement (initial and sustaining) of US$ 91 M over the 13-year LOM; efficiencies associated with
higher throughputs are expected drive a reduction in operating costs on a per tonne basis. This PEA indicates an after-tax NPV (8%) at 2,400 tpd (in 2024) of
US$ 81 M. Total operating cost for the LOM is US$ 352 M, equating to a total operating cost of US$ 35.24 per tonne milled and US$ 8.83 per ounce silver
equivalent. Economic estimates are based upon forward-looking information. This forward-looking information includes forecasts with material uncertainty
which could cause actual results to differ materially from those presented herein.
A sensitivity analysis was performed for each mining plan to analyze the impact of the change on the main drivers: metal grades, operating and capital costs, and
gross income. The sensitivity analysis shows that the NPV for the 2,400 tpd production rate is most sensitive to changes in the Ag grade and gross income,
moderately sensitive to changes in opex, and least sensitive to changes in the Zn grade, Pb grade, Au grade, and capex.
The proposed mine plan is conceptual in nature and would benefit from further investigation.
1.12 CONCLUSIONS AND RECOMMENDATIONS
Geology and Mineral Resources Estimation
SRK has the following recommendations for the geology and Mineral Resources at Cusi:
SRK is of the opinion that the exploration and evaluation work completed at Cusi are sufficient for the definition of Mineral Resources. The primary exploration
methods at Cusi have been diamond core drilling and sampling of underground working areas, and both have been successful in delineating a system of discrete
epithermal veins and related stockwork mineralization. The drilling appears to be able to target and identify mineralized structures with reasonable efficacy, and
the majority of drilling is oriented in a fashion designed to approximate the true thicknesses of the mineralized veins. The exploration planning should be
designed to maximize conversion of higher-grade Inferred areas with less dense drilling to Indicated and Measured, and/or extending mineralization away from
known areas accessed through channel sampling. The recent exploration activities have been focused on the area of SRL_HW zone that is characterized by
several mineralized veins following a complex structural setting that will require detailed mapping combined with close-spaced drilling.
Mine development activities are utilized for exploration purposes, because the mining exposures provide direct access to the mineralized veins along
underground drifts. These exposures allow the Cusi exploration team to better understand the mineralization on a local scale. It is recommended that greater
effort is required to improve the underground survey data, channel sampling procedures, and the 3D as-built data.
SRK notes that recent efforts have improved the quality of the drilling and related information through more complete and thorough survey data (for drilling and
underground development), as well as the implementation of QA/QC programs that are delivering reasonable results. This lends additional confidence to recently
defined resources or newly drilled portions of historic areas.
SRK also notes that some of the Malpaso Mill laboratory’s challenges identified in the previous technical reports are being addressed and the results of the
QA/QC controls of the exploration team have shown improvements. These were related to significant differences between the values reported for identical
samples between Malpaso and third-party laboratories. These issues, combined with historic deficiencies in downhole surveying, detract from the overall
confidence in the quality of the historic data.
SRK is aware that Sierra Metals continues with the implementation of standard operating procedures to improve the collection and reporting of data supporting
Mineral Resource estimation and classification exercises. This includes improving down-hole surveys, improved channel sampling and mine working surveys,
and adopting commercial standards for QA/QC. The Malpaso Mill laboratory will have to continue with making improvements in the sample preparation
procedures and analyses consistent with ISO-certified laboratories like ALS.
In SRK’s opinion, a combination of these factors, once demonstrated to be in full use and functioning appropriately, should be validated through a simple
quarterly check sample process to ensure that the Malpaso Mill laboratory can produce results to the same precision
59
and accuracy as commercial, independent laboratories. The implementation of detailed downhole surveys and updated industry-standard QA/QC protocols in the
recent infill drilling campaign have resulted in the definition of Measured resources in the SRL vein.
SRK has the following recommendations for additional work to be performed at the Cusi mine:
●
Continue identifying and drilling mineralized zones that are dominantly supported by channel sample data. This should be done at a regular spacing
of approximately 25 m.
–
SRK recommends continuing with the program of drilling the new zones of high-grade mineralization, resulting in local high-grade Inferred
blocks that could theoretically be converted to Measured and Indicated with additional drilling and mapping; these blocks should be
prioritized.
–
Areas of cross-cutting veins may host high grade shoots that should be investigated and evaluated in further detail.
●
Continue the implementation and improvement of the current QA/QC program and maintain regularity in the rates of insertion of controls including
second lab checks.
●
Continue the use of commercial standards for QA/QC monitoring taking into consideration the Ag, Au, Pb and Zn cut-off values and average
grades of the deposit.
●
All analyses supporting a Mineral Resource estimation should continue to be analyzed by an ISO-certified independent laboratory such as ALS
Minerals.
●
The results of the QA/QC controls sent to the Malpaso laboratory have shown improvements in the sample preparation and analysis procedures, but
this enhancement program should continue and be verified.
●
Continued downhole surveys via Reflex or another appropriate survey tool for all drill holes completed.
●
SRK recommends continuing the practice of using a total station GPS for surveying of drillhole collars and channel sample locations, as well as
mine workings. Discrepancies between the precise locations of these three types of data occur regularly where they are closely spaced and reduces
confidence in the data.
●
A 3D mine survey can be completed for minimal cost and should be conducted on a quarterly basis to develop improved measurements of the
mined out material to be used in reconciliation processes.
●
Develop a simple method of reconciling the resource models to production, using stope shapes and grades derived from channel sampling.
Mining
SRK has the following recommendations for the mining at Cusi:
●
A consolidated 3D LOM design should be completed to improve communication of the LOM plan, infill drilling requirements, and general mine
planning and execution.
●
Further technical-economic evaluations of the production rate expansion options should be undertaken via pre-feasibility and feasibility studies.
Geotechnical and Hydrogeological
SRK’s geotechnical and hydrogeological recommendations are as follows:
●
continue collecting geotechnical characterization data from mined drifts and exploration drillholes;
●
maintain a central geotechnical database;
●
develop and maintain geotechnical models, including structures and rock mass wireframes; and
●
examine the current mine sequence and simulate the optimal mine sequence to reduce safety risks and the risk of sterilizing mineralized material
due to unexpected ground problems.
Infrastructure
Ongoing monitoring of the stability of the TSF embankment and operations practices is recommended to conform to industry best practices.
60
Recovery Methods
SRK recommends that Cusi evaluate the maximum head grade the mill is able to receive without compromising the quality of its lead concentrate because of the
high presence of zinc (currently grading at about 9%). Improving selectivity will likely improve the overall lead grade in concentrate that needs to be at 50% Pb
or higher to achieve better economic value.
SRK recommends that Cusi improve its control of plant operations by installing more instrumentation and an automation control system. Doing so would lead to
more consistent plant operation, reduced electrical energy and reagent consumption, and ultimately initiate a continuous improvement of the plant’s unit
operations and overall performance.
Environmental Studies and Permitting
Social and environmental activities are currently of high importance in Mexico; therefore, SRK recommends that the company’s commitments and agreements be
fulfilled in detail and in a timely manner. Reputation and legal risks can arise due to this issue.
1.13 RECOMMENDED WORK PROGRAM COSTS
SRK notes that the costs for the majority of recommended work are likely to be a part of normal operating budgets that Cusi would incur as an operating mine.
These are cost estimates and would depend on actual contractor costs and scope to be determined by Sierra. SRK notes that the recommendations for metallurgy,
mine design, geotechnical studies, or economic analysis are not included in these costs, and that these recommendations solely impact the quality of the mineral
resource estimation.
Table 1-7 presents the general estimated cost of the future exploration drilling according to Sierra’s objectives.
Table 1-7: Summary of Costs for Recommended Work
Item
Cost (US$)
Drilling (infill - step out)
$
3,500,000
Source: SRK, 2020
Note: Drilling costs assume ~33,333 meters @ US$105/m drilling costs. Scope of drilling is difficult to assess without understanding the density of
drilling required to support mineral resource delineation.
UPDATED MINERAL RESOURCE AND MINERAL RESERVE INFORMATION
In accordance with NI 43-101, the Mineral Reserves previously reported for these mines are no longer valid after the issuance of the PEA Technical Reports and
so have been removed from the tables below.
61
The Company prepared an updated mineral resource estimate for the Yauricocha Mine, the Bolivar Mine and the Cusi Mine as at December 31, 2021 which is set
out in the chart below:
Contained Metal
Tonnes Ag Cu
Pb
Zn
Au AgEq CuEq ZnEq Ag Cu Pb Zn Au AgEq CuEq ZnEq
(x1000)
(g/t)
(%)
(%)
(%)
(g/t)
(g/t)
(%)
(%)
(M oz)
(M lb)
(M lb)
(M lb)
(K oz)
(M oz)
(M lb)
(M lb)
Yauricocha(2) Measured
3,776
61 1.11
0.9 2.57 0.59
—
— 6.78
7
93
75 214
72
—
—
564
Indicated
9,604
39 1.23 0.53 1.97 0.50
—
— 5.77
12 260 113 417 154
—
— 1,222
Measured&Indicated 13,379
45 1.19 0.64 2.14 0.52
—
— 6.05
19 353 187 632 225
—
— 1,786
Bolivar(3)
Measured
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Indicated
17,915
15 0.77
—
— 0.20
— 1.0
—
9 305
—
— 117
— 393
—
Measured&Indicated 17,915
15 0.77
—
— 0.20
— 1.0
—
9 305
—
— 117
— 393
—
Cusi(4)
Measured
647 230
— 0.24 0.29 0.02 247
—
—
5
—
3
4
—
5
—
—
Indicated
4,303 177
— 0.55 0.64 0.13 219
—
—
24
—
52
61
18
30
—
—
Measured&Indicated
4,951 184
— 0.51
0.6 0.11 223
—
—
29
—
56
64
18
35
—
—
Total
Measured&Indicated 36,245
49 0.82
0.3 0.87 0.31
—
—
—
57 658 243 696 360
35 393 1,786
Notes:
1.
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.
2.
Zinc equivalency is based on the following metal price assumptions: US$21.02/oz Ag, US$3.39/lb Cu, US$0.91/lb Pb, US$1.10/lb Zn and
US$1,598.21/oz Au. Metallurgical recovery assumptions are variable between mineralization types, and are based on actual plant data for 2019. The
average is (where recovered) 76% Ag, 75% Cu, 89% Pb, 89% Zn, 22% Au. The equivalency expression is designed to present an in-situ zinc equivalent,
considering the recovered value of the other metals expressed in the value of zinc percent. The equation is: ZnEq = ((Ag*Ag$*Agrec)+
(Cu*Cu$*Curec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Zn$*Znrec). Further details of the key assumptions, parameters and methods
used for this estimate are provided in the Yauricocha PEA Technical Report.
62
3.
Measured, Indicated and Inferred Resources include Proven and Probable Reserves. Copper equivalent is based on the following metal prices:
US$17.82/oz Ag, US3.08/lb Cu and US$1,354 Au. Totals for Proven and Probable are diluted for internal waste. Metallurgical recovery assumptions
are based on actual plant data for 2019 and are 78.6% Ag, 88% Cu, and 62.9% Au. The equivalency expression is designed to present an in-situ copper
equivalent, considering the recovered value of the other metals expressed in the value of copper percent.
The equation is: CuEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Au*Au$*Aurec)) / (Cu$*Curec). Further details of the key assumptions, parameters and
methods used for this estimate are provided in the Bolivar PEA Technical Report.
4.
Silver equivalency is based on the following metal price assumptions: US$20.0/oz Ag, US$0.91/lb Pb, US$1.07/lb Zn and US$1,541/oz Au. Based on
the historical production information for Cusi, the metallurgical recovery assumptions are 87% Ag, 86% Pb, 51% Zn, 57% Au. The equivalency
expression is designed to present an in-situ silver equivalent, considering the recovered value of the other metals expressed in the value of silver g/t.
The equation is: AgEq = ((Ag*Ag$*Agrec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Ag$*Agrec). Further details of the key
assumptions, parameters and methods used for this estimate are provided in the Cusi PEA Technical Report.
Contained Metal
Tonnese Ag
Cu
Pb
Zn
Au AgEq CuEq ZnEq Ag Cu Pb Zn Au AgEq CuEq ZnWq
(x1000)
(g/t)
(%)
(%)
(%)
(%)
(%)
(%)
(%)
(M oz)
(M lb)
(M lb)
(M lb)
(K oz)
(M oz)
(M lb)
(M lb)
Yauricocha(2)
11,566
29 1.40 0.32 1.03 0.44
—
— 4.87
11 358
83 262 162
—
— 1,242
Bolivar(3)
19,950
14 0.78
0.21
— 1.00
—
9 344
—
— 134
— 440
—
Cusi(4)
4,893 146
0.43 0.69 0.18 188
—
—
23
—
46
74
28
30
—
—
Total
Inferred 36,409
36 0.88 0.16 0.42 0.28
—
—
—
43 703 129 335 324
30 440 1,242
Notes:
1.
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.
2.
Zinc equivalency is based on the following metal price assumptions: US$21.02/oz Ag, US$3.39/lb Cu, US$0.91/lb Pb, US$1.10/lb Zn and
US$1,598.21/oz Au. Metallurgical recovery assumptions are variable between mineralization types, and are based on actual plant data for 2019. The
average is (where recovered) 76% Ag, 75% Cu, 89% Pb, 89% Zn, 22% Au. The equivalency expression is designed to present an in-situ zinc equivalent,
considering the recovered value of the other metals expressed in the value of zinc percent.
The equation is: ZnEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Zn$*Znrec). Further details of
the key assumptions, parameters and methods used for this estimate are provided in the Yauricocha PEA Technical Report.
3.
Measured, Indicated and Inferred Resources include Proven and Probable Reserves. Copper equivalent is based on the following metal prices:
US$17.82/oz Ag, US3.08/lb Cu and US$1,354 Au. Totals for Proven and Probable are diluted for internal waste. Metallurgical recovery assumptions
are based on actual plant data for 2019 and are 78.6% Ag, 88% Cu, and 62.9% Au. The equivalency expression is designed to present an in-situ copper
equivalent, considering the recovered value of the other metals expressed in the value of copper percent.
The equation is: CuEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Au*Au$*Aurec)) / (Cu$*Curec). Further details of the key assumptions, parameters and
methods used for this estimate are provided in the Bolivar PEA Technical Report.
63
4.
Silver equivalency is based on the following metal price assumptions: US$20.0/oz Ag, US$0.91/lb Pb, US$1.07/lb Zn and US$1,541/oz Au. Based on
the historical production information for Cusi, the metallurgical recovery assumptions are 87% Ag, 86% Pb, 51% Zn, 57% Au. The equivalency
expression is designed to present an in-situ silver equivalent, considering the recovered value of the other metals expressed in the value of silver g/t.
The equation is: AgEq = ((Ag*Ag$*Agrec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Ag$*Agrec). Further details of the key
assumptions, parameters and methods used for this estimate are provided in the Cusi PEA Technical Report.
The above mineral resource estimates have been prepared by Americo Zuzunaga FAusIMM CP (Mining Engineer), Vice-President Corporate Planning
of the Company, a Qualified Person and chartered professional qualifying as a Competent Person under the JORC Australasian Code for Reporting of
Exploration Results, Mineral Resources, and Ore Reserves.
The resource estimates are based on the consolidated mineral resource estimate with the following effective dates as contained in the respective PEA
Technical Reports filed for each of the mines:
Yauricocha PEA Technical Report – effective date: March 31, 2021
Bolivar PEA Technical Report – effective date: December 31, 2019
Cusi PEA Technical Report – effective date: August 31, 2020
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
estimates to December 31, 2021. 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 PEA Technical Reports.
All economic parameters are based on the respective PEA Technical Reports. All risks associated with the Mines are defined in the risks section of these
Technical Report. Disclosure follows assumptions and parameters used in the PEA Technical Reports.
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.
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.
64
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.
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 NPV 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 Yauricocha Mine and Bolivar Mine, none of the Company’s properties have any orebodies 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
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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.
Uncertainty of 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 changes 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.
This AIF and the documents incorporated by reference herein have been prepared and disclosed in accordance with the requirements of Canadian securities laws
that differ from the requirements of United States securities laws. Please refer to “Cautionary Note to U.S. Investors concerning Estimates of Mineral Reserves
and Measured, Indicated and Inferred Mineral Resources”.
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.
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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.
Risk of 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 in those countries 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, nationalization, 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.
Burden of 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.
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
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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.
Uncertainty of 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.
Environmental risks
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
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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.
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 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.
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
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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.
Significant shareholders
Arias Resource Capital Fund II L.P., Arias Resource Capital Fund II (Mexico) L.P. (collectively, the “ARC Funds”), Arias Resource Capital GP Ltd., J. Alberto
Arias 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
significant shareholders. In addition, these shareholders may be able to exercise influence over certain 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.
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.
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 or outside the Unites States, 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 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 (“RSUs”) issued by the Company and the issuance of other additional equity securities in the future could
result in dilution in the value of the 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.
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.
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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 mining and exploration industry is cyclical in nature. The mining industry is subject to commodity pricing, which is in turn affected by other economic
indicators and worldwide cycles. The pricing cycles that the mining industry experiences affect the overall environment in which the Company conducts its
business. For example, if commodity pricing is low, Sierra’s access to capital may be restricted. Continuing periods of low commodity prices or economic stalls
could also affect the economic potential of the Company’s current properties and may affect its ability to, among other things: (i) capitalize on financing,
including equity financing, to fund its ongoing operations and exploration and development activities; and (ii) continue exploration or development activities on
its properties.
Furthermore, weather cycles may affect the Company’s ability to conduct exploration activities at its mines, including the Yauricocha Mine, Bolivar Mine and
Cusi Mine. More specifically, drilling and other exploration activities may be restricted during periods of adverse weather conditions or winter seasons as a result
of weather-related factors, including inclement weather, snow covering the ground, frozen ground and restricted access due to snow, ice, or other weather-related
factors.
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.
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.
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Climate change
There is significant evidence of the effects of climate change on our planet and an intensifying focus on addressing these issues. Governments are introducing
climate change legislation and treaties at the international, national, and local levels, and regulations relating to emission levels and energy efficiency are
evolving and becoming more rigorous. However, the laws and regulatory requirements are not consistent across the jurisdictions in which we operate, and
regulatory uncertainty is likely to result in additional complexity and cost in our compliance efforts. Public perception of mining is, in some respects, negative
and there is increasing pressure to curtail mining in many jurisdictions as a result, in part, of perceived adverse effects of mining on the environment. Concerns
around climate change may also affect the market price of the Company’s shares as institutional investors and others may divest interests in industries that are
thought to have more environmental impacts. While the Company is committed to operating responsibly and reducing the negative effects of its operations on the
environment, its ability to reduce emissions, energy and water usage by increasing efficiency and by adopting new innovation is constrained by technological
advancement, operational factors and economics. Adoption of new technologies, the use of renewable energy, and infrastructure and operational changes
necessary to reduce water usage may also increase the costs at the Company’s operations significantly. Concerns over climate change, and the Company’s ability
to respond to regulatory requirements and societal pressures, may have significant impacts on its operations and on its reputation, and may even result in reduced
demand for its products. The physical risks of climate change could also adversely impact the Company’s operations. These risks include, among other things,
extreme weather events, resource shortages, changes in rainfall and in storm patterns and intensities, water shortages, changing sea levels and extreme
temperatures. Climate-related events such as mudslides, floods, droughts and fires can have significant impacts, directly and indirectly, on the Company’s
operations and could result in damage to its facilities, disruptions in accessing its sites with labour and essential materials or in shipping products from its mines,
risks to the safety and security of its personnel and to communities, shortages of required supplies such as fuel and chemicals, inability to source enough water to
supply its operations, and the temporary or permanent cessation of one or more of its operations. There is no assurance that the Company will be able to
anticipate, respond to, or manage the risks associated with physical climate change events and impacts, and this may result in material adverse consequences to
its business and to its financial results.
Biological hazards (COVID-19)
Since the outbreak of the coronavirus (COVID-19) in late 2019, it has spread into areas where the Company has operations and where the Company’s offices are
located. Government efforts to curtail the spread of COVID-19 resulted in reduced production at the Company’s operations as it enhanced physical distancing to
protect its personnel and the community. The spread of COVID-19 has impacted the Company’s employees and contractors, not only as it relates to potential
health concerns, but also in terms of limitations on movement, availability of food and other goods, and personal wellbeing, among others. The Company’s
suppliers and service providers have also been impacted.
While COVID-19 has already had significant, direct impacts on the Company’s operations, business, workforce and production, the extent to which COVID-19
will continue to impact the operations will depend on future developments which are highly uncertain and cannot be predicted with confidence. These future
developments include, but are not limited to, the duration of any outbreak, new information that may emerge concerning the severity of COVID-19, including
variants of the disease, and the actions taken to contain COVID-19 or treat it. The impact of governmental restrictions and health and safety protocols could
improve or worsen relative to the Company’s assumptions, depending on how each jurisdiction manages potential outbreaks of COVID-19, the development and
adequate supply of vaccines, and the effectiveness of such vaccines. The management assumes operations will continue to be impacted by comprehensive
COVID-19 protocols in 2022, which could increase costs and restrict throughput levels, especially at the Company’s underground mines. Exploration and
development programs were also impacted in 2021 due to COVID-related restrictions, protocols and travel restrictions, and the management anticipates that this
impact may also be felt in 2022. The Company’s ability to continue with its operations and activities, or to successfully maintain its operations on care and
maintenance if so required, or to restart or ramp-up any such operations efficiently or economically, or at all, is unknown.
Moreover, the continued presence of, or spread, of COVID-19, and any future emergence and spread of COVID-19 mutations or other pathogens, globally would
likely have material adverse effect on both global and regional economies, including those in which the Company operates. Such effects would not only affect the
Company’s business and results of operations, but also the operations of its suppliers, contractors and service providers, including smelter and refining service
providers, and the demand for its production. COVID-19 could also negatively impact stock markets, including the trading price of the Company’s shares,
adversely impact its ability to raise capital, cause continued interest rate volatility and movements that could make obtaining financing or refinancing its debt
obligations more challenging or more expensive (if such financing is available at all), and result in any operations affected by coronavirus becoming subject to
quarantine or shut down. Inflationary pressures relating to COVID-19 global financial support measures and current supply chain challenges are also having both
direct and indirect impacts on the Company’s costs to operate, which could have a material
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impact on its financial results. Any of these developments, and others, could have a material adverse effect on the Company’s business and results of operations.
Dividends and Distributions
There were no cash dividends or distributions declared on any of Sierra’s securities for the financial years ended December 31, 2020 and December 31, 2019. On
November 5, 2021, the Company declared an annual cash dividend of $0.03 per Common Share to the holders of issued and outstanding Common Shares as of
the close of business on November 22, 2021. Accordingly, this dividend of approximately $4.9 million was paid on December 7, 2021.
The amount of future dividends to be declared in the future, if any, shall be considered by the Board on a quarterly basis and will depend on the Company’s
overall cash and operating position at the relevant time, satisfaction of solvency tests imposed by applicable law for the declaration and payment of dividends and
other relevant factors.
DESCRIPTION OF CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of Common Shares without par value. As of the date hereof, the Company has 163,428,150 Common
Shares issued and outstanding.
Each Common Share carries one vote at all meetings of shareholders, is entitled to receive dividends as and when declared by the Board and is entitled to
participation in in the remaining property and assets of the Company upon dissolution or winding-up. The Common Shares do not carry any pre-emptive,
subscription, redemption or conversion rights.
MARKET FOR SECURITIES
The Common Shares are currently listed for trading on the TSX and the Lima Stock Exchange under the symbol “SMT”. The Common Shares are also listed for
trading on the NYSE American under the symbol “SMTS”.
Trading Prices and Volumes
The following table provides a summary of the high and low prices and aggregate volume for the Common Shares as traded on the TSX for the twelve-month
period ending December 31, 2021.(1)
Period
High (C$)
Low (C$)
Volume
January 2021
4.92
3.89
2,833,399
February 2021
4.75
3.28
3,021,153
March 2021
4.12
3.17
2,861,824
April 2021
4.83
3.50
2,278,333
May 2021
4.74
3.91
1,987,865
June 2021
4.56
3.58
1,864,867
July 2021
3.96
3.24
972,873
August 2021
3.91
2.68
1,492,774
September 2021
2.89
2.11
1,835,206
October 2021
3.57
2.33
2,785,756
November 2021
2.60
1.63
4,664,226
December 2021
1.83
1.56
2,176,056
(1)
Source: TSX Infosuite.
Prior Sales
During the fiscal year ended December 31, 2021, the Company issued the following securities that are not listed or quoted on a marketplace:
Date of last Issue
Type of Security Issued
Number of Securities Issued
March 31, 2021
RSUs
1,045,831(1)
73
(1)
60,407 of these RSUs have since been cancelled.
ESCROWED SECURITIES
To the Company’s knowledge, as at December 31, 2021, 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, the Board consists of nine 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 or her office is earlier vacated in accordance with the consenting documents of the Company or the provisions of the
CBCA.
74
The following table sets forth the names, residency and office of each director and executive officer of the Company as at the date hereof:
Name, position with the
Company, province or state
and country of residence
Principal occupation for the past five years
Director/officer of the Company since
LUIS C. MARCHESE (1)
Chief Executive Officer and
Director
(Lima, Peru)
-June 2020 to present: CEO of the Company
-August 2019 to May 2019: Alternate Director at Minera Poderosa
S.A (a mining company)
-August 2019 to May 2019: Director at Cia Minera San Ignacio de
Morococha S.A (a mining company)
- July 2018 to July 2019: Senior Advisor to CEO at Anglo American
(a mining company)
- May 2009 to June 2018: Country Manager Peru for Anglo American
(a mining company)
- CEO since June 1, 2020
-Director since May 19, 2020
JOSE VIZQUERRA
BENAVIDES (2)
Chairman of the Board and
Director
(Ontario, Canada)
-November 2019 to present: President & CEO of O3 Mining Inc. (a
mining company)
-June 2016 to November 2019: 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.
November 9, 2017
DOUGLAS F. CATER (1)(3)
(4)
Director
(Ontario, Canada)
-January 2019 to present: Independent Consultant
-January 2016 to January 2019: VP Exploration (Canada), Kirkland
Lake Gold Ltd. (a mining company)
June 10, 2009
STEVEN G. DEAN (2)(3)
Director
(British Columbia, Canada)
Independent businessman
October 4, 2011
DIONISIO ROMERO
PAOLETTI
Director
(Lima, Peru)
Corporate Director and Chairman of various public companies
November 16, 2015
KOKO YAMAMOTO (2) (4)
Director
(Ontario, Canada)
Partner and Accountant at McGovern, Hurley LLP (a public
accounting firm)
July 15, 2019
OSCAR MARIANO
CABRERA (4)
(Ontario, Canada)
-May 2021 to present: Retained by Nexa Resources S.A to advise on
strategy, business development and investor relations.
-February 2017 to September 2020: Executive Director, Institutional
Investment Research, CIBC World Markets Inc (investment banking
subsidiary of the Canadian Imperial Bank of Commerce)
-March 2009 to March 2016: Director, Global Investment Research,
Bank of America Merril Lynch (American multinational investment
banking division)
October 7, 2021
CARLOS ENRIQUE
SANTA-CRUZ BENDEZU
(1)
(Lima, Peru)
-January 2020 to present: Board member and Chairman of Mining
Committee of JRC Ingeniería y Construcción SAC (company
dedicated to the integral development of mines)
-August 2015 to present: Chairman of the Board and owner of
Buenaventura Ingeniería de Proyectos S.A. (company that provides
consulting services in engineering)
October 7, 2021
75
Name, position with the
Company, province or state
and country of residence
Principal occupation for the past five years
Director/officer of the Company since
-2013 to April 2015: Senior Vice President of Australian and New
Zealand Operations, Newmont Mining Corporation (a mining
company).
DAWN WHITTAKER (1) (3)
(Ontario, Canada)
- Prior to June 30, 2018 – Senior Partner, Norton Rose Fulbright
Canada LLP (retired on June 30, 2018)
- December 13, 2018 to January 31, 2020 – Director of Detour Gold
Corporation
- May 7, 2021 to present – Chair of the Board of Directors of Triple
Flag Precious Metals Corporation
February 24, 2022
ED GUIMARAES (5)
Chief Financial Officer and
Interim Corporate Secretary
(Ontario, Canada)
CFO of the Company
November 17, 2014
ALONSO LUJAN
Vice President, Exploration
(Chihuahua, Mexico)
-September 2016 to present: VP Exploration of the Company
-January 2016 to September 2016: Independent Consultant
September 14, 2016
RAJESH VYAS
Corporate Controller
(Ontario, Canada)
-December 2019 to present: Corporate Controller of the Company
-November 2017 to November 2019: Director of Finance of Alamos
Gold Inc. (a mining company)
-April 2016 to November 2017: Operations Controller of Richmont
Mines Inc. (a mining company)
December 18, 2019
(1) Member of the Health, Safety, Environment & Social Responsibility Committee
(2) Member of the Compensation Committee
(3) Member of the Corporate Governance and Nomination Committee
(4) Member of the Audit Committee
(5) Ed Guimaraes is also the Chief Compliance Officer of the Company and assumed responsibilities of the Corporate Secretary on January 16, 2021
As at the date hereof, the directors and executive officers of the Company as a group beneficially own, directly and indirectly, or exercise control or direction
over, an aggregate of 2,286,245 Common Shares, representing approximately 1.4% of the outstanding Common Shares.
Board Adviser
Mr. Alberto Beeck served as an adviser to the Board since December 20, 2017. As per the Adviser Agreement, Mr. Beeck had the right to attend all meetings the
Board strictly in a non-voting, advisory capacity without 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. Mr. Beeck stepped down as an adviser to the Board on November 5, 2021.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
No director 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:
(a)
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
76
(b)
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.
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)
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;
(b)
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.
Mr. Cater was a director of Harte Gold Corp. (“Harte Gold”) when it commenced proceedings for creditor protection under the Companies’ Creditors
Arrangement Act (Canada) (“CCAA”). On February 18, 2022, Harte Gold announced that, in connection with its creditor protection proceedings under the
CCAA, and its previously announced sale and investment solicitation process, it completed the transactions (the "Transaction") contemplated by that certain
subscription agreement (as amended from time to time, the "Subscription Agreement") with 1000025833 Ontario Inc. (the "Investor"), a subsidiary of Silver Lake
Resources Limited. The Subscription Agreement had been approved by the Ontario Superior Court of Justice (Commercial List) (the "Court") on January 28,
2022. Following completion of the Transaction, in accordance with the Subscription Agreement and the Court order, all of the previously issued and outstanding
common shares of Harte Gold have been cancelled without consideration, and Harte Gold became a wholly-owned subsidiary of the Investor and emerged from
the CCAA proceedings. Furthermore, all of the directors and executive officers of Harte Gold have resigned effective upon closing.
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 has been subject to:
(a)
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
(b)
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 the involvement of certain directors of the Company in other mining companies, 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.
AUDIT COMMITTEE INFORMATION
The Board has established the Audit Committee comprised of Koko Yamamoto (Chair), Douglas F. Cater and Oscar Cabrera. 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”).
77
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”.
Koko Yamamoto
Ms. Yamamoto is a chartered professional accountant with over 19 years’ experience. She is a partner at McGovern, Hurley LLP, a CPAB registered firm, since
2003, and her practice includes a focus on assurance engagements for reporting issuers in the resource sector. Ms. Yamamoto is involved in initial public
offerings and private placements, mergers and acquisitions. She is currently a director for Largo Inc. as well as Chair of the Largo Audit Committee.
Ms. Yamamoto is registered as a panel auditor with the Investment Industry Regulatory Organization of Canada (IIROC), which enables her to conduct audits of
investment dealers. Ms. Yamamoto obtained her CPA CA designation in 2001 and holds a Bachelor of Commerce from the University of British Columbia.
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 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.
Oscar Mariano Cabrera
Mr. Cabrera is a senior equity analyst with over 20 years of experience covering the metals and mining industry for global investment banks and Canadian
financial institutions, including Goldman Sachs, Merrill Lynch Canada and CIBC World Markets. He obtained recognition for industry thought leadership,
fundamental commodity analysis and strong industry relationships, which has led to advisory roles for public mining companies. Mr. Cabrera also participated in
the vetting of and advising on primary and secondary offerings in Canada, the U.S. and Europe. He currently serves as a senior advisor on strategy, business
development and investor relations to Nexa Resources S.A. Mr. Cabrera holds a MBA from York University, a MEng. in Structural Engineering from the
University of Toronto and a B. Sc in Civil Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey.
Audit Committee Oversight
At no time since January 1, 2021 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, 2021 and
December 31, 2020, the fees billed by PWC are summarized below for each category:
Service
Fees billed in 2021
Fees billed in 2020
Audit Fees
$
622,486
$
371,244
Audit-Related Fees (1)
$
83,965
$
73,455
Tax Fees
$
nil
$
nil
78
All Other Fees
$
nil
$
nil
Total Fees Paid
$
706,451
$
444,698
(1)
For the year ended December 31, 2021, the $83,965 in “Audit-Related Fees” relates to PWC’s quarterly reviews.
(2)
For the year ended December 31, 2020, the $73,455 in “Audit-Related Fees” relates to PWC’s quarterly reviews.
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.
“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 following is a description of the legal proceedings the Company is or was a party to, or that any of its property is or was the subject of, during the fiscal year
ended December 31, 2021:
These matters include an ongoing personal action filed in Mexico against Dia Bras Mexicana S.A de C.V (“DBM”) by an individual, Carlos Emilio Seijas
Bencomo, 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. Carlos.
Emilio Seijas Bencomo passed away in 2020 and his heirs appointed Mr. Emilio Ambrosio Bencomo Portillo as legal representative to pursue this case. As per
latest development, on March 21, 2021, the first Civil Court of Chihuahua absolved DBM of all claims raised by the plaintiff. Although the plaintiff filed an
appeal against this ruling on April 7, 2021, the Company believes that there is no merit in this appeal and the possibility of reversal of the March 12, 2021 ruling
is very unlikely. The Company is not aware of any other significant legal proceedings known to be contemplated.
◾
Regulatory Actions
During the financial year ended December 31, 2021, 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; or (c) settlement agreements the Company entered into before a court relating to
securities legislation or with a securities regulatory authority.
79
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 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 (i) or (ii) above.
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 (including the Corporate Facility, as amended), that are material to the Company and that were
entered into during the financial year ended December 31, 2021, 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 PEA Technical Report are Américo Zuzunaga Cardich, Sierra Metals Inc., Vice President
Corporate Planning (Infrastructure, Environmental), Andre Deiss, BSc. (Hons), Pr. Sci. Nat., SRK Principal Consultant (Resource Geology), Carl Kottmeier,
B.A.Sc., P. Eng., MBA, SRK Principal Consultant (Project Manager), Daniel H. Sepulveda, BSc., SME-RM, SRK Associate Consultant (Metallurgy) and
Mr. Enrique Rubio, Ph.D., Executive Director, Redco Global Peru S.A.C. (Reserves, Mining).
The Qualified Persons responsible for reviewing the Bolivar PEA Technical Report are Américo Zuzunaga Cardich, Sierra Metals Inc., Vice President Corporate
Planning, Cliff Revering, P. Eng., SRK Principal Consultant (Resource Geology), Carl Kottmeier, B.A.Sc., P. Eng., MBA, SRK Principal Consultant (Mining),
Daniel H. Sepulveda, BSc, SME-RM, SRK Associate Consultant (Metallurgy) and Jarek Jakubec, C. Eng. FIMMM, SRK Practice Leader/Principal Consultant
(Mining, Geotechnical).
The Qualified Persons responsible for reviewing the Cusi PEA Technical Report are Américo Zuzunaga Cardich, Sierra Metals Inc., Vice President Corporate
Planning, Giovanny Ortiz, B.Sc., PGeo., SRK Principal Consultant (Resource Geology), Carl Kottmeier, B.A.Sc., P. Eng., MBA, SRK Principal Consultant
(Mining) and Daniel H. Sepulveda, BSc, SME-RM, SRK Associate Consultant (Metallurgy).
To the knowledge of the Company, each of the Qualified Persons listed above hold less than 1% of the outstanding Common Shares, 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 FAusIMM CP (Mining Engineer), the Vice-President - Corporate Planning of the Company, is named in this AIF as having prepared the
Yauricocha PEA Technical Report, the Bolivar PEA Technical Report and the Cusi Technical Report under the heading “Material Mineral Properties”. As of the
date hereof, Americo Zuzunaga holds 44,871 shares and 56,144 RSUs of the Company.
PWC are the auditors of the Company who have prepared the auditors’ report in respect of Sierra’s annual financial statements for the fiscal year ended
December 31, 2021. 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.
80
ADDITIONAL INFORMATION
Additional information relating to the Company may be found on SEDAR at www.sedar.com. Additional information including directors’ and officers’
remuneration and indebtedness, principal holders of the Company’s securities, and securities authorized for issuance under equity compensation plans, if
applicable, is contained in the Company’s 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 financial statements and management discussion & analysis for its most recently completed
financial year.
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
DUTIES AND RESPONSIBILITIES
1.
The Committee shall:
(a)
review and recommend to the Board for approval the annual audited consolidated financial statements of the Corporation;
(b)
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;
(c)
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
(d)
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)
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;
(b)
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;
(c)
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;
(d)
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;
(e)
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;
(f)
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;
(g)
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;
(h)
review and approve the Corporation’s hiring policies regarding employees or former employees of the current and former
external auditors;
(i)
review the scope of the external audit, including the fees involved;
(j)
review the external auditors’ report on the annual audited consolidated financial statements;
(k)
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;
(l)
review major positive and negative observations of the external auditors during the course of the audit;
(m)
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;
(n)
review emerging accounting issues and their potential impact on the Corporation’s financial reporting;
(o)
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;
(p)
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;
(q)
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;
(r)
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;
(s)
review with management their approach with respect to business ethics and corporate conduct;
(t)
review annually the legal and regulatory requirements that, if breached, could have a significant impact on the
Corporation’s published financial reports or reputation;
(u)
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;
(v)
review with management the accuracy and timeliness of filing with regulatory authorities;
(w)
review periodically the business continuity plans for the Corporation;
(x)
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;
(y)
perform such other duties as required by the Corporation’s incorporating statute and applicable securities legislation and
policies; and
(z)
establish procedures for:
(i)
the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal
controls, or auditing matters; and
(ii)
the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable
accounting or audit matters.
3.
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.
4.
On an annual basis, the Committee will review the Audit Committee Charter and, where appropriate, recommend changes to the
Board.
IV
SECRETARY
The Secretary of the Committee will be appointed by the Chair of the Committee.
V
MEETINGS
1.
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.
2.
Meetings may be conducted with members present in person, by telephone or by video conference.
3.
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.
4.
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.
5.
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.
6.
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.
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.
Table of Contents
SIERRA METALS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2021
Corporate Office
TSX: SMT
NYSE AMERICAN: SMTS
161 Bay Street, Suite 4260
Toronto, ON, Canada M5J 2S1
BVL: SMT
www.sierrametals.com
Table of Contents
TABLE OF CONTENTS
1.
INTRODUCTION
3
2.
COMPANY OVERVIEW
3
3.
2021 OPERATING AND FINANCIAL HIGHLIGHTS
4
4.
COVID-19, OUTLOOK AND GUIDANCE 2022
7
5.
RESULTS OF OPERATIONS
11
6.
SUMMARIZED FINANCIAL RESULTS
19
7.
QUARTERLY FINANCIAL REVIEW
24
8.
LIQUIDITY AND CAPITAL RESOURCES
26
9.
SAFETY, HEALTH AND ENVIRONMENT
27
10.
FINANCIAL INSTRUMENTS AND RELATED RISKS
27
11.
OTHER RISKS AND UNCERTAINTIES
30
12.
NON-IFRS PERFORMANCE MEASURES
34
13.
RELATED PARTY TRANSACTIONS
40
14.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
40
15.
OFF BALANCE SHEET ARRANGEMENTS
42
16.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”)
42
17.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
43
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
3
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, 2021 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 16, 2022 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
Americo Zuzunaga, FAusIMM 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.
2.
COMPANY OVERVIEW
Sierra Metals Inc. is a diversified Canadian mining company with Green Metal exposure including increasing copper production and base metal production with
precious 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.
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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
4
3.
2021 OPERATING AND FINANCIAL HIGHLIGHTS
Three Months Ended
Year Ended
(In thousands of dollars, except per share and cash cost amounts, consolidated figures
unless noted otherwise)
December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
Operating
Ore Processed / Tonnes Milled
590,057
778,236
2,902,220
2,828,877
Silver Ounces Produced (000's)
805
922
3,527
3,465
Copper Pounds Produced (000's)
6,071
10,626
31,757
44,262
Lead Pounds Produced (000's)
6,011
7,630
30,816
32,972
Zinc Pounds Produced (000's)
14,913
21,612
79,281
81,868
Gold Ounces Produced
1,863
3,363
9,572
13,771
Copper Equivalent Pounds Produced (000's)1
17,841
29,267
89,926
118,214
Cash Cost per Tonne Processed
$
58.21
$
44.42
$
48.69
$
40.81
Cash Cost per CuEqLb2
$
2.29
$
1.31
$
1.81
$
1.13
AISC per CuEqLb2
$
4.13
$
2.56
$
3.40
$
2.12
Cash Cost per CuEqLb (Yauricocha)2
$
1.61
$
1.16
$
1.46
$
1.01
AISC per CuEqLb (Yauricocha)2
$
3.09
$
2.47
$
2.77
$
2.11
Cash Cost per CuEqLb (Bolivar)2
$
5.29
$
1.35
$
2.18
$
1.13
AISC per CuEqLb (Bolivar)2
$
8.58
$
2.34
$
4.22
$
1.88
Cash Cost per AgEqOz (Cusi)2
$
11.80
$
15.70
$
16.71
$
16.62
AISC per AgEqOz (Cusi)2
$
21.09
$
28.18
$
28.15
$
25.26
Financial
Revenues
$
62,240
$
76,218
$
272,014
$
246,888
Adjusted EBITDA2
$
18,843
$
33,725
$
104,732
$
102,833
Operating cash flows before movements in working capital
$
15,419
$
32,259
$
93,405
$
97,757
Adjusted net income attributable to shareholders2
$
5,443
$
8,670
$
21,571
$
30,817
Net income (loss) attributable to shareholders3
$
(34,716)
$
7,603
$
(27,363)
$
23,419
Cash and cash equivalents
$
34,929
$
71,473
$
34,929
$
71,473
Working capital
$
17,321
$
70,885
$
17,321
$
70,885
(1)
Copper equivalent pounds and silver equivalent ounces for Q4 2021 were calculated using the following realized prices: $23.41/oz Ag, $4.40/lb Cu, $1.55/lb
Zn, $1.06/lb Pb, $1,795/oz Au. Copper equivalent pounds and silver equivalent ounces for Q4 2020 were calculated using the following realized prices:
$24.30/oz Ag, $3.32/lb Cu, $1.22/lb Zn, $0.89/lb Pb, $1,859/oz Au. Copper equivalent pounds and silver equivalent ounces for full year 2021 were calculated
using the following realized prices: $25.21/oz Ag, $4.23/lb Cu, $1.37/lb Zn, $1.00/lb Pb, $1,796/oz Au. Copper equivalent pounds and silver equivalent ounces
for full year 2020 were calculated using the following realized prices: $20.59/oz Ag, $2.80/lb Cu, $1.03/lb Zn, $0.83/lb Pb, $1,771/oz Au.
(2) This is a non-IFRS performance measure, see Non-IFRS Performance Measures section of the MD&A.
(3) Net loss attributable to shareholders for Q4 and year 2021 includes an impairment charge of $35.0 million on the Cusi mine.
Q4 2021 Production Highlights
●
Copper production of 6.1 million pounds; a 43% decrease from Q4 2020
●
Zinc production of 14.9 million pounds; a 31% decrease from Q4 2020
●
Lead production of 6.0 million pounds; a 21% decrease from Q4 2020
●
Silver production of 0.8 million ounces; a 13% decrease from Q4 2020
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
5
●
Gold production of 1,863 ounces; a 45% decrease from Q4 2020
2021 Consolidated Production Highlights
●
Copper production of 31.8 million pounds; a 28% decrease from 2020
●
Zinc production of 79.3 million pounds; a 3% decrease from 2020
●
Lead production of 30.8 million pounds; a 7% decrease from 2020
●
Silver production of 3.5 million ounces; a 2% increase from 2020
●
Gold production of 9,572 ounces; a 30% decrease from 2020
●
Total of 2.9 million ore tonnes processed; a 3% increase from 2020
●
Consolidated copper equivalent production of 89.9 million pounds; a decrease of 24% from 2020
2021 Operational Highlights
Consolidated annual ore throughput of 2,902,220 tonnes, an increase of 3% over 2020, mainly driven by the higher throughputs from the Yauricocha and Cusi
mines, offset by a decline in the Bolivar annual throughput.
The Yauricocha mine received its Informe Tecnico Minero (“ITM”) permit in June 2021, allowing for an operating capacity of 3,600 tpd. Achieving the
maximum annual permitted capacity, throughput at Yauricocha was 1,256,847 tonnes, or an increase of 12% from the 2020 annual production.
Annual throughput of 295,771 tonnes at Cusi was 28% higher as the mine operated throughout the year, as compared to the year 2020, when almost four months
of production was lost during the care and maintenance period resulting from the government mandated shutdown.
The Bolivar mine achieved annual throughput of 1,349,602 tonnes, which was 9% lower than the 2020 throughput, as the mine continued to face manpower
issues such as reduced workforce due to COVID and high turnover in middle and senior management.
Consolidated copper equivalent production dropped 24% as compared to 2020 due to the aforementioned production issues at Bolivar and as higher throughput at
Yauricocha could not compensate for lower grades during the year. Metal production was higher at Cusi, driven by higher throughput and grades.
2021 Consolidated Financial Highlights
●
Revenue from metals payable of $272.0 million in 2021, an increase of 10% from 2020 annual revenue of $246.9 million. Higher revenue was largely a
result of the increase in realized prices for all metals as compared to 2020;
●
Yauricocha’s cash cost per copper equivalent payable pound was $1.46 (2020 - $1.01), and AISC per copper equivalent payable pound of $2.77 (2020 -
$2.11);
●
Bolivar’s cash cost per copper equivalent payable pound was $2.18 (2020 - $1.13), and AISC per copper equivalent payable pound was $4.22 (2020 -
$1.88);
●
Cusi’s cash cost per silver equivalent payable ounce was $16.71 (2020 - $16.62), and AISC per silver equivalent payable ounce was $28.15 (2020 -
$25.26);
●
Adjusted EBITDA(1) of $104.7 million for 2021, which is a 2% increase from the adjusted EBITDA of $102.8 million for 2020;
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
6
●
Net loss attributable to shareholders for 2021 was $27.4 million (2020: net income of $23.4 million) or $(0.17) per share (basic and diluted) (2020:
$0.14). Net losses for Q4 and the year ended 2021 included an impairment charge of $35.0 million on the Cusi mine;
●
Adjusted net income attributable to shareholders (1) of $21.6 million, or $0.13 per share, for 2021 was lower than the adjusted net income of $30.8
million, or $0.19 per share for 2020;
●
A large component of the net income for every period is the non-cash depletion charge in Peru, which was $9.3 million for 2021 (2020: $8.5 million).
The non-cash depletion charge is based on the aggregate fair value of the Yauricocha mineral property at the date of acquisition of Sociedad Minera
Corona S.A. de C.V. (“Corona”) of $371.0 million amortized over the life of the mine;
●
Cash flow generated from operations before movements in working capital of $93.4 million for 2021 was lower than the $97.8 million in 2020, mainly
due to higher G&A costs in 2021; and
●
Cash and cash equivalents of $34.9 million and working capital of $17.3 million as at December 31, 2021 compared to $71.5 million and $70.9 million,
respectively, at the end of 2020. Cash and cash equivalents decreased during 2021 as the $71.8 million used in investing activities and $36.9 million
used in financing activities exceeded cash generated from operating activities of $72.2 million.
(1) This is a non-IFRS performance measure, see Non-IFRS Performance Measures section of the MD&A.
Project Development
●
On August 16, 2021, the Company reported the inclusion of iron ore production in the 10,000 tonnes per day (“tpd”) Preliminary Economic Assessment
(“PEA”) for its Bolivar Mine mine. The updated PEA indicated an incremental benefit of after-tax NPV (@8%) of $78.2 million and IRR of 69.0%
versus the NPV of $57.4 million and IRR of 27.9% reported in the original PEA. A National Instrument 43-101 (“NI 43-101”) technical report was filed
on SEDAR and with the U.S. Securities and Exchange Commission on September 29, 2021;
●
On January 20, 2022, the Company announced results of the updated PEA on the expansion at its Yaurococha mine, which included Prefeasibility Study
level capital and operating expenditure. The updated PEA indicated an after-tax NPV (@8%) of $273.1 million. The Company filed the corresponding
NI 43-101 technical report on SEDAR and with the U.S Securities and Exchange Commission on March 3, 2022.
Exploration Highlights
Peru:
During the year, 9,719 meters of surface exploration using diamond drills was carried out in the Kilkasca, El Estacion, Yauricocha Medio, Fortuna and
Exito zones. Further, 18,509 meters of underground exploration was completed with the aim of replacing and increasing the mineral resources exploited
during the year.
Mexico:
Bolivar
●
During the year, 19,804 meters of infill drilling program was carried out at Bolivar including 13,072 meters in the El Gallo zone and 4,422 meters in the
Bolivar West zone; and
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
7
●
25,260 meters of brownfield exploration was completed in the Bolivar West and La Montura zones.
Cusi
●
The infill drilling program was carried out in the NorthEast and the North-NorthWest system, with the objective to define the continuity and the grades
of both systems. 21,059 meters of drilling was completed, including 4,702 meters of definition drilling into these systems with the termite rig; and
●
Brownfield exploration drilling program started at San Juan, San Antonio and Gallo Back veins and 4,703 meters of drilling was completed during
the year.
Corporate Development Highlights
Management and Board Changes
●
On January 29, 2021, Mr. Jose Vizquerra Benavides replaced Mr. Alberto Arias as the Chairman of the Board.
●
On July 19, 2021, Mr. Alberto Arias and Mr. Ricardo Arrarte resigned as directors of the Company. Following their resignations, Mr. Carlos E. Santa
Cruz and Mr. Oscar M. Cabrera were appointed to the Board on October 7, 2021.
●
On February 24, 2022, the Company appointed Ms. Dawn Whittaker to the Board.
4.
COVID-19, OUTLOOK AND GUIDANCE 2022
The Company gradually ramped up operations in 2021, despite continued restrictions imposed by the local governments. To deal with the impacts of the
pandemic, the Company continued with its various pro-active and reactive measures. These measures included a 4-day quarantine prior to entering a mining unit,
screening of employees using antigen tests and molecular tests (rt-PCR), physical distancing, capacity limitations on meetings or events, ventilation of work
areas, timely detection of cases with suspicious symptoms, and encouraging regular use of sanitizers. These measures resulted in additional costs of $7.6 million
in Peru and $2.0 million in Mexico. Further, the availability of personnel remained an issue throughout 2021, considering the absenteeism caused by quarantines
and due to the recovery phase of the workers who tested COVID-positive. Low availability of manpower led to delays in mine development and consequent
impact on metal production, which was particularly noticed at the Bolivar mine.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
8
Market Review and Trends
Metal Prices
One of the primary drivers of Sierra’s earnings and ability to generate operating cash flows are the metal market prices. Metal prices remained strong throughout
2021. Copper led the base-metals rally with the 2021 average prices being 51% higher than the 2020 averages. Zinc and lead prices averaged 32% and 20%
higher than the 2020 average prices. In the precious metals sector, average prices for silver were 23% higher as compared to 2020, while gold prices were up 2%.
LME Average Prices
Quarter ended Dec 31,
Year ended Dec 31
(In US dollars)
2021
2020
2021
2020
Silver (oz)
$ 23.32
$
24.39
$ 25.17
$ 20.51
Copper (lb)
$
4.40
$
3.25
$
4.22
$
2.80
Lead (lb)
$
1.06
$
0.86
$
1.00
$
0.83
Zinc (lb)
$
1.53
$
1.19
$
1.36
$
1.03
Gold (oz)
$ 1,796
$
1,875
$ 1,800
$ 1,770
The base metal market was primarily driven by the unprecedented demand after reopening of the global economy causing a big spike in inflation. Copper prices
started the year around $3.60 per pound and continued to climb throughout the year, except for some negligible pullback in Q3 2021. Copper prices were
supported not only by the unexpectedly strong demand, but also as supply growth struggled to keep up due to operational issues and shutdowns of some of the
copper mines. Most analysts feel that the strong copper demand will continue in 2022 especially driven by the import by China to feed the growth in electric
vehicles and renewable energy.
Zinc prices started 2021 at $1.26 per pound, and remained subdued in Q1 2021, before experiencing some volatility for the rest of the year. In the last quarter of
2021, zinc prices jumped to their highest levels in 14 years propped by increasing power costs prices and due to lack of supply as increasing costs forced some
smelters to decrease production by 50%. Analysts’ consensus for zinc prices remains similar to other base metals. Zinc prices are expected to move with the
demand for steel, galvanizing being zinc’s main end use.
Lead price was at $0.92 per pound at the beginning of the year and rallied 15% to end the year at $1.06 per pound, its biggest gain since 2017. Unlike copper and
zinc, analysts predict some weakening of lead prices by the end of 2022 due to the increase in the global lead supply and as the transition to electric cars is
expected to increase demand of nickel-lithium batteries over lead batteries.
As the demand for industrial metals drove the prices higher in 2021, precious metals such as gold and silver lagged behind. After a strong start to the year with
gold at $1,937 per ounce and silver at $27.27 per ounce, these metals remained weak throughout 2021, particularly impacted in the second half of the year, as
expectations of a tightening monetary policy and higher interest rates reduced the appeal for precious metals. Although analysts have predicted a gradual decline
in the precious metal prices for 2022, gold prices particularly rose in February 2022 to the $1,900 levels fueled by the geopolitical fears including the Russia-
Ukraine conflict.
2022 Guidance
Production Guidance
The year 2021 has been a challenging year for the mining operations of the Company due to the decrease in grades at Yauricocha and Bolivar, and availability of
ore, as lack of equipment and decrease in manpower impacted development mainly at the Bolivar mine. Despite the COVID related issues, operations at
Yauricocha and Cusi are gradually returning to normalcy. However, the Company anticipates that the backlog of ongoing operational challenges at Bolivar will
be overcome during the year, leading to much improved production starting Q3 2022. During this period, the Company’s focus would be on increasing the infill
drilling and development and the expansion of the plant facility with the objective to gradually achieve an average Q4 2022 throughput rate at Bolivar of 5,600
tpd, as compared to the 3,000 tpd in Q1 2022. With addressing of these development issues in the mine and plant infrastructure expansion,
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
9
a much-improved performance is anticipated in the second half of the year. In view of this, full year guidance for the year has been split into H1 and H2 2022.
A table summarizing 2022 production guidance has been provided below:
H1 2022
H2 2022
2022 Guidance
2021
Low
High
Low
High
Low
High
Production
Silver (oz)
1,490,500
1,591,500
1,712,000
1,769,000
3,202,500
3,360,500
3,527,438
Gold (oz)
5,000
6,000
10,500
11,500
15,500
17,500
9,572
Zinc (000 lbs)
23,500
27,500
25,500
27,000
49,000
54,500
79,281
Lead (000 lbs)
8,500
9,500
8,000
8,000
16,500
17,500
30,816
Copper (000 lbs)
13,500
16,500
21,000
24,500
34,500
41,000
31,757
Copper equivalent pounds (000's)(1)
34,000
39,500
45,500
50,100
79,500
89,700
89,926
(1)
Copper equivalent guidance is calculated using the March 2022 CIBC analyst consensus commodity price forecast: $23.68/oz Ag, $4.22/lb Cu, $1.42/lb Zn,
$0.99/lb Pb, $1,789/oz Au.
2022 Cost Guidance
A mine by mine breakdown of 2022 production guidance, cash costs and all-in sustaining costs (“AISC”) are included in the table below. All costs are in USD.
Cash costs and AISC guidance is shown per copper equivalent payable pound at Yauricocha and Bolivar, and silver equivalent payable ounce at Cusi.
Equivalent Production Cash cost range per
AISC(2) range per
Range (1)
CuEqLb or AgEqOz
CuEqLb or AgEqOz
Yauricocha Cu Eq Lbs (000s)
45,000 – 49,000
$2.00 - $2.15
$2.90 - $3.10
Bolivar Cu Eq Lbs (000s)
23,800 – 29,900
$2.15 - $2.30
$3.50 - $3.85
Cusi Ag Eq Oz (000s)
1,750 – 1,850
$16.45 - $16.50
$22.00 - $23.00
(1)
Copper equivalent guidance is calculated using the March 2022 CIBC analyst consensus commodity price forecast: $23.68/oz Ag, $4.22/lb Cu, $1.42/lb Zn,
$0.99/lb Pb, $1,789/oz Au.
(2)
AISC includes treatment and refining charges, selling costs, G&A costs and sustaining capital expenditure.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
10
2022 EBITDA Guidance
Consolidated EBITDA Guidance including corporate expenses, at consensus prices(1), is expected to be between $90.0 million and $105.0 million, which is
broken down as follows:
EBITDA Range H1 2022
EBITDA Range H2 2022
Full Year EBITDA Range
(Amounts in $M)
Low
High
Low
High
Low
High
Yauricocha
22.1
26.2
30.9
33.8
53.0
60.0
Bolivar
3.3
5.8
31.7
36.2
35.0
42.0
Cusi
3.0
3.4
4.0
4.6
7.0
8.0
Corporate
(2.4)
(2.4)
(2.6)
(2.6)
(5.0)
(5.0)
Total
26.0
33.0
64.0
72.0
90.0
105.0
(1)
March 2022 CIBC analyst consensus commodity price forecast: $23.68/oz Ag, $4.22/lb Cu, $1.42/lb Zn, $0.99/lb Pb, $1,789/oz Au.
2022 Capital Expenditures
A breakdown by mine of the throughput and planned capital investments is shown in the following table:
CAPEX Range (Amounts in $M)
Sustaining
Growth
Total
Yauricocha
12
17
29
Bolivar
23
10
33
Cusi
6
—
6
Greenfield Exploration
—
1
1
Total
41
28
69
Total sustaining capital for 2022 is expected to be $41.0 million, mainly comprising of mine development ($5.3 million), ventilation infrastructure ($2.5 million)
and mine camp ($1.3 million) in Yauricocha, and infill drilling ($5.5 million), mine development ($7.2 million) and tailings dam ($6.9 million) at the Bolivar
mine. The intensive infill drilling program of approximately 80,000 meters is planned for the year with the objective of increasing the reserves. Sustaining capital
at Cusi is expected to be $6.0 million, including $3.0 million for mine development and the remainder for equipment replacement and tailings dam.
Growth capital for 2022 is projected at $28.0 million. Major growth projects at the Yauricocha mine include tailings dam expansion ($7.7 million), Yauricocha
shaft and related integration access ($5.8 million) and exploration ($3.0 million). At the Bolivar mine, growth capital is mainly focused around the afore-
mentioned expansion of plant capacity ($6.2 million) and the integration tunnel ($3.5 million), with planned completion of both projects by the end of Q3 2022.
Management will continue to review metal prices and its EBITDA performance throughout the year, while continuing to explore value enhancing opportunities.
The management also retains the option to adjust the 2022 capital expenditure plan should business conditions experience any dramatic changes within the year.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
11
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, 2021 the US dollar/Peruvian Nuevo Sol exchange rate was 4.00 (December 31, 2020: 3.62) and the US
dollar/Mexican Peso exchange rate was 20.52 (December 31, 2020: 19.94). A 10% appreciation in the value of the Nuevo Sol and Peso against the US dollar
would have resulted in a change of $5.3 million and $4.2 million in the Company’s net profit, respectively, assuming that our operational performance during
2021 was consistent with 2020.
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
2021
2020
Production Highlights
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Ore Processed/tonnes milled
Yauricocha
277,531
324,196
328,909
326,211
311,946
318,155
202,534
285,225
Bolivar
227,722
364,941
385,331
371,608
383,607
410,468
308,951
377,562
Cusi
84,804
61,071
73,294
76,602
82,683
69,835
—
77,911
Consolidated
590,057
750,208
787,534
774,421
778,236
798,458
511,485
740,698
Cash cost per tonne processed
Yauricocha
$
64.54 $
60.18 $
61.35 $
60.43
$
62.44 $
50.09 $
44.27 $
70.20
Bolivar
$
50.29 $
25.58 $
27.87 $
31.38
$
26.66 $
21.50 $
23.38 $
25.82
Cusi
$
58.77 $
75.83 $
78.25 $
71.07
$
58.81 $
57.31 $
— $
62.11
Consolidated
$
58.21 $
44.63 $
46.54 $
47.54
$
44.42 $
36.02 $
34.26 $
46.73
Silver ounces produced (000's)
Yauricocha
331
451
483
451
430
520
358
495
Bolivar
57
95
202
197
149
199
214
210
Cusi
417
261
269
313
343
304
—
243
Consolidated
805
807
954
961
922
1,023
572
948
Copper pounds produced (000's)
Yauricocha
3,836
4,641
3,697
2,682
4,759
5,419
4,164
5,384
Bolivar
2,235
3,615
5,838
5,213
5,867
6,734
5,544
6,391
Consolidated
6,071
8,256
9,535
7,895
10,626
12,153
9,708
11,775
Lead pounds produced (000's)
Yauricocha
5,430
7,146
7,831
8,706
7,040
9,550
6,406
8,608
Cusi
581
695
129
298
590
305
—
471
Consolidated
6,011
7,841
7,960
9,004
7,630
9,855
6,406
9,079
Zinc pounds produced (000's)
Yauricocha
14,913
19,112
21,133
24,123
21,612
24,869
13,741
21,646
Consolidated
14,913
19,112
21,133
24,123
21,612
24,869
13,741
21,646
Gold ounces produced
Yauricocha
957
1,169
1,043
890
1,112
1,076
850
1,254
Bolivar
634
899
1,627
1,591
2,017
2,740
1,912
2,191
Cusi
272
193
142
155
234
173
—
212
Consolidated
1,863
2,261
2,812
2,636
3,363
3,989
2,762
3,657
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
12
Three months Ended
Year Ended
Consolidated Production
December 31, 2021 December 31, 2020
% Var
December 31, 2021 December 31, 2020
% Var
Tonnes processed
590,057
778,236
(24)%
2,902,220
2,828,877
3 %
Daily throughput
6,743
8,894
(24)%
8,292
8,083
3 %
Silver ounces (000's)
805
922
(13)%
3,527
3,465
2 %
Copper pounds (000's)
6,071
10,626
(43)%
31,757
44,262
(28)%
Lead pounds (000's)
6,011
7,630
(21)%
30,816
32,972
(7)%
Zinc pounds (000's)
14,913
21,612
(31)%
79,281
81,868
(3)%
Gold ounces
1,863
3,363
(45)%
9,572
13,771
(30)%
Copper equivalent pounds (000's) (1)
17,841
29,267
(39)%
89,926
118,214
(24)%
Metals payable in concentrates
Silver ounces (000's)
699
790
(12)%
3,009
2,973
1 %
Copper pounds (000's)
5,422
10,170
(47)%
28,531
40,517
(30)%
Lead pounds (000's)
5,797
6,329
(8)%
29,313
29,709
(1)%
Zinc pounds (000's)
13,365
18,253
(27)%
67,305
69,365
(3)%
Gold ounces
1,449
3,389
(57)%
8,079
12,963
(38)%
Copper equivalent pounds (000's) (1)
15,837
26,254
(40)%
78,635
104,901
(25)%
(1) Copper equivalent pounds for Q4 2021 were calculated using the following realized prices: $23.41/oz Ag, $4.40/lb Cu, $1.55/lb Zn, $1.06/lb Pb, $1,795/oz
Au. Copper equivalent pounds for Q4 2020 were calculated using the following realized prices: $24.30/oz Ag, $3.32/lb Cu, $1.22/lb Zn, $0.89/lb Pb, $1,859/oz
Au. Copper equivalent pounds for full year 2021 were calculated using the following realized prices: $25.21/oz Ag, $4.23/lb Cu, $1.37/lb Zn, $1.00/lb Pb,
$1,796/oz Au. Copper equivalent pounds for full year 2020 were calculated using the following realized prices: $20.59/oz Ag, $2.80/lb Cu, $1.03/lb Zn, $0.83/lb
Pb, $1,771/oz Au.
The Peruvian Operation
Yauricocha Mine, Yauyos Province
Sierra’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. The mine received its Informe Tecnico Minero (“ITM”) permit in June 2021, allowing for
an operating capacity of 3,600 tpd. The ore is treated in two separate circuits and is extracted from three different types of deposits which include the following:
-
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
On January 20, 2022, the Company announced a positive updated PEA on the Yauricocha expansion. This updated PEA included the last reported resource dated
March 31, 2021 and revised Prefeasibility Study (“PFS”) level operating and capital expenditure. The Company filed the corresponding updated NI 43-101
technical report on March 3, 2022.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
13
Yauricocha Production
A summary of contained metal production from the Yauricocha Mine for the three months and year ended December 31, 2021 has been provided below:
Three Months Ended December 31,
Year Ended December 31,
Yauricocha Production
2021
2020
% Var.
2021
2020
% Var.
Tonnes processed
277,531
311,946
(11)%
1,256,847
1,117,860
12 %
Daily throughput
3,172
3,565
(11)%
3,591
3,194
12 %
Silver grade (g/t)
51.34
53.74
(4)%
55.01
61.55
(11)%
Copper grade
0.82 %
0.95 %
(14)%
0.74 %
1.08 %
(31)%
Lead grade
1.03 %
1.15 %
(10)%
1.18 %
1.45 %
(19)%
Zinc grade
2.82 %
3.59 %
(21)%
3.23 %
3.77 %
(14)%
Gold Grade (g/t)
0.53
0.57
(7)%
0.48
0.61
(21)%
Silver recovery
72.26 %
79.8 %
(9)%
77.21 %
81.53 %
(5)%
Copper recovery
76.44 %
72.69 %
5 %
72.92 %
74.20 %
(2)%
Lead recovery
86.55 %
88.82 %
(3)%
88.76 %
88.63 %
0 %
Zinc recovery
86.53 %
87.62 %
(1)%
88.59 %
88.13 %
1 %
Gold Recovery
20.24 %
19.34 %
5 %
21.03 %
19.72 %
7 %
Silver production (000 oz)
331
430
(23)%
1,716
1,803
(5)%
Copper production (000 lb)
3,836
4,759
(19)%
14,856
19,726
(25)%
Lead production (000 lb)
5,430
7,040
(23)%
29,113
31,605
(8)%
Zinc production (000 lb)
14,913
21,612
(31)%
79,281
81,868
(3)%
Gold Production (oz)
957
1,112
(14)%
4,059
4,292
(5)%
Copper equivalent pounds (000's)(1)
12,567
18,373
(32)%
59,470
75,079
(21)%
(1) Copper equivalent pounds for Q4 2021 were calculated using the following realized prices: $23.41/oz Ag, $4.40/lb Cu, $1.55/lb Zn, $1.06/lb Pb, $1,795/oz
Au. Copper equivalent pounds for Q4 2020 were calculated using the following realized prices: $24.30/oz Ag, $3.32/lb Cu, $1.22/lb Zn, $0.89/lb Pb, $1,859/oz
Au. Copper equivalent pounds for full year 2021 were calculated using the following realized prices: $25.21/oz Ag, $4.23/lb Cu, $1.37/lb Zn, $1.00/lb Pb,
$1,796/oz Au. Copper equivalent pounds for full year 2020 were calculated using the following realized prices: $20.59/oz Ag, $2.80/lb Cu, $1.03/lb Zn, $0.83/lb
Pb, $1,771/oz Au.
The Yauricocha mine processed 277,531 tons during Q4 2021, a decrease of 11% compared to Q4 2020, as mine operations were halted a few days before year-
end to avoid exceeding the maximum permitted capacity1 for 2021. It may be noted that the mine operated at a high throughput for the first nine months of
the year, which resulted in attaining the maximum annual permitted capacity before the end of the year. Copper equivalent metal production in Q4 2021
decreased by 32% due to lower throughput and lower head grades, due to the inability to mine in the higher-grade zones.
Yauricocha’s annual throughput was 1,256,847 tonnes, representing an increase of 12% as compared to the 2020 annual production. While the mine’s operational
flexibility allowed for an increase in the throughput, accessing higher targeted grades remained a challenge throughout the year. The negative variations in the
polymetallic ore resulted from the regulatory limitations to access some of the high-
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
14
grade ore bodies. Also, copper sulfide grades were lower mainly due to the delays in the contribution of the Esperanza body due to ground conditions, which
were controlled and corrected.
Although higher throughput partially compensated for lower grades, metal production declined. Year over year copper equivalent production decreased 21% in
2021 compared to the prior year. 2021 annual production of silver, copper, lead, zinc and gold declined by 5%, 25%, 8%, 3% and 5% respectively compared to
2020 annual production.
1. Maximum annual capacity of 1,256,850 tonnes calculated using permitted capacity of 3,000 tpd until June 15, 2021 and 3,600 thereafter on receipt of permit.
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. After successive expansions, current target throughput is approximately 5,000 tpd.
The 2022 capital expenditure plan includes expansion of the Bolivar plant capacity to 6,000 tpd by the end of the year.
In April 2021, the Company announced its plans to invest in construction of a magnetite processing plant at Bolivar. The plant is expected to produce
approximately 500,000 tonnes of 62% iron ore fines per year. The project is in the detailed engineering phase, results for which are expected in Q2 2022. The
Company anticipates increase sales revenue, reduced future closure costs and reduced tailings deposition as a result of completion of this project. In August 2021,
the Company announced positive results of a Preliminary Economic Assessment (“PEA”), which considered expansion to 10,000 tpd combined with production
of iron ore at Bolivar. On September 29, 2021, the Company filed a NI 43-101 Technical Report for this PEA.
Mine development at Bolivar during 2021 totaled 11,462 meters, which included 2,282 meters for the tunnel, 4,503 meters of development to prepare stopes for
mine production and 4,677 meters related to the deepening of ramps and developing service ramps to be used for ventilation and pumping in the El Gallo Inferior
and Bolivar West zones.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
15
Bolivar Production
A summary of contained metal production from the Bolivar Mine for the three months and year ended December 31, 2021 has been provided below:
Three Months Ended December 31,
Year Ended December 31,
Bolivar Production
2021
2020
% Var.
2021
2020
% Var.
Tonnes processed (t)
227,722
383,607
(41)%
1,349,602
1,480,588
(9)%
Daily throughput
2,603
4,384
(41)%
3,856
4,230
(9)%
Copper grade
0.55 %
0.79 %
(30)%
0.72 %
0.87 %
(17)%
Silver grade (g/t)
9.52
14.50
(34)%
15.49
19.61
(21)%
Gold grade (g/t)
0.11
0.25
(56)%
0.16
0.29
(45)%
Copper recovery
80.79 %
88.21 %
(8)%
79.28 %
86.76 %
(9)%
Silver recovery
82.34 %
83.44 %
(1)%
81.95 %
82.73 %
(1)%
Gold recovery
78.32 %
64.41 %
22 %
68.88 %
64.07 %
8 %
Copper production (000 lb)
2,235
5,867
(62)%
16,901
24,536
(31)%
Silver production (000 oz)
57
149
(62)%
551
772
(29)%
Gold production (oz)
634
2,017
(69)%
4,751
8,860
(46)%
Copper equivalent pounds (000's)(1)
2,800
8,091
(65)%
22,207
35,804
(38)%
(1) Copper equivalent pounds for Q4 2021 were calculated using the following realized prices: $23.41/oz Ag, $4.40/lb Cu, $1.55/lb Zn, $1.06/lb Pb, $1,795/oz
Au. Copper equivalent pounds for Q4 2020 were calculated using the following realized prices: $24.30/oz Ag, $3.32/lb Cu, $1.22/lb Zn, $0.89/lb Pb, $1,859/oz
Au. Copper equivalent pounds for full year 2021 were calculated using the following realized prices: $25.21/oz Ag, $4.23/lb Cu, $1.37/lb Zn, $1.00/lb Pb,
$1,796/oz Au. Copper equivalent pounds for full year 2020 were calculated using the following realized prices: $20.59/oz Ag, $2.80/lb Cu, $1.03/lb Zn, $0.83/lb
Pb, $1,771/oz Au.
During the year 2021, the impacts of COVID-19 have been more noticeable at the Bolivar mine. A reduced workforce resulted in delays in infill drilling, mine
development and services. The mine also faced high turnover in middle management and senior management personnel during the year, which impacted
production performance.
The Bolivar mine processed 227,722 tonnes of ore in Q4 2021, a 41% decrease as compared to the Q4 2020 throughput. Grades were also negatively impacted by
the lack of development and limited infill drilling information, which necessitated the launch of an upgraded new infill drilling and mine development program in
Q4 2021. Copper equivalent production declined 65% as compared to Q4 2020.
Annual throughput at Bolivar was 1,349,602 tonnes, or a 9% decrease from the 2020 annual throughput, due to the afore-mentioned reasons. Copper equivalent
production for the full year 2021 declined 38% as compared to full year 2020.
Cusi Mine, Chihuahua State
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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
16
Mine development totaled 7,004 meters, mainly related to stope preparation in various zones within the mine.
Cusi Production
A summary of contained metal production from the Cusi Mine for the three months and year ended December 31, 2021 has been provided below:
Three Months Ended December 31,
Year Ended December 31,
Cusi Production
2021
2020
% Var.
2021
2020
% Var.
Tonnes processed (t)
84,804
82,683
3 %
295,771
230,429
28 %
Daily throughput(2)
969
945
3 %
845
658
28 %
Silver grade (g/t)
179.07
160.62
11 %
159.74
149.62
7 %
Gold grade (g/t)
0.21
0.19
11 %
0.18
0.18
0 %
Lead grade
0.39 %
0.28 %
39 %
0.32 %
0.29 %
10 %
Silver recovery (flotation)
85.52 %
80.37 %
6 %
82.98 %
80.32 %
3 %
Gold recovery (lixiviation)
47.29 %
46.73 %
1 %
45.05 %
45.75 %
(2)%
Lead recovery
80.69 %
82.79 %
(3)%
81.78 %
82.40 %
(1)%
Silver production (000 oz)
417
343
22 %
1,260
890
42 %
Gold production (oz)
272
234
16 %
762
619
23 %
Lead production (000 lb)
581
590
(2)%
1,703
1,367
25 %
Silver equivalent ounces (000's)(1)
465
383
21 %
1,382
998
38 %
(1) Silver equivalent ounces for Q4 2021 were calculated using the following realized prices: $23.41/oz Ag, $4.40/lb Cu, $1.55/lb Zn, $1.06/lb Pb, $1,795/oz Au.
Silver equivalent ounces for Q4 2020 were calculated using the following realized prices: $24.30/oz Ag, $3.32/lb Cu, $1.22/lb Zn, $0.89/lb Pb, $1,859/oz Au.
Silver equivalent ounces for full year 2021 were calculated using the following realized prices: $25.21/oz Ag, $4.23/lb Cu, $1.37/lb Zn, $1.00/lb Pb, $1,796/oz
Au. Silver equivalent ounces for full year 2020 were calculated using the following realized prices: $20.59/oz Ag, $2.80/lb Cu, $1.03/lb Zn, $0.83/lb Pb,
$1,771/oz Au.
Q4 2021 throughput at the Cusi mine was 84,804 tonnes or 3% higher than the Q4 2020 throughput. Grades for Q4 2021 were higher for all metals, as the mine
continued to operate in the high-grade Northeast Southwest vein system.
Annual production at the Cusi Mine was 295,771 tonnes in 2021, which was 28% higher than 2020, as the mine operated for the full twelve months in 2021 as
compared to 2020, when Cusi lost more than a quarter’s production due to the COVID-driven care and maintenance. Higher throughput and grades resulted in
silver equivalent production which was 21% higher for Q4 2021 and 38% higher for the full year 2021, as compared to the corresponding periods of the
prior year.
During Q4 2021, the Company announced its increased focus on copper and other steel-making products and possible divestment of the silver-producing Cusi
CGU. As a result of this announcement, the uncertainties about the potential for the CGU to increase production (including a lower probability for the company
to expand the current capacity of the CUSI CGU) and, higher production costs, management concluded that impairment indicators existed as of December 31,
2021 and therefore estimated the recoverable amount of the CGU. The estimation of Fair Value Less Costs of Disposal (“FVLCD”) resulted in an impairment of
$35,000 on the Cusi assets.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
17
CONSOLIDATED MINERAL RESERVES AND RESOURCES
The Company announced PEA results for the Cusi mine at the end of 2020 and filed the corresponding NI 43-101 Technical Report of January 5, 2021. On
August 16, 2021 the Company announced results of the 10,000 tpd PEA for its Bolivar and filed the NI 43-101 Technical Report on September 29, 2021. After
the close of the year, the Company announced positive results of the updated PEA on expansion of its Yauricocha Mine, the Technical Report for which was filed
on March 3, 2022.
In accordance with NI 43-101, the Mineral Reserves previously reported for these mines are no longer valid after the issuance of the PEA Technical Reports and
so have been removed from the tables below. The Mineral Resources have been adjusted for the mining depletion as of the effective date of the technical reports
to December 31, 2021.
Resources - Measured and Indicated (1) (Based on SRK Technical Reports, depleted by production to December 2021)
Contained Metal
Tonnes
Ag
Cu
Pb
Zn
Au
AgEq
CuEq
ZnEq
Ag
Cu
Pb
Zn
Au
AgEq
CuEq
ZnEq
(x1000)
(g/t)
(%)
(%)
(%)
(g/t)
(g/t)
(%)
(%)
(M oz) (M lb) (M lb) (M lb) (K oz) (M oz) (M lb)
(M lb)
Yauricocha (2)
Measured
3,776
61
1.11
0.90
2.57
0.59
—
—
6.78
7
93
75
214
72
—
—
564
Indicated
9,604
39
1.23
0.53
1.97
0.50
—
—
5.77
12
260
113
417
154
—
—
1,222
Measured &
Indicated
13,379
45
1.19
0.64
2.14
0.52
—
—
6.05
19
353
187
632
225
—
—
1,786
Bolivar (3)
Measured
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Indicated
17,915
15
0.77
0.20
—
1.00
—
9
305
—
—
117
—
393
—
Measured &
Indicated
17,915
15
0.77
—
—
0.20
—
1.00
—
9
305
—
—
117
—
393
—
Cusi (4)
Measured
647
230
0.24
0.29
0.02
247
—
—
5
—
3
4
0
5
—
—
Indicated
4,303
177
0.55
0.64
0.13
219
—
—
24
—
52
61
18
30
—
—
Measured &
Indicated
4,951
184
—
0.51
0.60
0.11
223
—
—
29
—
56
64
18
35
—
—
Total
Measured &
Indicated
36,245
49
0.82
0.30
0.87
0.31
57
658
243
696
360
35
393
1,786
Notes:
1.
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.
2.
Zinc equivalency is based on the following metal price assumptions: US$21.02/oz Ag, US$3.39/lb Cu, US$0.91/lb Pb, US$1.10/lb Zn and US$1,598.21/oz
Au. Metallurgical recovery assumptions are variable between mineralization types, and are based on actual plant data for 2019. The average is (where
recovered) 76% Ag, 75% Cu, 89% Pb, 89% Zn, 22% Au. The equivalency expression is designed to present an in-situ zinc equivalent, considering the
recovered value of the other metals expressed in the value of zinc percent.
The equation is: ZnEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Zn$*Znrec). Further details of the
key assumptions, parameters and methods used for this estimate are provided in the Yauricocha PEA Technical Report.
3.
Measured, Indicated and Inferred Resources include Proven and Probable Reserves. Copper equivalent is based on the following metal prices: US$17.82/oz
Ag, US3.08/lb Cu and US$1,354 Au. Totals for Proven and Probable are diluted for internal waste. Metallurgical recovery assumptions are based on actual
plant data for 2019 and are 78.6% Ag, 88% Cu, and 62.9% Au. The equivalency expression is designed to present an in-situ copper equivalent, considering
the recovered value of the other metals expressed in the value of copper percent.
The equation is: CuEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Au*Au$*Aurec)) / (Cu$*Curec). Further details of the key assumptions, parameters and
methods used for this estimate are provided in the Bolivar PEA Technical Report.
4.
Silver equivalency is based on the following metal price assumptions: US$20.0/oz Ag, US$0.91/lb Pb, US$1.07/lb Zn and US$1,541/oz Au. Based on the
historical production information for Cusi, the metallurgical recovery assumptions are 87% Ag,
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
18
86% Pb, 51% Zn, 57% Au. The equivalency expression is designed to present an in-situ silver equivalent, considering the recovered value of the other
metals expressed in the value of silver g/t.
The equation is: AgEq = ((Ag*Ag$*Agrec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Ag$*Agrec). Further details of the key assumptions,
parameters and methods used for this estimate are provided in the Cusi PEA Technical Report.
Resources - Inferred (1) (Based on SRK Technical Reports, depleted by production to December 2021)
Contained Metal
Tonnes
Ag
Cu
Pb
Zn
Au
AgEq
CuEq
ZnEq
Ag
Cu
Pb
Zn
Au
AgEq
CuEq
ZnEq
(x1000)
(g/t)
(%)
(%)
(%)
(g/t)
(g/t)
(%)
(%)
(M oz) (M lb) (M lb) (M lb) (K oz) (M oz) (M lb) (M lb)
Yauricocha (2)
11,566
29
1.40
0.32
1.03
0.44
—
—
4.87
11
358
83
262
162
—
—
1,242
Bolivar (3)
19,950
14
0.78
0.21
—
1.00
—
9
344
—
—
134
—
440
—
Cusi (4)
4,893
146
0.43
0.69
0.18
188
—
—
23
—
46
74
28
30
—
—
Total
Inferred
36,409
36
0.88
0.16
0.42
0.28
43
703
129
335
324
30
440
1,242
Notes:
1.
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.
2.
Zinc equivalency is based on the following metal price assumptions: US$21.02/oz Ag, US$3.39/lb Cu, US$0.91/lb Pb, US$1.10/lb Zn and US$1,598.21/oz
Au. Metallurgical recovery assumptions are variable between mineralization types, and are based on actual plant data for 2019. The average is (where
recovered) 76% Ag, 75% Cu, 89% Pb, 89% Zn, 22% Au. The equivalency expression is designed to present an in-situ zinc equivalent, considering the
recovered value of the other metals expressed in the value of zinc percent.
The equation is: ZnEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Zn$*Znrec). Further details of the
key assumptions, parameters and methods used for this estimate are provided in the Yauricocha PEA Technical Report.
3.
Measured, Indicated and Inferred Resources include Proven and Probable Reserves. Copper equivalent is based on the following metal prices: US$17.82/oz
Ag, US3.08/lb Cu and US$1,354 Au. Totals for Proven and Probable are diluted for internal waste. Metallurgical recovery assumptions are based on actual
plant data for 2019 and are 78.6% Ag, 88% Cu, and 62.9% Au. The equivalency expression is designed to present an in-situ copper equivalent, considering
the recovered value of the other metals expressed in the value of copper percent.
The equation is: CuEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Au*Au$*Aurec)) / (Cu$*Curec). Further details of the key assumptions, parameters and
methods used for this estimate are provided in the Bolivar PEA Technical Report.
4.
Silver equivalency is based on the following metal price assumptions: US$20.0/oz Ag, US$0.91/lb Pb, US$1.07/lb Zn and US$1,541/oz Au. Based on the
historical production information for Cusi, the metallurgical recovery assumptions are 87% Ag, 86% Pb, 51% Zn, 57% Au. The equivalency expression is
designed to present an in-situ silver equivalent, considering the recovered value of the other metals expressed in the value of silver g/t.
The equation is: AgEq = ((Ag*Ag$*Agrec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec)) / (Ag$*Agrec). Further details of the key assumptions,
parameters and methods used for this estimate are provided in the Cusi PEA Technical Report.
The above mineral resource estimate has been prepared by Americo Zuzunaga FAusIMM CP (Mining Engineer), Vice-President Corporate Planning of the
Company, a Qualified Person and chartered professional qualifying as a Competent Person under the JORC Australasian Code for Reporting of Exploration
Results, Mineral Resources, and Ore Reserves.
The resource estimate is based on the consolidated mineral resource estimate with the following effective dates as contained in the PEA Technical Reports filed
for each of the mines:
Yauricocha Technical Report – effective date: March 31, 2021
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
19
Bolivar Technical Report – effective date: December 31, 2019
Cusi Technical Report – effective date: August 31, 2020
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, 2021. 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 PEA Technical Reports.
All economic parameters are based on the respective PEA Technical Reports. All risks associated with the Mines are defined in the risks section of these
Technical Report. Disclosure follows assumptions and parameters used in the Technical Reports.
6.
SUMMARIZED FINANCIAL RESULTS
Year ended December 31, 2021 (compared to the year ended December 31, 2020)
Year ended
Year ended
(In thousands of United States dollars, except cash costs)
Dec 31, 2021
Dec 31, 2020
Revenue
$
272,014
$
246,888
Adjusted EBITDA 1
104,732
102,833
Cash flow from operations before movements in working capital
93,405
97,757
Adjusted net income attributable to shareholders
21,571
30,817
Non-cash charge on the acquisition of Corona
9,329
8,503
Gross profit
81,219
81,585
Income tax expense
(25,103)
(22,586)
Net income (loss) attributable to shareholders
(27,363)
23,419
1 This is a non-IFRS performance measure, see Non-IFRS Performance Measures section
(In thousands of United States dollars)
Dec 31, 2021
Dec 31, 2020
Cash and cash equivalents
$
34,929
$
71,473
Assets
396,824
439,592
Liabilities
192,192
199,384
Net Debt 1
45,875
27,910
Equity
204,632
240,208
1 Loans payable minus cash and cash equivalents.
Net loss attributable to shareholders for 2021 was $27.4 million (2020: net income of $23.4 million) or $(0.17) per share (basic and diluted) (2020: $0.14). Net
loss for the year included an impairment charge of $35.0 million on the Cusi mine. The other major differences between these periods are explained below.
Revenues
Average realized sale prices increased for copper (51%), zinc (33%), silver (22%), lead (20%) and gold (1%) respectively as compared to 2020.
Revenue from metals payable of $180.6 million at the Yauricocha Mine in Peru increased by 23% compared to $146.9 million of revenues in 2020 due to the
impact of higher realized metal prices and lower treatment and refining charges, which offset lower quantities of metals sold as compared to 2020.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
20
Revenue from metals payable in Mexico decreased to $91.4 million for 2021 from $100.0 million in 2020. Bolivar revenue for the full year declined 20% over
2020 revenue, despite higher realized metal prices, as production declined due to lower throughput and grades. Annual revenue at the Cusi mine were 44% higher
due to the combined impact of 28% higher throughput, better grades and higher realized metal prices as compared to 2020.
The following table shows the Company’s realized selling prices for the years ended December 31, 2021 and December 31, 2020:
Realized Metal Prices
Year ended December 31,
(In US dollars)
2021
2020
Silver (oz)
$
25.21
$
20.59
Copper (lb)
$
4.23
$
2.80
Lead (lb)
$
1.00
$
0.83
Zinc (lb)
$
1.37
$
1.03
Gold (oz)
$
1,796
$
1,771
Yauricocha’s cash cost per copper equivalent payable pound was $1.46 (2020 - $1.01), and AISC per copper equivalent payable pound of $2.77 (2020 - $2.11).
The annual increase in cash costs was a combined result of higher operating costs, mainly related to additional contractors at higher costs, and the 21% decrease
in copper equivalent pounds sold as compared to the year 2020. The increase in the AISC per copper equivalent payable pound for 2021 compared to 2020 was a
combined result of higher cash costs and sustaining capital expenditure, offset by the anticipated decrease in treatment and refining charges during 2021.
Bolivar’s cash cost per copper equivalent payable pound was $2.18 (2020 - $1.13), and AISC per copper equivalent payable pound was $4.22 (2020 - $1.88).
Operating costs per tonne were 32% as compared to 2020. Cash costs were negatively impacted further as lower grades resulted in a 42% decrease in copper
equivalent payable pounds as compared to 2020. Higher AISC for the year resulted from higher cash costs combined with a 95% increase in treatment and
refining charges and 117% increase in sustaining capital, as the Company advanced its capital projects, which were deferred due to COVID in 2020.
Cusi’s cash cost per silver equivalent payable ounce was $16.71 (2020 - $16.62), and AISC per silver equivalent payable ounce was $28.15 (2020 - $25.26). Cash
costs at Cusi were in-line with 2020 as the higher silver equivalent payable ounces offset the increase in operating costs for the year as compared to 2020. The
increase in AISC resulted from higher cash costs combined with higher treatment and refining charges and sustaining capital, as the Company advanced its
capital projects, which were deferred due to COVID in 2020.
Non-Cash Depletion, Depreciation and Amortization
The Company recorded total non-cash depletion, depreciation and amortization expense for 2021 of $44.7 million compared to $41.7 million for the same period
in 2020.
A large component of the net income for every period is the non-cash depletion charge in Peru, which was $9.3 million for 2021 (2020 - $8.5 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 life of the mine.
General and Administrative Expenses
General and administrative expenses for 2021 increased to $23.8 million from the $20.3 million spent in 2020. The 18% increase in general and administrative
costs in 2021 compared to 2020 resulted mainly from higher legal charges and consulting fees.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
21
Adjusted EBITDA (1)
The Company recorded adjusted EBITDA of $104.7 million during 2021 (2020: $102.8 million) which includes $87.6 million (2020: $64.3 million) from the
Peruvian operations and $22.4 million (2020: $42.2 million) from the operations in Mexico. The increase in adjusted EBITDA is due to the increase in gross
margins at the Yauricocha and Cusi mines. 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.
The following tables display selected annual financial results detailed by operating segment:
Peru
Mexico
Mexico
Canada
Yauricocha Mine
Bolivar Mine
Cusi Mine
Corporate
Total
Year ended December 31, 2021
$
$
$
$
$
Revenue (1)
180,598
65,275
26,141
—
272,014
Production cost of sales
(80,765)
(43,186)
(22,144)
—
(146,095)
Depletion of mineral property
(9,329)
(5,424)
(1,908)
—
(16,661)
Depreciation and amortization of property, plant and equipment
(15,571)
(8,805)
(3,663)
—
(28,039)
Cost of sales
(105,665)
(57,415)
(27,715)
—
(190,795)
Gross profit (loss) from mining operations
74,933
7,860
(1,574)
—
81,219
Net income (loss) from operations (2)
25,707
(1,368)
(39,657)
(6,790)
(22,108)
Adjusted EBITDA
87,584
19,202
3,211
(5,265)
104,732
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
22
(1) Includes provisional pricing adjustments of:$(493) for Yauricocha, $(221) for Bolivar, and $(549) for Cusi.
(2) Includes impairment charge of $35,000 on the Cusi Mine
Peru
Mexico
Mexico
Canada
Yauricocha Mine
Bolivar Mine
Cusi Mine
Corporate
Total
Year ended December 31, 2020
$
$
$
$
$
Revenue (1)
146,941
81,762
18,185
—
246,888
Production cost of sales
(70,660)
(37,319)
(15,670)
—
(123,649)
Depletion of mineral property
(8,503)
(3,873)
(2,063)
—
(14,439)
Depreciation and amortization of property, plant and equipment
(13,455)
(10,320)
(3,440)
—
(27,215)
Cost of sales
(92,618)
(51,512)
(21,173)
—
(165,303)
Gross profit (loss) from mining operations
54,323
30,250
(2,988)
—
81,585
Net income (loss) from operations
17,133
19,322
(4,198)
(4,866)
27,391
Adjusted EBITDA
64,259
39,081
3,112
(3,619)
102,833
(1) Includes provisional pricing adjustments of:$2,899 for Yauricocha, $(889) for Bolivar, and $1,180 for Cusi.
Income Taxes
Current tax expense recorded for 2021 was $27.5 million, higher than the $20.5 million recorded in 2020. The increase in current tax expense was the result of
the higher taxable income from the mining operations in Peru.
During 2021, the Company recorded a deferred tax recovery of $2.4 million compared to $2.1 million deferred tax expense in 2020. The deferred tax recovery is
mainly for 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 $21.6 million, or $0.13 per share, for 2021 was lower than the adjusted net income of $30.8 million, or
$0.19 per share for 2020. 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.
Total Comprehensive Income (loss)
Total comprehensive loss (“TCL”) for 2021 was $22.7 million compared to total comprehensive income (“TCI”) of $27.5 million in 2020. TCL includes a
foreign currency loss of $0.5 million for 2021 (2020 – gain of $0.1 million).
(1)
This is a non-IFRS performance measure, see non-IFRS Performance Measures section of this MD&A.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
23
Cash Flows
Cash flow generated from operations before movements in working capital of $93.4 million for 2021 was lower than the $97.8 million generated in 2020. The
decrease in operating cash flow is mainly the result of higher general and administrative expenses in 2021 compared to 2020.
Net cash flow of $(71.8) million (2020- $(34.2) million) used in investing activities during 2021 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. Investment activities for the
prior year 2020 were net of proceeds of equipment sale in Peru for $0.9 million and proceeds of an insurance claim related to damage to the fresh-water dam in
Mexico.
A breakdown of the Company’s capital expenditures of $71.8 million during the year ended December 31, 2021 is presented in the following table:
Capital Expenditures by Mine for the year ended December 31, 2021
($ 000)
Yauricocha
Bolivar
Cusi
Total
Expenditure
Exploration
$
2,991
$
3,652
$
556
$
7,199
Development
$
12,989
$
12,359
$
4,497
$
29,845
Equipment
$
3,163
$
2,829
$
1,749
$
7,741
Mascota Shaft / Central Shaft
$
1,338
$
—
$
—
$
1,338
Concentrator Plant
$
122
$
1,535
$
233
$
1,890
Ventilation
$
592
$
—
$
—
$
592
Tailings dam
$
8,322
$
2,295
$
1,324
$
11,941
Other
$
915
$
1,901
$
60
$
2,876
Expansion studies
$
185
$
950
$
838
$
1,973
Yauricocha Shaft
$
3,383
$
—
$
—
$
3,383
Mine Camp
$
2,247
$
—
$
—
$
2,247
Mining Concession Fees
$
747
$
—
$
—
$
747
$
36,994
$
25,521
$
9,257
$
71,772
Net cash outflow of $36.5 million during 2021 was mainly due to the $71.8 million used in investing activities and $36.9 million used in financing activities
exceeded cash generated from operating activities of $72.2 million. Financing activities during the year included repayment instalments of the BCP loan $19.0
million, interest payment of $3.2 million, dividends to shareholders of $4.9 million, dividend to non-controlling interest $9.0 million and lease repayments of
$0.9 million
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
24
7.
QUARTERLY FINANCIAL REVIEW
The following table displays selected results from the eight most recent quarters:
2021
2020
(In thousands of United States dollars, except per share
amounts)
Dec-31
Sep-30
Jun-30
Mar-31
Dec-31
Sep-30
Jun-30
Mar-31
Revenues
62,240 60,701 79,449 69,624
76,218 73,211 41,901 55,558
Adjusted EBITDA (1)
18,843 17,444 40,499 27,946
33,725 39,739 13,295 16,074
Adjusted net income (loss) attributable to shareholders (2)
5,443
(1,677) 13,066
4,739
8,670 18,377
1,344
2,426
Net income (loss) attributable to shareholders (3)
(34,716)
(4,815)
9,084
3,084
7,603 17,531
154
(1,869)
Basic and diluted earnings (loss) per share ($)
(0.21)
(0.03)
0.06
0.02
0.04
0.11
—
(0.01)
(1)
The EBITDA calculations for the year 2020 have been adjusted to include costs related to COVID to make them comparable to 2021.
(2)
The Adjusted net income attributable to shareholders for the year 2020 has been adjusted to include ‘NRV adjustments on inventory’ to make the calculation
comparable to 2021.
(3)
Net loss attributable to shareholders for Q4 2021 includes an impairment charge of $35.0 million on the Cusi mine.
Three months ended December 31, 2021 (compared to the three months ended December 31, 2020)
Net loss attributable to shareholders for Q4 2021 was $34.7 million, or $(0.21) per share (basic and diluted), compared to net income of $7.6 million, or $0.04 per
share (basic and diluted) for the same period in 2020. The major differences between these periods are explained below.
Revenues
Revenue from metals payable from the Yauricocha Mine in Peru were $43.5 million for Q4 2021 compared to $45.2 million in Q4 2020. Quarterly revenue was
slightly lower as the decrease in metal sales, attributable to lower throughput and grades, were partially offset by the increase in realized metal prices and a 34%
decline in the treatment and refining charges during the Q4 2021.
Despite higher metal prices, revenue from metals payable from the Bolivar mine decreased to $9.9 million from the $23.1 million in Q4 2020, due to lower
production resulting from the decline in throughput and grades, and higher treatment and refining costs as compared to Q4 2020.
Revenue generated at the Cusi Mine for Q4 2021 was $8.9 million compared to $7.9 million for Q4 2020. Quarterly revenue at Cusi were positively impacted by
higher throughput, grades and realized metal prices as compared to Q4 2020.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
25
The following table shows the Company’s realized selling prices for each quarter in 2021 and 2020:
Realized Metal Prices
2021
2020
(In US dollars)
Q4
Q3
Q2
Q1
H1
Q4
Q3
Q2
Q1
Silver (oz)
$ 23.41 $ 24.20 $ 26.80 $ 26.44 $ 26.62 $ 24.30 $ 24.89 $ 16.59 $ 16.57
Copper (lb)
$
4.40 $
4.20 $
4.37 $
3.88 $
4.13 $
3.32 $
2.97 $
2.40 $
2.53
Lead (lb)
$
1.06 $
1.07 $
0.97 $
0.92 $
0.94 $
0.89 $
0.85 $
0.76 $
0.80
Zinc (lb)
$
1.55 $
1.36 $
1.34 $
1.24 $
1.29 $
1.22 $
1.08 $
0.89 $
0.93
Gold (oz)
$ 1,795 $ 1,790 $ 1,818 $ 1,778 $ 1,798 $ 1,859 $ 1,916 $ 1,722 $ 1,585
Yauricocha’s cash cost per copper equivalent payable pound was $1.61 (Q4 2020 - $1.16), and AISC per copper equivalent payable pound of $3.09 (Q4 2020 -
$2.47). The increase in cash cost per copper equivalent pound for Q4 2021 over Q4 2020 was mainly due to the 28% decrease in copper equivalent payable
pounds. AISC per copper equivalent payable pound sold increased due to higher cash costs and higher sustaining costs as compared to Q4 2020.
Bolivar’s cash cost per copper equivalent payable pound was $5.29 (Q4 2020 - $1.35), and AISC per copper equivalent payable pound was $8.58 (Q4 2020 -
$2.34) for Q4 2021. Cash costs and AISC per copper equivalent payable pound were negatively impacted by the 73% decline in copper equivalent payable
pounds as compared to Q4 2020, attributable to lower throughput and grades.
Cusi’s cash cost per silver equivalent payable ounce was $11.80 (Q4 2020 - $15.70), and AISC per silver equivalent payable ounce was $21.09 (Q4 2020 -
$28.18) for Q4 2021. Cash costs and AISC for the quarter decreased mainly due to the 27% increase in silver equivalent payable ounces.
Non-Cash Depletion, Depreciation and Amortization
The Company recorded total non-cash depletion, depreciation and amortization expense for Q4 2021 of $10.4 million compared to $12.6 million for the same
period in 2020.
A large component of the non-cash depletion, depreciation and amortization expense is the depletion charge on the acquisition of Corona of $2.1 million for Q4
2021 compared to $2.3 million for the same period in 2020. 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 life of the mine.
General and Administrative Expenses
The Company incurred general and administrative expenses of $5.8 million for Q4 2021, slightly higher than $5.7 million for Q4 2020.
Adjusted EBITDA
Adjusted EBITDA(1) for Q4 2021 decreased by 44% to $18.8 million as compared to the $33.7 million in Q4 2020, largely due to 57% lower revenues at Bolivar,
resulting from lower throughput and grades during Q4 2021.
Income Taxes
The Company recorded current tax expense of $3.8 million for Q4 2021 compared to $9.0 million in Q4 2020. Current taxes decreased due to lower net income
during the quarter as compared to same quarter of the prior year.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
26
During Q4 2021, the Company recorded a deferred tax recovery of $3.1 million compared to deferred tax expense of $0.4 million in Q4 2020. The main driver
for the Company’s consolidated deferred tax recovery is the non-cash recovery associated with the acquisition of Corona.
Adjusted Net Income Attributable to Shareholders
The Company recorded an adjusted net income of $5.4 million for Q4 2021 compared to $8.7 million for Q4 2020.
Total Comprehensive Income (loss)
TCL for Q4 2021 was $37.4 million compared to TCI of $9.9 million for the same period in 2020. TCL includes a foreign currency loss of $0.5 million in Q4
2021 (Q4 2020 – gain of $0.6 million).
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, 2021 and December 31, 2020:
(000's)
December 31, 2021
December 31, 2020
Cash and cash equivalents
$
34,929
$
71,473
Working capital
$
17,321
$
70,885
Total assets
$
396,824
$
439,592
Debt (net of financing fees)
$
80,804
$
99,383
Total liabilities
$
192,192
$
199,384
Equity attributable to owners of the Company
$
169,249
$
201,000
Cash and cash equivalents of $34.9 million and working capital of $17.3 million as at December 31, 2021 compared to $71.5 million and $70.9 million,
respectively, at the end of 2020. Cash and cash equivalents decreased during 2021 as the $71.8 million used in investing activities and $36.9 million used in
financing activities exceeded cash generated from operating activities of $72.2 million. Cash used in financing activities included repayment instalments of the
BCP loan amounting to $19.0 million, interest payment of $3.2 million, dividend payments of $4.9 million to shareholders and $9.0 million to non-controlling
interests
Trade and other receivables include $4.9 million (December 31, 2020 - $5.9 million) of Mexican value-added tax (“VAT”) receivables. The Company expects to
collect or offset the VAT balance against 2022 VAT payables. Amounts included in trade and other receivables are current and the Company has no allowance
for doubtful accounts as at December 31, 2021.
Sierra’s outstanding loan and credit facilities are shown below:
Balance Outstanding
(000's)
Limit
December 31, 2021
December 31, 2020
Senior Secured Corporate Facility with BCP(1)
$
100,000
$
80,804
$
99,383
Total Debt
$
80,804
$
99,383
Less cash balances
$
34,929
$
71,473
Net Debt
$
45,875
$
27,910
(1)
See consolidated financial statements as at December 31, 2021 for details of the credit facility.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
27
Outstanding Shares
The authorized share capital at December 31, 2021 was an unlimited number of common shares without par value. As at March 16, 2022, the Company had 163.4
million shares issued and outstanding (December 31, 2020 – 162.8 million shares issued and outstanding).
As at December 31, 2021, there were 1,045,831 RSUs outstanding at a weighted average fair value of C$2.63.
As at March 16, 2022 there are 985,424 RSUs outstanding at a weighted average fair value of C$2.66.
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.
(a) Market Risk
(i)
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, accounts payable and other liabilities that are subject to currency risk.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
28
The following are the most significant areas of exposure to currency risk:
December 31, 2021
Peruvian
Mexican
Nuevo
CAN dollar
Peso
Soles
Total $
Cash and cash equivalents
301
55
678
1,034
Income tax and other receivables
69
19,478
1,665
21,212
370
19,533
2,343
22,246
Accounts payable and other liabilities
(705)
(38,271)
(22,997)
(61,973)
Total
(335)
(18,738)
(20,654)
(39,727)
December 31, 2020
Peruvian
Mexican
Nuevo
CAN dollar
Peso
Soles
Total $
Cash and cash equivalents
179
1,706
1,625
3,510
Income tax and other receivables
39
13,371
723
14,133
218
15,077
2,348
17,643
Accounts payable and other liabilities
(885)
(27,009)
(16,438)
(44,332)
Total
(667)
(11,932)
(14,090)
(26,689)
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, 2021, 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, 2021, with all the other variables held constant, would have resulted in an increase to the Company’s net income of $2,455 (2020 -
$1,965).
A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial assets and liabilities held at December 31, 2021
and 2020, with all the other variables held constant, would have resulted in a negligible impact to the Company’s net income (loss).
(ii) 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. 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, 2021 on its loans
and notes payable in Peru was 3.31% (2020 – 4.07%). With all other variables unchanged a 1% increase in the interest rate would have increased the
Company’s net loss by $678 (2020 - $708).
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
29
(iii) 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, 2021 and 2020, the Company had certain amounts related to the sales of concentrates that have only been provisionally priced. The
Company’s exposure to commodity price risk is as follows:
2021
2020
Commodity
$
$
10% decrease in silver prices
(1,458)
(471)
10% decrease in copper prices
(3,213)
(743)
10% decrease in zinc prices
(605)
(354)
10% decrease in lead prices
(1,002)
(105)
10% decrease in gold prices
(297)
(928)
The increase in commodity price risk in 2021 compared to 2020 resulted from higher metal prices and the increase in unhedged positions.
As at December 31, 2021 and 2020, the Company did not have any forward contracts outstanding.
(b) 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, 2021 of the Company’s financial liabilities and
operating and capital commitments:
Within 1 year
1-2 years
3-5 years
After 5 years
Total
$
$
$
$
$
Accounts payable and accrued liabilities
44,308
—
—
—
44,308
Loans payable
25,000
25,000
31,250
—
81,250
Interest on loans payable
2,433
1,586
797
—
4,816
Decommissioning liability
1,034
3,824
3,090
13,297
21,245
Other liabilities
11,183
3,477
—
—
14,660
Total Commitments
83,958
33,887
35,137
13,297
166,279
In the opinion of management, the working capital at December 31, 2021, together with future cash flows from operations and available loan facilities,
is sufficient to support the Company’s commitments through 2022.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
30
(c) 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, 2021 and 2020 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.
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, mud-rushes 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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
31
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.
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
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
32
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.
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.
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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
33
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.
Biological hazards (COVID-19)
Since the outbreak of the coronavirus (COVID-19) in late 2019, it has spread into areas where the Company has operations and where the Company’s offices are
located. Government efforts to curtail the spread of COVID-19 resulted in reduced production at the Company’s operations as it enhanced physical distancing to
protect its personnel and the community. The spread of COVID-19 has impacted the Company’s employees and contractors, not only as it relates to potential
health concerns, but also in terms of limitations on movement, availability of food and other goods, and personal wellbeing, among others. The Company’s
suppliers and service providers have also been impacted.
While COVID-19 has already had significant, direct impacts on the Company’s operations, business, workforce and production, the extent to which COVID-19
will continue to impact the operations will depend on future developments which are highly uncertain and cannot be predicted with confidence. These future
developments include, but are not limited to, the duration of any outbreak, new information that may emerge concerning the severity of COVID-19, including
variants of the disease, and the actions taken to contain COVID-19 or treat it. The impact of governmental restrictions and health and safety protocols could
improve or worsen relative to the Company’s assumptions, depending on how each jurisdiction manages potential outbreaks of COVID-19, the development and
adequate supply of vaccines, and the effectiveness of such vaccines. The management assumes operations will continue to be impacted by comprehensive
COVID-19 protocols in 2022, which could increase costs and restrict throughput levels, especially at the Company’s underground mines. Exploration and
development programs were also impacted in 2021 due to COVID-related restrictions, protocols and travel restrictions, and the management anticipates that this
impact may also be felt in 2022. The Company’s ability to continue with its operations and activities, or to successfully maintain its operations on care and
maintenance if so required, or to restart or ramp-up any such operations efficiently or economically, or at all, is unknown.
Moreover, the continued presence of, or spread, of COVID-19, and any future emergence and spread of COVID-19 mutations or other pathogens, globally would
likely have material adverse effect on both global and regional economies, including those in which the Company operates. Such effects would not only affect the
Company’s business and results of operations, but also the operations of its suppliers, contractors and service providers, including smelter and refining service
providers, and the demand for its production. COVID-19 could also negatively impact stock markets, including the trading price of the Company’s shares,
adversely impact its ability to raise capital, cause continued interest rate volatility and movements that could make obtaining financing or refinancing its debt
obligations more challenging or more expensive (if such financing is available at all), and result in any operations affected by coronavirus becoming subject to
quarantine or shut down. Inflationary pressures relating to COVID-19 global financial support measures and current supply chain challenges are also having both
direct and indirect impacts on the Company’s costs to operate, which could have a material
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
34
impact on its financial results. Any of these developments, and others, could have a material adverse effect on the Company’s business and results of operations.
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.
These matters include an ongoing personal action filed in Mexico against Dia Bras Mexicana S.A de C.V (“DBM”) by an individual, Carlos Emilio Seijas
Bencomo, 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. Carlos.
Emilio Seijas Bencomo passed away in 2020 and his heirs appointed Mr. Emilio Ambrosio Bencomo Portillo as legal representative to pursue this case. As per
latest development, on March 21, 2021, the first Civil Court of Chihuahua absolved DBM of all claims raised by the plaintiff. Although the plaintiff filed an
appeal against this ruling on April 7, 2021, the Company believes that there is no merit in this appeal and the possibility of reversal of the March 12, 2021 ruling
is very unlikely.
12. NON-IFRS PERFORMANCE MEASURES
Adjusted EBITDA and Adjusted net income (loss) attributable to shareholders are non-IFRS performance measures. Management believes these measures better
reflect the Company’s performance for the current period and are better indications of its expected performance in future periods. These measures are used
internally by the Company to evaluate the performance of its underlying operations and to assist with its planning and forecasting of future operating results. As
such, the Company believes these measures are useful to investors in assessing the Company’s underlying performance. These measures are intended to provide
additional information, but do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be directly comparable to similar measures
presented by other issuers.
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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
35
The following table provides a reconciliation of adjusted EBITDA to the consolidated financial statements for the three months and years ended December 31,
2021 and 2020:
Three Months Ended
Year Ended
(In thousands of United States dollars)
December 31,2021
December 31,2020
December 31,2021
December 31,2020
Net income (loss)
$
(33,220) $
9,348
$
(22,108) $
27,391
Adjusted for:
Depletion and depreciation
10,526
12,390
46,074
41,654
Interest expense and other finance costs
886
882
3,645
4,293
NRV adjustments on inventory
3,619
32
5,746
1,248
Impairment charges
35,000
—
35,000
—
Share-based payments
20
203
1,059
668
Derivative gains
—
37
(451)
(904)
Foreign currency exchange and other provisions
(280)
(1,151)
(583)
(1,022)
Costs related to COVID
1,590
2,598
9,582
5,851
Legal settlement and related charges
—
—
1,665
1,068
Income taxes
702
9,386
25,103
22,586
Adjusted EBITDA
$
18,843
$
33,725
$
104,732
$
102,833
Note: The EBITDA calculations for the year 2020 have been adjusted to include costs related to COVID to make them comparable to 2021.
Non-IFRS Reconciliation of Adjusted Net Income
Adjusted net income (loss) attributable to shareholders represents net income (loss) attributable to shareholders excluding certain impacts, net of taxes, such as
non-cash depletion charge due to the acquisition of Corona, impairment charges and reversal of impairment charges, write-down of assets, and certain non-cash
and non-recurring items including but not limited to share-based compensation and foreign exchange (gain) loss.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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
36
The following table provides a reconciliation of adjusted net income to the consolidated financial statements for the three months and years ended December 31,
2021 and 2020:
Three Months Ended
Year Ended
(In thousands of United States dollars)
December 31,2021
December 31,2020
December 31,2021
December 31,2020
Net income (loss) attributable to shareholders
$
(34,716) $
7,603
$
(27,363) $
23,419
Non-cash depletion charge on Corona's acquisition
2,084
2,311
9,329
8,503
Deferred tax recovery on Corona's acquisition depletion charge
(284)
—
(2,831)
(2,163)
Share-based compensation
20
203
1,059
668
NRV adjustments on inventory
3,619
32
5,746
1,248
Impairment charges
35,000
—
35,000
—
Legal settlement and related charges
—
—
1,665
1,068
Derivative gains
—
(1,516)
(451)
(904)
Foreign currency exchange loss
(280)
37
(583)
(1,022)
Adjusted net income attributable to shareholders
$
5,443
$
8,670
$
21,571
$
30,817
Note: The Adjusted net income attributable to shareholders for the year 2020 has been adjusted to include ‘NRV adjustments on inventory’ to make the
calculation comparable to 2021.
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.”
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
37
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 years ended December 31, 2021 and 2020:
Three months ended
Three months ended
(In thousand of US dollars, unless stated)
December 31, 2021
December 31, 2020
Yauricocha
Bolivar
Cusi
Consolidated
Yauricocha
Bolivar
Cusi
Consolidated
Cash Cost per Tonne of Processed Ore
Cost of Sales
24,695
15,393
6,465
46,553
25,764
15,033
6,771
47,568
Reverse: Workers Profit Sharing
(748)
—
—
(748)
(657)
—
—
(657)
Reverse: D&A/Other adjustments
(5,564)
(3,790)
(1,549)
(10,903)
(6,871)
(4,110)
(1,632)
(12,613)
Reverse: Variation in Finished Inventory
(471)
(151)
68
(554)
1,242
(696)
(276)
270
Total Cash Cost
17,912
11,452
4,984
34,348
19,478
10,227
4,863
34,568
Tonnes Processed
277,531
227,722
84,804
590,057
311,946
383,607
82,683
778,236
Cash Cost per Tonne Processed US$
64.54
50.29
58.77
58.21
62.44
26.66
58.81
44.42
Twelve months ended
Twelve months ended
December 31, 2021
December 31,2020
(In thousand of US dollars, unless stated)
Yauricocha
Bolivar
Cusi
Consolidated
Yauricocha
Bolivar
Cusi
Consolidated
Cash Cost per Tonne of Processed Ore
Cost of Sales
105,665
57,415
27,715
190,795
92,618
51,512
21,173
165,303
Reverse: Workers Profit Sharing
(4,266)
—
—
(4,266)
(2,879)
—
—
(2,879)
Reverse: D&A/Other adjustments
(24,899)
(15,963)
(7,110)
(47,972)
(22,994)
(14,599)
(6,636)
(44,229)
Reverse: Variation in Finished Inventory
814
1,736
190
2,740
(2,341)
(902)
498
(2,745)
Total Cash Cost
77,314
43,188
20,795
141,297
64,404
36,011
15,035
115,450
Tonnes Processed
1,256,847
1,349,602
295,771
2,902,220
1,117,860
1,480,588
230,429
2,828,877
Cash Cost per Tonne Processed US$
61.51
32.00
70.31
48.69
57.61
24.32
65.25
40.81
The following table provides detailed information on Yauricocha’s cash cost, and all-in sustaining cost per copper equivalent payable pound for the three months
and years ended December 31, 2021 and 2020:
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
38
Yauricocha:
YAURICOCHA
Three months ended
Twelve months ended
(In thousand of US dollars, unless stated)
December 31, 2021 December 31, 2020
December 31, 2021 December 31, 2020
Cash Cost per zinc equivalent payable pound
Total Cash Cost
17,912
19,478
77,314
64,404
Variation in Finished inventory
471
(1,242)
(814)
2,341
Total Cash Cost of Sales
18,383
18,236
76,500
66,745
Treatment and Refining Charges
8,534
12,904
35,634
45,761
Selling Costs
1,026
1,212
4,670
4,785
G&A Costs
2,166
2,631
9,344
9,072
Sustaining Capital Expenditures
5,235
3,966
18,843
12,718
All-In Sustaining Cash Costs
35,344
38,949
144,991
139,081
Copper Equivalent Payable Pounds (000's)
11,427
15,770
52,251
65,827
Cash Cost per Copper Equivalent Payable Pound (US$)
1.61
1.16
1.46
1.01
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound (US$)
3.09
2.47
2.77
2.11
The following table provides detailed information on Bolivar’s cash cost, and all-in sustaining cost per copper equivalent payable pound for the three months
and years ended December 31, 2021 and 2020:
Bolivar:
BOLIVAR
Three months ended
Twelve months ended
(In thousand of US dollars, unless stated)
December 31, 2021 December 31, 2020
December 31, 2021 December 31, 2020
Cash Cost per copper equivalent payable pound
Total Cash Cost
11,452
10,227
43,188
36,011
Variation in Finished inventory
151
696
(1,736)
902
Total Cash Cost of Sales
11,603
10,923
41,452
36,913
Treatment and Refining Charges
2,435
2,302
14,240
7,297
Selling Costs
728
1,430
3,986
4,534
G&A Costs
1,181
1,748
5,997
5,763
Sustaining Capital Expenditures
2,870
2,562
14,551
6,718
All-In Sustaining Cash Costs
18,817
18,965
80,226
61,225
Copper Equivalent Payable Pounds (000's)
2,194
8,089
19,033
32,644
Cash Cost per Copper Equivalent Payable Pound(1) (US$)
5.29
1.35
2.18
1.13
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound(1) (US$)
8.58
2.34
4.22
1.88
The following table provides detailed information on Cusi’s cash cost, and all-in sustaining cost per silver equivalent payable ounce for the three months
and years ended December 31, 2021 and 2020:
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
39
Cusi:
CUSI
Three months ended
Twelve months ended
(In thousand of US dollars, unless stated)
December 31, 2021 December 31, 2020
December 31, 2021 December 31, 2020
Cash Cost per silver equivalent payable ounce
Total Cash Cost
4,984
4,863
20,795
15,035
Variation in Finished inventory
(68)
276
(190)
(498)
Total Cash Cost of Sales
4,916
5,139
20,605
14,537
Treatment and Refining Charges
1,061
1,093
3,899
2,350
Selling Costs
342
377
1,227
876
G&A Costs
928
320
2,449
861
Sustaining Capital Expenditures
1,536
2,295
6,537
3,462
All-In Sustaining Cash Costs
8,783
9,224
34,717
22,086
Silver Equivalent Payable Ounces (000's)
416
327
1,233
874
Cash Cost per Silver Equivalent Payable Ounce (US$)
11.80
15.70
16.71
16.62
All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce (US$)
21.09
28.18
28.15
25.26
Consolidated:
CONSOLIDATED
Three months ended
Twelve months ended
(In thousand of US dollars, unless stated)
December 31,2021 December 31,2020 December 31,2021 December 31,2020
Total Cash Cost of Sales
34,902
34,298
138,557
118,195
All-In Sustaining Cash Costs
62,944
67,138
259,934
222,392
Copper Equivalent Payable Pounds (000's)
15,240
26,254
76,355
104,901
Cash Cost per Copper Equivalent Payable Pound (US$)
2.29
1.31
1.81
1.13
All-In Sustaining Cash Cost per Copper Equivalent Payable Pound (US$)
4.13
2.56
3.40
2.12
Additional Non-IFRS Measures
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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
40
13. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2021, the Company recorded consulting fees of $200 (2020 - $200) to companies related by common directors or officers.
Related party transactions occurred in the normal course of business.
(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, 2021 and 2020 are as
follows:
2021
2020
$
$
Salaries, Cash Bonuses, Severance and Directors Fees
2,626
2,289
Share-based payments1
1,373
496
3,999
2,785
(1)
calculated at fair value on day of the grant
(b) Principal Subsidiaries
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.
The principal subsidiaries of the Company and their geographical locations as at December 31, 2021 are as follows:
Name of the subsidiary
Ownership interest
Location
Dia Bras EXMIN Resources Inc.
100 %
Canada
Sociedad Minera Corona, S. A. (“Corona”) 1
81.84 %
Perú
Dia Bras Peru, S. A. C. (“Dia Bras Peru”) 1
100 %
Perú
Dia Bras Mexicana, S. A. de C. V. (“Dia Bras Mexicana”)
100 %
México
EXMIN, S. A. de C. V.
100 %
México
Servicios de Produccion Y Extraccion de Chihuahua, S.A. de C.V
100 %
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, 2021 consolidated financial statements,
management is required to make judgments, estimates and assumptions about the effects of uncertain
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
41
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:
(a) 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, 2021, the Company’s assessment of its
long-lived assets and exploration and evaluation expenditures resulted in an impairment of $35.0 million on its Cusi mine.
(b) Mineral Reserves and Resources
The Company estimates mineral reserves and resources based on information prepared by qualified persons as defined in accordance with 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.
As indicated earlier, in accordance with NI 43-101, the Mineral Reserves previously reported for these mines are no longer valid after the issuance of the
PEA Technical Reports and so have not been disclosed in this document. The Mineral Resources reported herein reflect the resources as at the effective dates
of each mine’s Reserves and Resources update reduced by depletion until December 31, 2021.
(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 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
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
42
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) COVID-19 uncertainty
In preparing the Company’s consolidated financial statements, the management makes judgments in applying its accounting policies. The areas of policy
judgment are consistent with those reported in the Company’s 2020 annual consolidated financial statements. In addition, the Company makes assumptions
about the future in deriving estimates used in preparing our consolidated financial statements. Sources of estimation uncertainty include estimates used to
determine the recoverable amounts of long-lived assets, recoverable reserves and resources, the provision for income taxes and the related deferred tax assets
and liabilities and the valuation of other assets and liabilities including decommissioning and restoration provisions.
The Company has assessed the economic impacts of the COVID-19 pandemic on its consolidated financial statements. Mining operations at the Company’s
Bolivar mine were impacted during the year ended December 31, 2021 resulting in a high cost of stockpile and concentrate inventory and consequent
reduction of these inventories to their net realizable value (“NRV”). Further, the availability of personnel remained an issue throughout 2021, considering the
absenteeism caused by quarantines and due to the recovery phase of the workers who tested COVID-positive. Low availability of manpower led to delays in
mine development and consequent impact on metal production, which was particularly noticed at the Bolivar mine. The measures taken by the Company to
detect and restrict the spread of COVID resulted in additional costs of $9.6 million (2020 - $5.9 million). Despite these impacts, the management has
determined that the Company’s ability to execute its medium- and longer-term plans and the economic viability of its assets including the carrying value of
its long-lived assets are not materially impacted. In making this judgment, management has assessed various criteria including, but not limited to, existing
laws, regulations, orders, disruptions and potential disruptions in our supply chain, disruptions in the markets for our products, commodity prices and foreign
exchange prices and the actions that the Company has taken at its operations to protect the health and safety of its workforce and local community.
15. OFF BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as at December 31, 2021.
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.
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
43
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, 2021, 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.
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 2021.
Based on this evaluation, management concluded that our internal control over financial reporting was effective as at December 31, 2021 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, 2021 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 completed for the year ended December 31, 2021 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.
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
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
44
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.
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
Table of Contents
Sierra Metals Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2021
(In thousands of United States dollars, unless otherwise stated)
45
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
In particular, and without limiting the generality of the foregoing, the terms “inferred mineral resources,” “indicated mineral resources,” “measured mineral
resources” and “mineral resources” used or referenced in this document and the Company’s AIF dated March 16, 2022 are Canadian mineral disclosure terms as
defined in accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in the 2014
Canadian Institute of Mining, Metallurgy and Petroleum Standards for Mineral Resources and Mineral Reserves, Definitions and Guidelines, May 2014 (the
“CIM Standards”). The CIM Standards differ significantly from the historic standards in the United States included in U.S. Securities and Exchange Commission
(the “SEC”) Industry Guide 7.
The SEC has adopted amendments to its disclosure rules to modernize the mineral property disclosure requirements for issuers whose securities are registered
with the SEC under the U.S. Securities Exchange Act of 1934, as amended. These amendments became effective February 25, 2019 (the “SEC Modernization
Rules”) with compliance required for the first fiscal year beginning on or after January 1, 2021. Under the SEC Modernization Rules, the historical property
disclosure requirements for mining registrants included in SEC Industry Guide 7 will be rescinded and replaced with disclosure requirements in subpart 1300 of
SEC Regulation S-K. As an issuer that is eligible to file reports with the SEC pursuant to the multi-jurisdictional disclosure system, the Company is not required
to provide disclosure on its mineral properties under the SEC Modernization Rules and will continue to provide disclosure under NI 43-101 and the CIM
Definition Standards.
As a result of the adoption of the SEC Modernization Rules, the SEC will recognize estimates of “measured mineral resources”, “indicated mineral resources”
and “inferred mineral resources.” In addition, the SEC has amended its definitions of “proven mineral reserves” and “probable mineral reserves” to be
“substantially similar” to the corresponding definitions under the CIM Standards that are required under NI 43-101. Accordingly, during the period leading up to
the compliance date of the SEC Modernization Rules, information regarding mineral resources or mineral reserves contained or referenced in our AIF may not be
comparable to similar information made public by companies that report in accordance with U.S. standards. While the above terms are “substantially similar” to
CIM Definitions, there are differences in the definitions under the SEC Modernization Rules and the CIM Definition Standards. Accordingly, there is no
assurance any mineral reserves or mineral resources that the Company may report as “proven mineral reserves”, “probable mineral reserves”, “measured mineral
resources”, “indicated mineral resources” and “inferred mineral resources” under NI 43-101 would be the same had the Company prepared the reserve or
resource estimates under the standards adopted under the SEC Modernization Rules.
SIERRA METALS INC.
Consolidated Financial Statements
Years ended December 31, 2021 and 2020
2 | page
March 14, 2022
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.
“Luis Marchese”
“Ed Guimaraes”
Luis Marchese
Ed Guimaraes
Chief Executive Officer
Chief Financial Officer
3 | 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, 2021 and 2020, 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, 2021 and 2020, and its financial performance and its cash flows for the years then ended in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
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
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
4 | page
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 14, 2022
We have served as the Company’s auditor since at least 1997.
5 | page
Sierra Metals Inc.
Consolidated Statements of Financial Position
December 31, 2021 and 2020
(In thousands of United States dollars)
Note
December 31, 2021
December 31, 2020
$
$
ASSETS
Current assets:
Cash and cash equivalents
34,929
71,473
Trade and other receivables
5
37,122
38,694
Income tax receivable
4,857
438
Prepaid expenses
2,538
1,968
Inventories
6
26,677
23,476
Total Current assets
106,123
136,049
Non-current assets:
Property, plant and equipment
7
289,615
301,786
Deferred income tax
1,086
1,757
Total assets
396,824
439,592
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities
8
44,308
30,317
Income tax payable
7,444
7,545
Loans payable
10
24,855
18,480
Decommissioning liability
11
1,012
1,260
Other liabilities
12
11,183
7,562
Total Current liabilities
88,802
65,164
Non-current liabilities:
Loans payable
10
55,949
80,903
Deferred income tax
9
26,824
29,903
Decommissioning liability
11
17,140
21,207
Other liabilities
12
3,477
2,207
Total liabilities
192,192
199,384
EQUITY
Share capital
13
232,915
230,980
Accumulated deficit
(74,086)
(41,820)
Other reserves
10,420
11,840
Equity attributable to owners of the Company
169,249
201,000
Non-controlling interest
14
35,383
39,208
Total equity
204,632
240,208
Total liabilities and equity
396,824
439,592
Contingencies (notes 10 and 24)
Approved on behalf of the Board and authorized for issue on March 14, 2022:
“Jose Vizquerra”
“Koko Yamamoto”
Jose Vizquerra
Koko Yamamoto
Chairman of the Board
Chairperson Audit Committee
The accompanying notes are an integral part of the consolidated financial statements.
6 | page
Sierra Metals Inc.
Consolidated Statements of Income (Loss)
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts)
Year Ended December 31,
Note
2021
2020
$
$
Revenue
23
272,014
246,888
Cost of sales
Mining costs
15(a)
(146,095)
(123,649)
Depletion, depreciation and amortization
15(a)
(44,700)
(41,654)
(190,795)
(165,303)
Gross profit from mining operations
81,219
81,585
General and administrative expenses
15(b)
(23,837)
(20,270)
Selling expenses
(9,882)
(10,195)
Asset impairment
7
(35,000)
—
Income from operations
12,500
51,120
Other expenses
16
(6,894)
(665)
Foreign currency exchange gain
583
2,911
Interest expense and other finance costs
17
(3,645)
(4,293)
Derivative instruments gains
451
904
Income before income tax
2,995
49,977
Income taxes recovery (expense):
Current tax expense
9
(27,543)
(20,535)
Deferred tax recovery (expense)
9
2,440
(2,051)
(25,103)
(22,586)
Net income (loss)
(22,108)
27,391
Net income (loss) attributable to:
Shareholders of the Company
(27,363)
23,419
Non-controlling interests
14
5,255
3,972
(22,108)
27,391
Weighted average shares outstanding (000s)
Basic
163,276
162,638
Diluted
163,276
164,047
Basic income (loss) per share
(0.17)
0.14
Diluted income (loss) per share
(0.17)
0.14
The accompanying notes are an integral part of the consolidated financial statements.
7 | page
Sierra Metals Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars)
Year Ended December 31,
2021
2020
$
$
Net income (loss)
(22,108)
27,391
Other comprehensive income (loss)
Items that may be subsequently classified to net loss:
Currency translation adjustments on foreign operations
(544)
130
Total comprehensive income (loss)
(22,652)
27,521
Total comprehensive income (loss) attributable to shareholders
(27,907)
23,549
Non-controlling interests
5,255
3,972
Total comprehensive income (loss) attributable to shareholders
(22,652)
27,521
The accompanying notes are an integral part of the consolidated financial statements.
8 | page
Sierra Metals Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars)
Common Shares
Other
Retained earnings
Total attributable
Non-controlling
Total
Shares
Amounts
reserves
(accumulated deficit)
to shareholders
Interest
shareholders' equity
$
$
$
$
$
$
Balance at January 1, 2021
162,810,553
230,980
11,840
(41,820)
201,000
39,208
240,208
Exercise of RSUs
617,597
1,935
(1,935)
—
—
—
—
Share-based compensation expense
—
—
1,059
—
1,059
—
1,059
Dividends paid to shareholders (note 13 (c))
—
—
—
(4,903)
(4,903)
—
(4,903)
Dividends paid to non-controlling interest (note 14)
—
—
—
—
—
(9,080)
(9,080)
Total comprehensive income (loss)
—
—
(544)
(27,363)
(27,907)
5,255
(22,652)
Balance at December 31, 2021
163,428,150
232,915
10,420
(74,086)
169,249
35,383
204,632
Common Shares
Other
Retained earnings
Total attributable
Non-controlling
Total
Shares
Amounts
reserves
(accumulated deficit)
to shareholders
Interest
shareholders' equity
$
$
$
$
$
$
Balance at January 1, 2020
162,115,379
230,456
11,566
(65,239)
176,783
35,236
212,019
Exercise of RSUs
695,174
524
(524)
—
—
—
—
Share-based compensation expense
—
—
668
—
668
—
668
Total comprehensive income
—
—
130
23,419
23,549
3,972
27,521
Balance at December 31, 2020
162,810,553
230,980
11,840
(41,820)
201,000
39,208
240,208
The accompanying notes are an integral part of the consolidated financial statements.
9 | page
Sierra Metals Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars)
Year Ended December 31,
Note
2021
2020
$
$
Cash flows from operating activities
Net income (loss) from operations
(22,108)
27,391
Items not affecting cash:
Depletion, depreciation and amortization
46,074
41,916
Share-based compensation
1,059
668
Impairment charge
7
35,000
—
Loss on disposals and write-offs
2,388
1,571
Change in supplies inventory reserve
2,291
176
Interest expense and other finance costs
3,652
4,592
Current income tax expense
27,543
20,535
Deferred income taxes expense (recovery)
(2,440)
2,051
Unrealized foreign currency exchange gain
(507)
(1,143)
Other non-cash items
453
—
Operating cash flows before movements in working capital
93,405
97,757
Net changes in non-cash working capital items
22
11,671
(16,991)
Decomissioning liabilities settled
(799)
(405)
Income tax paid
(32,032)
(13,380)
Cash generated from operating activities
72,245
66,981
Cash flows used in investing activities
Capital expenditures
(71,772)
(35,972)
Proceeds from sale of property, plant and equipment
—
901
Proceeds from insurance claim
—
822
Cash used in investing activities
(71,772)
(34,249)
Cash flows used in financing activities
Repayment of BCP loan
(18,750)
—
Loan interest paid
(3,209)
(4,066)
Repayment of lease liabilities
(946)
—
Dividends paid to non-controlling interest
14
(9,080)
—
Dividends paid to shareholders
13
(4,903)
—
Cash used in financing activities
(36,888)
(4,066)
Effect of foreign exchange rate changes on cash and cash equivalents
(129)
(173)
Increase (decrease) in cash and cash equivalents
(36,544)
28,493
Cash and cash equivalents, beginning of period
71,473
42,980
Cash and cash equivalents, end of period
34,929
71,473
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, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
10 | page
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 diversified Canadian 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 14, 2022.
(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.
The principal subsidiaries of the Company and their geographical locations as at December 31, 2021 are as follows:
Name of the subsidiary
Ownership interest
Location
Dia Bras EXMIN Resources Inc.
100%
Canada
Sociedad Minera Corona, S. A. (“Corona”) 1
81.84%
Perú
Dia Bras Peru, S. A. C. (“Dia Bras Peru”) 1
100%
Perú
Dia Bras Mexicana, S. A. de C. V. (“Dia Bras Mexicana”)
100%
México
EXMIN, S. A. de C. V.
100%
México
Servicios de Produccion Y Extraccion de Chihuahua, S.A. de C.V
100%
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.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
11 | page
2
Significant accounting policies (continued)
(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$”). The functional currency of the
Mexican and Peruvian subsidiaries is the United States dollar.
(ii) Presentation currency
The presentation currency of the financial statements is United States dollar (“$”). 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.
(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’s financial assets and liabilities (financial instruments) include cash and cash equivalents, trade receivables, accounts
payable and accrued liabilities and long-term debt. The Company recognizes financial assets and financial liabilities on the date the
Company becomes a party to the contractual provisions of the instruments. A financial asset is derecognized either when the Company
has transferred substantially all the risks and rewards of ownership of the financial asset or when cash flows expire. A financial liability
is derecognized when the obligation specified in the contract is discharged, canceled or expired.
Financial Assets
Cash and cash equivalents are recorded at amortized cost using the effective interest method.
Trade receivables are classified as financial assets at fair value through profit or loss and measured at fair value.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
12 | page
2
Significant accounting policies (continued)
Financial Liabilities
Financial liabilities, including accounts payable and accrued liabilities, as well as debt and financing obligations are accounted for at
amortized cost.
Non-hedge derivatives
The Company may hold derivative financial instruments to hedge its risk explosure to fluctuations in commodity prices. These
derivative financial instruments are classified as financial instruments through profit or loss and recorded in the balance sheet at fair
value. Changes in the estimated fair value of non-hedge derivatives at each reporting date are included in the Consolidated Statement of
Income (Loss) as derivative gain or loss.
(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 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 are 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
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
13 | page
2
Significant accounting policies (continued)
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.
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:
Asset class
Useful lives (years)
Vehicle, furniture and other assets
3 to 10
Machinery and equipment
5 to 20
Buildings and other constructions
5 to 50
Mining 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.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
14 | page
2
Significant accounting policies (continued)
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.
(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
Revenues include sales of metal concentrates net of treatment and refining charges.
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 right 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.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
15 | page
2
Significant accounting policies (continued)
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) Leases
At inception of a contract, the Company assesses whether a contract is, or contains, a lease by determining whether the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A right-of-use ("ROU")
asset and lease liability is recognized at the lease commencement date. The ROU asset is initially measured at cost, which comprises
the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial
direct costs incurred, less any lease incentives received.
The right-of-use asset is subsequently depreciated from the commencement date to the earlier of the end of the lease term, or the end of
the useful life of the asset. In addition, the right-of-use asset may be reduced due to impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
A lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted
by the interest rate implicit in the lease, or if that rate cannot be readily determined, the incremental borrowing rate. Lease payments
included in the measurement of the lease liability are comprised of:
●
fixed payments, including in-substance fixed payments, less any lease incentives receivable;
●
variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
●
amounts expected to be payable under a residual value guarantee;
●
exercise prices of purchase options if we are reasonably certain to exercise that option; and
●
payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future
lease payments arising from a change in an index or rate, or if there is a change in our estimate or assessment of the expected amount
payable under a residual value guarantee, purchase, extension or termination option. Variable lease payments not included in the initial
measurement of the lease liability are charged directly to profit.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
16 | page
2
Significant accounting policies (continued)
(n) 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.
(o)
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.
(p) 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.
(q) Earnings per share
Basic earnings 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 and RSUs granted to employees. In periods of loss, basic and
diluted EPS are the same, as the effect of dilutive instruments is anti-dilutive.
(r)
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.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
17 | page
2
Significant accounting policies (continued)
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.
(s)
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.
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.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
18 | page
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 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, 2021, the Company’s assessment of its long-lived assets and exploration and evaluation expenditures resulted in an
impairment of $35.0 million on its Cusi mine (December 31, 2020 - $nil) (note 7).
(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.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
19 | page
3
Significant accounting estimates and judgments (continued)
(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)
COVID-19 uncertainty
In preparing the Company’s consolidated financial statements, the management makes judgments in applying its accounting policies.
The areas of policy judgment are consistent with those reported in the Company’s 2020 annual consolidated financial statements. In
addition, the Company makes assumptions about the future in deriving estimates used in preparing our consolidated financial
statements. Sources of estimation uncertainty include estimates used to determine the recoverable amounts of long-lived assets,
recoverable reserves and resources, the provision for income taxes and the related deferred tax assets and liabilities and the valuation of
other assets and liabilities including decommissioning and restoration provisions.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
20 | page
3
Significant accounting estimates and judgments (continued)
The Company has assessed the economic impacts of the COVID-19 pandemic on its consolidated financial statements. Mining
operations at the Company's Bolivar mine were impacted during the year ended December 31, 2021, resulting in a high cost of
stockpile and concentrate inventory and consequent reduction of these inventories to their net realizable value (“NRV”). Further, the
availability of personnel remained an issue throughout 2021, considering the absenteeism caused by quarantines and due to the
recovery phase of the workers who tested COVID-positive. Low availability of manpower led to delays in mine development and
consequent impact on metal production, which was particularly noticed at the Bolivar mine. The measures taken by the Company to
detect and restrict the spread of COVID resulted in additional costs of $9.6 million (2020 - $5.9 million). Despite these impacts, the
management has determined that the Company's ability to execute its medium- and longer-term plans and the economic viability of its
assets including the carrying value of its long-lived assets are not materially impacted. In making this judgment, management has
assessed various criteria including, but not limited to, existing laws, regulations, orders, disruptions and potential disruptions in our
supply chain, disruptions in the markets for our products, commodity prices and foreign exchange prices and the actions that the
Company has taken at its operations to protect the health and safety of its workforce and local community.
4
Adoption of new accounting standards and future accounting changes
The following new accounting standard was not yet effective for the year ended December 31, 2021 and have not been applied in preparing
these consolidated financial statements.
Amendment to IAS 1, Classification of liabilities
On January 23, 2020, the IASB issued amendments to IAS 1 Presentation of Financial Statements, to clarify the classification of liabilities
as current or non-current. On July 15, 2020 the IASB issued an amendment to defer the effective date by one year. For the purposes of non-
current classification, the amendments removed the requirement for a right to defer settlement or roll over of a liability for at least twelve
months to be unconditional. Instead, such a right must have substance and exist at the end of the reporting period. The amendments also
clarify how a company classifies a liability that includes a counterparty conversion option.
The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. The Company is
evaluating the impact of this amendment on its Financial Statements.
IAS 16, Property, Plant and Equipment
The IASB issued an amendment to IAS 16, Property, Plant and Equipment to prohibit deducting from property, plant and equipment
amounts received from selling items produced while preparing an asset for its intended use. Instead, sales proceeds and related costs must be
recognized in profit or loss. The amendment will require companies to distinguish between costs associated with producing and selling items
before the item of property, plant and equipment is available for use and costs associated with making the item of property, plant and
equipment available for its intended use. The amendment is effective for annual periods beginning on or after January 1, 2022, with earlier
application permitted. The Company is currently evaluating the impacts that this modification will have on the iron ore plant project at its
Bolivar mine.
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
21 | page
4
Adoption of new accounting standards and future accounting changes (continued)
Interest Rate Reforms
On August 27, 2020, the IASB finalized its response to the ongoing reform of inter-bank offered rates and other interest rate benchmarks by
issuing a package of amendments to IFRS Standards (Phase 2). The standards impacted include: Amendments to IFRS 9, IAS 39, IFRS 7,
IFRS 4 and IFRS 16. The amendments complement those issued in 2019 as part of Phase 1 amendments and mainly relate to:
●
changes to contractual cash flows—a company will not have to derecognize the carrying amount of financial instruments for
changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark
rate;
●
hedge accounting—a company will not have to discontinue its hedge accounting solely because it makes changes required by the
reform, if the hedge meets other hedge accounting criteria; and
●
disclosures—a company will be required to disclose information about new risks arising from the reform and how it manages the
transition to alternative benchmark rates.
The Company’s credit facility with BCP (note 10) is exposed to 3-month LIBOR. As at December 31, 2021, the Company has not yet
transitioned this credit agreement to an alternative benchmark interest rate. While there remains some uncertainty around the timing of
adoption and the precise nature of an alternative benchmark rate, the replacement of the rate is not expected to result in a significant change
in the Company’s interest rate risk management strategy or interest rate risk.
5
Trade and other receivables
December 31,
December 31,
2021
2020
$
$
Trade receivables
27,001
28,750
Sales tax receivables
10,121
9,944
37,122
38,694
6
Inventories
December 31,
December 31,
2021
2020
$
$
Stockpiles
4,092
1,047
Concentrates
3,630
4,185
Supplies and spare parts
18,955
18,244
26,677
23,476
Cost of sales are comprised of production costs and depletion, depreciation and amortization, and represent the cost of inventories
recognized as an expense for the years ended December 31, 2021 and 2020 of $190,795 and $165,303, respectively. Supplies and spare parts
inventory as at December 31, 2021 is stated net of a provision of $6,396 (2020 - $3,808) to write inventories down due to obsolescence or
infrequent use. During the year ended December 31, 2021, the Company wrote down stockpiles and concentrates inventory to its NRV,
recording a charge of $5,752 (2020 - $1,248). Stockpiles and concentrates inventory held at NRV as at December 31, 2021 was $2,710
(2020 - $nil).
7
Property, plant and equipment
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
22 | page
Exploration
Plant and
Mining
Assets under
and evaluation
equipment
properties
construction
assets
Total
Cost
$
$
$
$
$
Balance as of January 1, 2020
269,669
447,075
50,152
69,259
836,155
Additions
5,180
6,348
13,218
11,184
35,930
Change in estimate of decomissioning liability
5,427
—
—
—
5,427
Disposals
(4,514)
—
—
(2,032)
(6,546)
Transfers
24,783
25,979
(10,909)
(39,853)
—
Balance as of December 31, 2020
300,545
479,402
52,461
38,558
870,966
Additions
4,137
16,830
36,825
17,410
75,202
Change in estimate of decomissioning liability
(3,870)
—
—
—
(3,870)
Disposals
(8,033)
—
(3)
(1,312)
(9,348)
Transfers
20,414
2,345
(17,508)
(5,251)
—
Balance as of December 31, 2021
313,193
498,577
71,775
49,405
932,950
Exploration
Plant and
Mining
Assets under
and evaluation
equipment
properties
construction
assets
Total
Accumulated depreciation
$
$
$
$
$
Balance as of January 1, 2020
166,946
351,053
—
13,041
531,040
Depletion, depreciation and amortization
27,475
13,958
—
—
41,433
Disposals
(3,293)
—
—
—
(3,293)
Transfers
12,310
731
—
(13,041)
—
Balance as of December 31, 2020
203,438
365,742
—
—
569,180
Depletion, depreciation and amortization
29,327
16,747
—
—
46,074
Disposals
(6,919)
—
—
—
(6,919)
Impairment
9,588
20,828
—
4,584
35,000
Balance as of December 31, 2021
235,434
403,317
—
4,584
643,335
Net Book Value - December 31, 2021
77,759
95,260
71,775
44,821
289,615
Net Book Value - December 31, 2020
97,107
113,660
52,461
38,558
301,786
a)
During Q4 2021, the Company announced its increased focus on copper and other steel-making products and possible divestment of the
silver-producing Cusi CGU. As a result of this announcement, the uncertainties about the potential for the CGU to increase production
(including a lower probability for the company to expand the current capacity of the CUSI CGU) and higher production costs, management
concluded that impairment indicators existed as of December 31, 2021 and therefore estimated the recoverable amount of the CGU. This
change in Company’s strategy resulted in a lower probability of an expansion of the Cusi facilities. As a result, the Company developed
three life of mine (“LOM”) scenarios at different throughput levels, incorporating alternative design approaches and processing methods.
Cash flows were forecasted for each of these LOMs considering the most recent information regarding future production levels (based on
estimated quantities of mineral resources and the Company’s ability to convert resources to reserves), future production costs, capital
expenditures and future metal prices. The company assigned weighted probabilities to each of these scenarios to estimate the Fair Value Less
Costs of Disposal (“FVLCD”) as on December 31, 2021. Estimated quantities of mineral resources were based on information compiled by
management’s experts. An impairment of $35,000 was recognized during the year ended December 31, 2021. In accordance with IAS 36, the
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
23 | page
impairment loss was allocated to mineral properties and exploration & evaluation assets based on their pro rata carrying values.
7
Property, plant and equipment (continued)
The key assumptions used in making this assessment as of December 31, 2021 included future metal prices, discount rate, quantities of
mineral resources and the Company's ability to convert those resources to reserves, silver grades, future production costs, and the weighted
probabilities of different scenarios. Estimated quantities of mineral resources are based on information compiled by management’s internal
and external experts.
Future forecasted metal prices for silver were obtained from independent sources and range between $21.04/oz and $24.07/oz during the life
of the mine. If the prices used by management were to decrease by 10%, the company would have had to recognize an additional impairment
charge of $18,870.
A discount rate of 10.5% was estimated based on the Cusi’s weighted average cost of capital, considering the nature of the assets being
valued and their specific risk profile. If the discount rate applied to the cash flow projections had been 100 basis points higher, the company
would have to recognize an additional impairment charge of $1,727.
The quantities of mineral resources used in the determination of the FVLCD, was determined based on recent exploration results, and was
estimated based on information provided by internal and external experts. If the estimated quantities of mineral resources were 10% lower
than the one estimated by management, the Company would have recognized an additional impairment charge of $6,554.
If the silver grades were 10% lower than those estimated in the different scenarios, the Company would have recognized an additional
impairment charge of $18,314.
If the estimated future production costs were 10% higher than the one estimated by management, the Company would have recognized an
additional impairment charge of $11,811.
If the probabilities of the different scenarios had been 10% more negative than management’s estimates, the Company would have
recognized an additional impairment charge of $3,024.
b)
The Company wrote off $1,312 of exploration and evaluation assets and recognized a loss of $1,076 on disposal of equipment at the
Yauricocha mine during the year ended December 31, 2021.
8
Accounts payable and accrued liabilities
December 31,
December 31,
2021
2020
$
$
Trade payables
28,436
16,949
Other payables and accrued liabilities
15,872
13,368
44,308
30,317
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
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
24 | page
2021
2020
$
$
Current Tax Expense
Current income tax
27,543
20,535
27,543
20,535
Deferred Tax Recovery
Deferred tax expense (recovery)
(2,440)
2,051
(2,440)
2,051
Total tax expense
25,103
22,586
(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 years ended December 31, 2021 and 2020 is as follows:
2021
2020
$
$
Income before income taxes
2,995
49,977
Expected tax rate @ 26.50% (2020 - 26.50%)
794
13,244
Effect of tax rate differences
(814)
1,838
Stock based compensation costs
177
177
Other non-deductible expenses
7,044
909
Unrealized foreign exchange income
(69)
(175)
Inflation adjustment for Mexico tax purposes
638
150
Utilization of prior year losses
12,372
3,896
Foreign exchange and other
4,125
(3,326)
Mining royalties and other
836
5,873
25,103
22,586
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
25 | page
9
Current and deferred income tax liability (continued)
(c)
Deferred tax asset and liability
The significant components and movements of the Company’s net deferred tax assets and liabilities are as follows:
Balance
Balance
Balance
January 1, Change in December 31, Change in December 31,
2020
2020
2020
2021
2021
$
$
$
$
$
Property, plant, and equipment
(816)
341
(475)
3,956
3,481
Inventory
(1,178)
(2,892)
(4,070)
(2,078)
(6,148)
Provisions
3,726
(194)
3,532
2,525
6,057
Decommissioning liabilities
5,002
1,632
6,634
946
7,580
Mining royalties
1,615
103
1,718
(1,195)
523
Mining assets
(42,554)
157
(42,397)
1,896
(40,501)
Other items
2,298
(1,000)
1,298
1,562
2,860
Non-capital losses
6,286
(672)
5,614
(5,204)
410
Net deferred tax (liabilities) assets
(25,621)
(2,525)
(28,146)
2,408
(25,738)
Deferred tax assets have not been recognized in respect of the following temporary differences:
2021
2020
$
$
Non-capital and capital losses
49,641
62,250
Property, plant and equipment
96
83
Mineral properties
37,290
2,280
Other
(37)
(37)
86,990
64,576
(d) Tax losses
In Canada, the Company has aggregate tax losses not recognized of $46,399 (December 31, 2020 – $37,771) expiring in periods from
2027 to 2041. 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 $1,403 of capital losses in Canada that are without expiry as at December 31, 2021 (December 31, 2020 -
$1,403).
(e)
Unrecognized deferred tax liabilities
As at December 31, 2021, the Company has taxable temporary difference of $83,052 (2020 - $77,582) 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.
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
26 | page
10
Loans payable and notes payable
December 31,
December 31,
2021
2020
$
$
Senior Secured Corporate Credit Facility with Banco de Credito del Peru ("BCP")
Current Portion
24,855
18,480
Long term Portion
55,949
80,903
Total loans payable
80,804
99,383
Senior Secured Corporate Credit Facility with BCP
On March 11, 2019, the Company entered into a six-year senior secured corporate credit facility (“Corporate Facility”) with BCP that
provides funding of up to $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 also used the proceeds of the new facility to repay existing debt balances. The most significant terms of the agreement
were:
●
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. The Company is in compliance with all covenants as at December 31, 2021.
The Company drew down $21.4 million on March 11, 2019, $48.6 million on May 8, 2019 and the balance of $30.0 million on June 29,
2019. The Company repaid the amount owed on the Corona Acquisition Loan on May 11, 2019 using funds drawn from the new
facility. Interest is payable quarterly and interest payments began on the drawn and undrawn portions of the facility starting in
June 2019. During the year ended December 31, 2021, The Company made interest payments of $3,209 (2020 - $4,066).
On February 17, 2020, BCP entered into a syndication agreement with Banco Santander S.A for $30.0 million of this credit facility.
BCP continues to remain as the principal lender and there were no changes to the terms and conditions of the original agreement.
Principal payments on the amount drawn from the facility began in June 2021. The loan is recorded at amortized cost and is being
accreted to face value over 4 years using an effective interest rate of 3.26%.
11
Decommissioning liability
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
27 | page
December 31,
December 31,
2021
2020
$
$
Balance, beginning of year
22,467
16,894
Liabilities settled during the year
(799)
(405)
Interest cost
478
551
Revisions and new estimated cash flows
(3,994)
5,427
Balance, end of year
18,152
22,467
Less: current portion
1,012
1,260
Long-term decommissioning liability
17,140
21,207
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 2021 and 2020, the decommissioning liability was calculated based on the following key assumptions:
2021
2020
Mexico
Peru
Mexico
Peru
Estimated undiscounted cash flows ($)
1,261
19,984
1,182
24,297
Discount rate (%)
7.8
7.0
5.6
4.1
Settlement period (years)
3
5-11
4
3-14
Inflation (%)
4.0
2.5
4.0
2.0
12
Other liabilities
December 31,
December 31,
2021
2020
$
$
Current
Profit-sharing and other employee related obligations
10,195
7,267
Current portion of lease liabilities
988
295
11,183
7,562
Non-current
Other employee related obligations
1,831
1,426
Lease liabilities
1,646
781
3,477
2,207
As at December 31, 2021, there is a provision amounting to $6,404 for employee profit sharing in Peru and $3,791 for wages, salaries and other
employee benefits outstanding (December 31, 2020 - $2,244 and $5,023, 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.
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
28 | page
(b) Restricted share units (“RSUs”)
The changes in RSU’s issued during the years ended December 31, 2021 and 2020 was as follows:
December 31,
December 31,
2021
2020
Outstanding, beginning of period
1,409,058
1,630,423
Granted
617,187
898,857
Exercised
(617,597)
(695,174)
Forfeited
(362,817)
(425,048)
Outstanding, end of period
1,045,831
1,409,058
On June 30, 2020, 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 5% of the
number of issued and outstanding common shares of the Company at the time of grant. 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, 2021, the Company granted RSU’s totalling 617,187 which had a fair value of C$3.95 based on
the closing share price at grant date. RSUs exercised during the year ended December 31, 2021 had a weighted average fair value of
C$1.81 (2020 – C$2.60) and the RSUs forfeited had a weighted average fair value of C$2.17 (2020 – C$1.88). As at December 31,
2021, the weighted average fair value of the RSUs outstanding is C$2.63 (2020 – C$1.57).
The total RSU expense recognized during the year ended December 31, 2021 was $1,059 with a corresponding credit to other reserves
(2020 - $668).
(c)
Cash Dividend
On November 5, 2021, the Company declared an annual cash dividend of $0.03 per common share to the holders of issued and
outstanding shares as of the close of business on November 22, 2021. Accordingly, this dividend of $4,903 was paid on December 7,
2021 (2020 - $nil).
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
29 | page
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 statements of financial position
December 31,
December 31,
2021
2020
$
$
Current
Assets
97,988
118,045
Liabilities
(38,845)
(26,890)
Total current net assets
59,143
91,155
Non-current
Assets
178,610
170,277
Liabilities
(42,558)
(45,145)
Total non-current net assets
136,052
125,132
Net assets
195,195
216,287
Summarized income statement
For the twelve months ended December 31,
2021
2020
$
$
Revenue
180,598
146,941
Income before income tax
54,957
39,809
Income tax expense
(26,048)
(17,934)
Total income
28,909
21,875
Total income attributable to non-controlling interests
5,255
3,972
Summarized cash flows
For the twelve months ended December 31,
2021
2020
$
$
Cash flows from operating activities
Cash generated from operating activities
83,471
64,797
Net changes in non cash working capital items
1,752
(2,992)
Decomissioning liabilities settled
(730)
(405)
Income taxes paid
(23,760)
(12,824)
Net cash generated from operating activities
60,733
48,576
Net cash used in investing activities
(37,903)
(19,205)
Net cash used in financing activities (1)
(54,956)
705
Effect of foreign exchange rate changes on cash and cash equivalents
(31)
(53)
(Decrease) increase in cash and cash equivalents
(32,157)
30,023
Cash and cash equivalents, beginning of period
65,027
35,004
Cash and cash equivalents, end of period
32,870
65,027
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
30 | page
(1) includes dividends of $9,080 paid to non-controlling interests
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, 2021 and 2020 relate to the Yauricocha,
Bolivar and Cusi Mines.
(a)
Mining costs
Year Ended December 31,
2021
2020
$
$
Employee compensation and benefits
29,756
26,472
Third party and contractors costs
68,962
52,616
Depreciation
44,700
41,654
Consumables
33,910
30,850
Changes in inventory and other
13,467
13,711
190,795
165,303
(b)
General and administrative expenses
Year ended December 31,
2021
2020
$
$
Salaries and benefits
9,929
9,097
Consulting and professional fees
6,016
2,922
Office expenses
2,211
2,182
Marketing and communication expenses
804
815
Share-based compensation expense
1,059
668
Listing and filing fees
299
257
Director expenses
941
1,307
Travelling expense
368
237
Other
2,210
2,785
23,837
20,270
16
Other expenses (income)
2021
2020
$
$
Loss on sale of supplies and fixed assets
1,441
124
Exploration expenditure written off
1,312
1,829
Allowance for inventory obsolescence
2,291
176
Miscellaneous expenses (income)
1,850
(1,464)
6,894
665
17
Interest expense and other finance costs
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
31 | page
2021
2020
$
$
Interest expense on loans
3,181
4,046
Interest cost on decommissioning liability
471
547
Other interest
294
—
Interest income
(301)
(300)
3,645
4,293
18
Segment reporting
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
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
32 | page
18
Segment reporting (continued)
The following is a summary of the reported amounts of net income (loss) and the carrying amounts of assets and liabilities by operating
segment:
Peru
Mexico
Mexico
Canada
Yauricocha Mine
Bolivar Mine
Cusi Mine
Corporate
Total
Year ended December 31, 2021
$
$
$
$
$
Revenue (1)
180,598
65,275
26,141
—
272,014
Production cost of sales
(80,765)
(43,186)
(22,144)
—
(146,095)
Depletion of mineral property
(9,329)
(5,424)
(1,908)
—
(16,661)
Depreciation and amortization of property, plant and equipment
(15,571)
(8,805)
(3,663)
—
(28,039)
Cost of sales
(105,665)
(57,415)
(27,715)
—
(190,795)
Gross profit (loss) from mining operations
74,933
7,860
(1,574)
—
81,219
Income (loss) from operations (2)
60,919
(2,201)
(40,283)
(5,935)
12,500
Derivative instrument gains
—
—
451
—
451
Interest expense and other finance costs
(2,347)
(139)
(57)
(1,102)
(3,645)
Other income (expense)
(6,327)
(279)
(278)
(10)
(6,894)
Foreign currency exchange gain (loss)
(265)
420
171
257
583
Income (loss) before income tax
51,980
(2,198)
(39,997)
(6,790)
2,995
Income tax (expense) recovery
(26,273)
831
339
—
(25,103)
Net income (loss) from operations
25,707
(1,368)
(39,657)
(6,790)
(22,108)
December 31, 2021
Peru
Mexico
Canada
Total
$
$
$
$
Total assets
252,638
142,745
1,441
396,824
Non-current assets
178,892
111,744
65
290,701
Total liabilities
138,332
28,729
25,131
192,192
(1) Includes provisional pricing adjustments of:$(493) for Yauricocha, $(221) for Bolivar, and $(549) for Cusi.
(2) Includes impairment charge of $35,000 on Cusi
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
33 | page
18
Segment reporting (continued)
Peru
Mexico
Mexico
Canada
Yauricocha Mine
Bolivar Mine
Cusi Mine
Corporate
Total
Year ended December 31, 2020
$
$
$
$
$
Revenue (1)
146,941
81,762
18,185
—
246,888
Production cost of sales
(70,660)
(37,319)
(15,670)
—
(123,649)
Depletion of mineral property
(8,503)
(3,873)
(2,063)
—
(14,439)
Depreciation and amortization of property, plant and equipment
(13,455)
(10,320)
(3,440)
—
(27,215)
Cost of sales
(92,618)
(51,512)
(21,173)
—
(165,303)
Gross profit from mining operations
54,323
30,250
(2,988)
—
81,585
Income (loss) from operations
40,179
19,953
(4,725)
(4,287)
51,120
Derivative instrument gains
—
—
904
—
904
Interest expense and other finance costs
(2,965)
18
(105)
(1,241)
(4,293)
Other income (expense)
(2,476)
1,573
238
—
(665)
Foreign currency exchange gain
329
1,575
345
662
2,911
Income (loss) before income tax
35,067
23,119
(3,343)
(4,866)
49,977
Income tax expense
(17,934)
(3,797)
(855)
—
(22,586)
Net income (loss) from operations
17,133
19,322
(4,198)
(4,866)
27,391
December 31, 2020
Peru
Mexico
Canada
Total
$
$
$
$
Total assets
269,179
167,866
2,547
439,592
Non-current assets
170,681
132,822
40
303,543
Total liabilities
141,548
26,952
30,884
199,384
(1) Includes provisional pricing adjustments of: $2,899 for Yauricocha, ($889) for Bolivar, $1,180 for Cusi
For the year ended December 31, 2021, 66% of the revenues ($180,598) were from seven customers based in Peru and the remaining 34%
of the revenues ($91,416) were from two customers based in Mexico. In Peru, two major customers accounted for 53% and 25% of the
revenues. In Mexico, the two customers accounted for 69% and 31% of the revenues.
As at December 31, 2021, the trade receivable balance of $27,001 ($28,750 as at December 31, 2020) includes amounts outstanding of
$5,943 ($10,957 as at December 31, 2020) and $21,058 ($17,793 as at December 31, 2020) from the customers in Mexico and Peru,
respectively.
For the year ended December 31, 2020, 60% of the revenues ($146,941) were from six customers based in Peru and the remaining 40% of
the revenues ($99,947) were from two customers based in Mexico. In Peru, two major customers accounted for 37% and 33% of the
revenues. In Mexico, the two customers accounted for 77% and 23% of the revenues.
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
34 | page
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
Amortized
Cost
FVTPL
Total
At December 31, 2021
$
$
$
Financial assets
Cash and cash equivalents
34,929
—
34,929
Trade receivables (1)
—
27,001
27,001
Total Financial assets
34,929
27,001
61,930
Financial liabilities
Accounts payable and accued liabilities
44,308
—
44,308
Loans payable
80,804
—
80,804
Total Financial liabilities
125,112
—
125,112
Loans and
receivables
FVTPL
Total
At December 31, 2020
$
$
$
Financial assets
Cash and cash equivalents
71,473
—
71,473
Trade receivables (1)
—
28,750
28,750
Total Financial assets
71,473
28,750
100,223
Financial liabilities
Accounts payable and accued liabilities
30,317
—
30,317
Loans payable
99,383
—
99,383
Total Financial liabilities
129,700
—
129,700
(1)
Trade receivables exclude sales and income tax receivables.
(b) Fair value of financial instruments
As at December 31, 2021 and 2020, 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)
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.
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
35 | page
19
Financial instruments and financial risk management (continued)
Level 3 – inputs for the asset or liability that are not based on observable market data.
At December 31, 2021 and 2020, 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:
December 31, 2021
December 31, 2020
Recurring measurements
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$
$
$
$
$
$
$
$
Trade receivables (1)
—
27,001
—
27,001
—
28,750
—
28,750
—
27,001
—
27,001
—
28,750
—
28,750
(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, 2021 and 2020.
(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.
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 and other liabilities that are subject to currency risk.
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
36 | page
19
Financial instruments and financial risk management (continued)
The following are the most significant areas of exposure to currency risk:
December 31, 2021
Peruvian
Mexican
Nuevo
CAN dollar
Peso
Soles
Total $
Cash and cash equivalents
301
55
678
1,034
Income tax and other receivables
69
19,478
1,665
21,212
370
19,533
2,343
22,246
Accounts payable and other liabilities
(705)
(38,271)
(22,997)
(61,973)
Total
(335)
(18,738)
(20,654)
(39,727)
December 31, 2020
Peruvian
Mexican
Nuevo
CAN dollar
Peso
Soles
Total $
Cash and cash equivalents
179
1,706
1,625
3,510
Income tax and other receivables
39
13,371
723
14,133
218
15,077
2,348
17,643
Accounts payable and other liabilities
(885)
(27,009)
(16,438)
(44,332)
Total
(667)
(11,932)
(14,090)
(26,689)
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, 2021, 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, 2021, with all the other variables held constant, would have resulted in an increase to
the Company’s net income of $2,455 (2020 - $1,965).
A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial assets and liabilities held at
December 31, 2021 and 2020, 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, 2021 on its loans and notes payable was 3.31% (2020 – 4.07%). With all
other variables unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $678 (2020 - $708).
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
37 | page
19
Financial instruments and financial risk management (continued)
(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, 2021 and 2020, the Company had certain amounts related to the sales of concentrates that have only been
provisionally priced. The Company’s exposure to commodity price risk is as follows:
2021
2020
Commodity
$
$
10% decrease in silver prices
(1,458)
(471)
10% decrease in copper prices
(3,213)
(743)
10% decrease in zinc prices
(605)
(354)
10% decrease in lead prices
(1,002)
(105)
10% decrease in gold prices
(297)
(928)
The increase in commodity price risk in 2021 compared to 2020 resulted from higher metal prices and the increase in unhedged
positions.
As at December 31, 2021 and 2020, 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, 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, 2021 of the
Company’s financial liabilities and operating and capital commitments:
Within 1 year
1-2 years
3-5 years
After 5 years
Total
$
$
$
$
$
Accounts payable and accrued liabilities
44,308
—
—
—
44,308
Loans payable
25,000
25,000
31,250
—
81,250
Interest on loans payable
2,433
1,586
797
—
4,816
Decommissioning liability
1,034
3,824
3,090
13,297
21,245
Other liabilities
11,183
3,477
—
—
14,660
Total Commitments
83,958
33,887
35,137
13,297
166,279
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
38 | page
19
Financial instruments and financial risk management (continued)
In the opinion of management, the working capital at December 31, 2021, together with future cash flows from operations and
available loan facilities, is sufficient to support the Company’s commitments through 2022.
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 78% of its revenue in Peru is from two customers and 100% of its revenue in Mexico is from two customers.
There are no significant provisions recorded for expected credit losses as at December 31, 2021 and 2020.
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.
The Company’s maximum exposure to credit risk is as follows:
December 31,
December 31,
2021
2020
$
$
Cash and cash equivalents
34,929
71,473
Trade receivables
27,001
28,750
61,930
100,223
20
Capital management
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:
December 31,
December 31,
2021
2020
$
$
Equity attributable to owners of the Company
169,249
201,000
Loans payable
80,804
99,383
250,053
300,383
Less: Cash and cash equivalents
(34,929)
(71,473)
215,124
228,910
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
39 | page
20
Capital management (continued)
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, 2021, 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, 2021, the Company was in compliance with the external capital requirements.
21
Related party transactions
(a)
Related party transactions
During the year ended December 31, 2021, the Company recorded consulting fees of $200 (2020 - $200) to companies related by
common directors or officers. Related party transactions occurred in the normal course of business.
(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,
2021 and 2020 are as follows:
2021
2020
$
$
Salaries, Cash Bonuses, Severance and Directors Fees
2,626
2,289
Share-based payments1
1,373
496
3,999
2,785
1 calculated at fair value on day of the grant
22
Changes in working capital
Year Ended
December 31,
2021
2020
$
$
Trade and other receivables
1,572
(6,802)
Financial and other assets
(1,470)
(63)
Inventories
(5,492)
1,918
Accounts payable and accrued liabilities
13,991
(12,600)
Other liabilities
3,070
556
11,671
(16,991)
Sierra Metals Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(In thousands of United States dollars, except per share amounts and unless otherwise stated)
40 | page
23
Revenues from mining operations
The Company has recognized the following amounts related to revenue in the consolidated statements of income:
Year Ended
December 31,
2021
2020
$
$
Revenues from contracts with customers
273,277
243,698
Provisional pricing adjustments on concentrate sales
(1,263)
3,190
Total revenues
272,014
246,888
The following table sets out the disaggregation of revenue by metals and form of sale:
Year Ended
December 31,
2021
2020
$
$
Revenues from contracts with customers:
Silver
65,884
54,641
Copper
96,493
96,159
Lead
26,086
22,068
Zinc
71,077
49,102
Gold
13,737
21,728
Total revenues from contracts with customers
273,277
243,698
24
Contingencies
The Company and its subsidiaries have been named as defendants in certain actions incurred in the normal course of business. The
Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of
Management, these matters will not have a material effect on the consolidated financial statements of the Company.
These matters include an ongoing personal action filed in Mexico against Dia Bras Mexicana S.A de C.V (“DBM”) by an individual, Carlos
Emilio Seijas Bencomo, 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.
Carlos. Emilio Seijas Bencomo passed away in 2020 and his heirs appointed Mr. Emilio Ambrosio Bencomo Portillo as legal representative
to pursue this case. As per the latest development, on March 21, 2021, the first Civil Court of Chihuahua absolved DBM of all claims raised
by the plaintiff. Although the plaintiff filed an appeal against this ruling on April 7, 2021, the Company believes that there is no merit in this
appeal and the possibility of reversal of the March 12, 2021 ruling is very unlikely.
25
Subsequent event
In January 2022, the Company launched the process of divestiture of the Cusi assets.