Exhibit 99.1
SIERRA METALS INC.
Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(unaudited)
1 | Page
May 11, 2020
Management’s Responsibility for Financial Reporting
Management is responsible for the preparation of the unaudited condensed interim consolidated financial statements. These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting” using accounting policies consistent 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 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 financial statements and to discuss audit and internal control related matters.
The Audit Committee of the Board of Directors approved the Company’s unaudited condensed interim consolidated financial statements.
| “Igor Gonzales” | “Ed Guimaraes” | |
| Igor Gonzales | Ed Guimaraes | |
| President and Chief Executive Officer | Chief Financial Officer |
2 | Page
Sierra Metals Inc.
Condensed Interim Consolidated Statements of Financial Position
As at March 31, 2020 and December 31, 2019
(In thousands of United States dollars, unaudited)
| Note | March 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | |||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | 36,915 | 42,980 | ||||||||||
| Trade and other receivables | 4 | 24,457 | 31,892 | |||||||||
| Income tax receivable | 4,131 | 1,471 | ||||||||||
| Prepaid expenses | 1,687 | 1,904 | ||||||||||
| Inventories | 5 | 24,661 | 26,053 | |||||||||
| 91,851 | 104,300 | |||||||||||
| Non-current assets: | ||||||||||||
| Property, plant and equipment | 6 | 306,446 | 305,115 | |||||||||
| Deferred income tax | 1,009 | 2,032 | ||||||||||
| Total assets | 399,306 | 411,447 | ||||||||||
| LIABILITIES | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable and accrued liabilities | 7 | 34,895 | 44,910 | |||||||||
| Income tax payable | 692 | 1,355 | ||||||||||
| Decommissioning liability | 1,100 | 865 | ||||||||||
| Other liabilities | 5,971 | 7,248 | ||||||||||
| 42,658 | 54,378 | |||||||||||
| Non-current liabilities: | ||||||||||||
| Loans payable | 8 | 99,474 | 99,814 | |||||||||
| Deferred income tax | 30,252 | 27,653 | ||||||||||
| Decommissioning liability | 15,742 | 16,029 | ||||||||||
| Other liabilities | 1,272 | 1,554 | ||||||||||
| Total liabilities | 189,398 | 199,428 | ||||||||||
| EQUITY | ||||||||||||
| Share capital | 9 | 230,980 | 230,456 | |||||||||
| Accumulated deficit | (67,108 | ) | (65,239 | ) | ||||||||
| Other reserves | 10,679 | 11,566 | ||||||||||
| Equity attributable to owners of the Company | 174,551 | 176,783 | ||||||||||
| Non-controlling interest | 10 | 35,357 | 35,236 | |||||||||
| Total equity | 209,908 | 212,019 | ||||||||||
| Total liabilities and equity | 399,306 | 411,447 | ||||||||||
Contingencies (notes 3, 8 and 16) and Subsequent Events (note 17)
Approved on behalf of the Board and authorized for issue on May 11, 2020:
| “Alberto Arias” | “Koko Yamamoto” | |
| Alberto Arias | Koko Yamamoto | |
| Chairman of the Board | Chairperson Audit Committee |
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
3 | Page
Sierra Metals Inc.
Condensed Interim Consolidated Statements of Income (Loss)
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts, unaudited)
| Three Months Ended March 31, | ||||||||||||
| 2020 | 2019 | |||||||||||
| Note | $ | $ | ||||||||||
| Revenue | 15 | 55,558 | 49,180 | |||||||||
| Cost of sales | ||||||||||||
| Mining costs | 11 | (37,748 | ) | (30,799 | ) | |||||||
| Depletion, depreciation and amortization | 11 | (9,593 | ) | (8,118 | ) | |||||||
| (47,341 | ) | (38,917 | ) | |||||||||
| Gross profit from mining operations | 8,217 | 10,263 | ||||||||||
| General and administrative expenses | (5,490 | ) | (3,905 | ) | ||||||||
| Selling expenses | (2,598 | ) | (2,128 | ) | ||||||||
| Income from operations | 129 | 4,230 | ||||||||||
| Other income (loss) | 316 | (715 | ) | |||||||||
| Foreign currency exchange gain (loss) | 3,444 | (651 | ) | |||||||||
| Interest expense and other finance costs | (1,432 | ) | (1,175 | ) | ||||||||
| Income before income tax | 2,457 | 1,689 | ||||||||||
| Income taxes (expense) recovery: | ||||||||||||
| Current tax expense | (2,011 | ) | (2,961 | ) | ||||||||
| Deferred tax recovery (expense) | (2,194 | ) | 716 | |||||||||
| (4,205 | ) | (2,245 | ) | |||||||||
| Net loss | (1,748 | ) | (556 | ) | ||||||||
| Net income (loss) attributable to: | ||||||||||||
| Shareholders of the Company | (1,869 | ) | (1,724 | ) | ||||||||
| Non-controlling interests | 10 | 121 | 1,168 | |||||||||
| (1,748 | ) | (556 | ) | |||||||||
| Weighted average shares outstanding (000s) | ||||||||||||
| Basic | 162,115 | 163,455 | ||||||||||
| Diluted | 162,115 | 163,455 | ||||||||||
| Basic earnings (loss) per share | (0.01 | ) | (0.01 | ) | ||||||||
| Diluted earnings (loss) per share | (0.01 | ) | (0.01 | ) | ||||||||
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
4 | Page
Sierra Metals Inc.
Condensed Interim Consolidated Statements of Comprehensive Income (Loss)
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, unaudited)
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Net loss | (1,748 | ) | (556 | ) | ||||
| Other comprehensive income (loss) | ||||||||
| Items that may be subsequently classified to net income (loss): | ||||||||
| Currency translation adjustments on foreign operations | (736 | ) | 353 | |||||
| Total comprehensive income (loss) | (2,484 | ) | (203 | ) | ||||
| Total comprehensive loss attributable to shareholders | (2,605 | ) | (1,371 | ) | ||||
| Non-controlling interests | 121 | 1,168 | ||||||
| Total comprehensive loss attributable to shareholders | (2,484 | ) | (203 | ) | ||||
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
5 | Page
Sierra Metals Inc.
Condensed Interim Consolidated Statements of Changes in Equity
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, unaudited)
| 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 | 162,115,380 | 230,456 | 11,566 | (65,239 | ) | 176,783 | 35,236 | 212,019 | ||||||||||||||||||||
| Exercise of RSUs | 695,174 | 524 | (524 | ) | - | - | - | - | ||||||||||||||||||||
| Share-based compensation expense | - | 373 | - | 373 | - | 373 | ||||||||||||||||||||||
| Total comprehensive income (loss) | - | (736 | ) | (1,869 | ) | (2,605 | ) | 121 | (2,484 | ) | ||||||||||||||||||
| Balance at March 31, 2020 | 162,810,554 | 230,980 | 10,679 | (67,108 | ) | 174,551 | 35,357 | 209,908 | ||||||||||||||||||||
| Common Shares | Other | Retained earnings | Total attributable | Non-controlling | Total | |||||||||||||||||||||||
| Shares | Amounts | reserves | (accumulated deficit) | to shareholders | Interest | shareholders' equity | ||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Balance at January 1, 2019 | 163,427,336 | 231,792 | 10,870 | (69,307 | ) | 173,355 | 30,250 | 203,605 | ||||||||||||||||||||
| 0 | ||||||||||||||||||||||||||||
| Exercise of RSUs | 700,698 | 1,145 | (1,145 | ) | - | - | - | - | ||||||||||||||||||||
| Share-based compensation expense | - | 402 | - | 402 | - | 402 | ||||||||||||||||||||||
| Shares repurchased and cancelled (note 9) | (40,112 | ) | (50 | ) | - | (50 | ) | (100 | ) | - | (100 | ) | ||||||||||||||||
| Total comprehensive income (loss) | - | 353 | (1,724 | ) | (1,371 | ) | 1,168 | (203 | ) | |||||||||||||||||||
| Balance at March 31, 2019 | 164,087,922 | 232,887 | 10,480 | (71,081 | ) | 172,286 | 31,418 | 203,704 | ||||||||||||||||||||
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
6 | Page
Sierra Metals Inc.
Condensed Interim Consolidated Statements of Cash Flows
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, unaudited)
| Three months ended March 31, | ||||||||||||
| Note | 2020 | 2019 | ||||||||||
| $ | $ | |||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) from operations | (1,748 | ) | (556 | ) | ||||||||
| Adjustments for: | ||||||||||||
| Items not affecting cash: | ||||||||||||
| Depletion, depreciation and amortization | 9,702 | 8,130 | ||||||||||
| Share-based compensation | 373 | 402 | ||||||||||
| Loss on disposals and write-offs | 202 | - | ||||||||||
| Interest expense and other finance costs | 1,432 | 1,175 | ||||||||||
| NRV adjustment to inventory | 1,216 | - | ||||||||||
| Current income tax expense | 2,011 | 2,961 | ||||||||||
| Deferred income taxes expense (recovery) | 2,194 | (716 | ) | |||||||||
| Unrealized foreign currency exchange (gain) loss | 328 | 408 | ||||||||||
| Operating cash flows before movements in working capital | 15,710 | 11,804 | ||||||||||
| Net changes in non-cash working capital items | 14 | (3,767 | ) | (1,216 | ) | |||||||
| Decomissioning liabilities settled | (38 | ) | (49 | ) | ||||||||
| Income tax paid | (5,375 | ) | (8,896 | ) | ||||||||
| Cash generated from operating activities | 6,530 | 1,643 | ||||||||||
| Cash flows used in investing activities | ||||||||||||
| Capital expenditures | (11,235 | ) | (11,343 | ) | ||||||||
| Cash used in investing activities | (11,235 | ) | (11,343 | ) | ||||||||
| Cash flows from (used in) financing activities | ||||||||||||
| Proceeds from issuance of loans, net of transaction costs | - | 20,662 | ||||||||||
| Repayment of loans and credit facilities | - | (8,193 | ) | |||||||||
| Loans interest paid | (1,273 | ) | (509 | ) | ||||||||
| Cash paid to repurchase shares | 9 | - | (100 | ) | ||||||||
| Cash from (used in) financing activities | (1,273 | ) | 11,860 | |||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | (87 | ) | (55 | ) | ||||||||
| Increase (decrease) in cash and cash equivalents | (6,065 | ) | 2,105 | |||||||||
| Cash and cash equivalents, beginning of period | 42,980 | 21,832 | ||||||||||
| Cash and cash equivalents, end of period | 36,915 | 23,937 | ||||||||||
| Supplemental cash flow information | 14 | |||||||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
7 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| 1 | Description of business and nature of operations |
Sierra Metals Inc. (“Sierra Metals” or the “Company”) was incorporated under the Canada Business Corporations Act on April 11, 1996, and is a Canadian and Peruvian listed mining company focused on the production, exploration and development of precious and base metals in Peru and Mexico. The Company’s key priorities are to generate strong cash flows and to maximize shareholder value.
The Company’s shares are listed on the TSX, NYSE American Exchange, and the Bolsa de Valores de Lima (“BVL”) and its registered office is 161 Bay Street, Suite 4260, Toronto, Ontario, M5J 2S1, Canada.
The Company owns an 81.84% interest in the polymetallic Yauricocha Mine in Peru and a 100% interest in the Bolivar and Cusi Mines in Mexico. In addition to its producing mines, the Company also owns various exploration projects in Mexico and Peru.
| 2 | Significant accounting policies |
The significant accounting policies used in the preparation of these condensed interim consolidated financial statements are as follows:
| (a) | Basis of preparation |
These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019. The Company’s significant accounting policies were presented in note 2 to the consolidated financial statements for the year ended December 31, 2019, and have been consistently applied in the preparation of these condensed interim consolidated financial statements. These condensed interim consolidated financial statements were authorized for issuance by the Board of Directors on May 11, 2020.
| (b) | Basis of consolidation |
These condensed interim 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.
| 8 | P a g e |
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| 2 | Significant accounting policies(continued) |
The principal subsidiaries of the Company and their geographical locations as at March 31, 2020 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 | |||
| Servicios de Minería de la Sierra, S. A. de C. V. | 100 | % | México | |||
| Bolívar Administradores, S. A. de C. V. | 100 | % | México | |||
| EXMIN, S. A. de C. V. | 100 | % | México | |||
| Servicios de Produccion Y Extraccion de Chihuahua, S.A. de C.V | 100 | % | México | |||
| Asesores Administrativos Y de Recursos Humanos, S.A. de C.V | 100 | % | México | |||
1The 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.
| 3 | COVID-19 estimation 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 2019 annual consolidated financial statements. In addition, the Company makes assumptions about the future in deriving estimates used in preparing our consolidated financial statements. As disclosed in the 2019 annual 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.
In March 2020, the World Health Organization declared a global pandemic related to COVID-19. The current and expected impacts on global commerce are anticipated to be far-reaching. To date there have been significant stock market declines and volatility, significant volatility in commodity and foreign exchange markets, restrictions on the conduct of business in many jurisdictions and the global movement of people and some goods has become restricted. There is significant ongoing uncertainty surrounding COVID-19 and the extent and duration of the impacts that it may have on demand and prices for the commodities the Company produces, on the Company’s suppliers, on its employees and on global financial markets.
On March 17, 2020, the Peruvian government announced a state of emergency to contain the advancement of COVID-19. On March 31, 2020, the Mexican Federal Government also announced suspension of all non-essential services for a period of 30 days. The Company has slowed down its mining operations at Yauricocha and Bolivar to safeguard the interest of the employees, while Cusi has been placed under care and maintenance considering its proximity to urban communities.
During the quarter ended March 31, 2020, the Company has made efforts to safeguard the health of its employees, while continuing to operate safely and responsibly maintain employment and economic activity. These measures combined with commodity market fluctuations resulting from COVID-19 have affected the Company’s financial results. While commodity prices have declined in U.S. dollar terms; the Company’s operations located in Canada, Peru and Mexico have benefited from the weakening of local currencies relative to the U.S. dollar.
| 9 | P a g e |
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
The reductions in production levels did not materially impact costs during the quarter but resulted in adjustments to inventory at the Cusi mine. Due to the decrease in the net realizable value resulting from COVID-19 impact on metal prices, the Company recorded inventory net realizable value write-downs of $1.2 million for the stockpiles and lead concentrate inventory. Additional write-downs of inventory or reversals of the write-downs taken this period may occur over the balance of 2020 as commodity prices and foreign exchange rates fluctuate.
Impairment assessment of the cash generating units (CGUs) at the end of Q1 2020 did not show any required impairment charges, after identifying impairment indicators as of that date. However, there is heightened potential for impairments over the balance of 2020. In the current environment, assumptions about future commodity prices, exchange rates, interest rates and customer credit performance are subject to greater variability than normal, which could in future significantly affect the valuation of our assets, both financial and non-financial. Short-term prices for all of our commodities, with the exception of gold, have declined in the period preceding the end of the first quarter; however, given the relatively short duration of this market movement, market participant views of commodity prices over a longer horizon have remained largely unchanged. As an understanding of the longer-term impacts of COVID-19 on commodity, credit and equity markets develops, there is heightened potential for changes in these views over the balance of 2020.
The Peruvian Government has extended the state of emergency until May 24. As such, permitting submissions in Peru have also been halted, which will result in a delay in all permits being issued. In effort to ramp up economic activities in the country, the Government has lifted the suspension for some activities, which includes open pit mining. The Company continues to operate Yauricocha at a reduced capacity, anticipating suspension to be relaxed for subterranean mining in the near future.The Mexican Federal Government announced extension of suspension of all non-essential activities in Mexico until May 30.The Mexican Government also announced that suspension of activities will not apply to the municipalities that present a low or null transmission of COVID-19 as of May 18, 2020. The Mexican Government is expected to set clear guidelines before that time. The Bolivar mine continues to operate at reduced capacity, while the Cusi mine remains under care and maintenance during this period.
| 4 | Trade and other receivables |
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Trade receivables | 14,609 | 20,549 | ||||||
| Sales tax receivables | 9,848 | 11,343 | ||||||
| 24,457 | 31,892 | |||||||
| 5 | Inventories |
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Stockpiles | 2,519 | 4,096 | ||||||
| Concentrates | 4,852 | 4,376 | ||||||
| Supplies and spare parts | 17,290 | 17,581 | ||||||
| 24,661 | 26,053 | |||||||
| 10 | P a g e |
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
Cost of sales are comprised of production costs of sales and depletion, depreciation and amortization, and represent the cost of inventories recognized as an expense for the periods ended March 31, 2020 and 2019 of $47,341 and $38,917, respectively. During the three months ended March 31, 2020, the Company wrote down stockpile and concentrate inventory to its net realizable value (“NRV”), recording a charge of $1,216 (2019 - $nil), which is included in our mining costs as per note 11.
| 6 | Property, plant and equipment |
| Cost | Plant and equipment | Mining properties | Assets under construction | Exploration and evaluation expenditure | Total | |||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| Balance as of January 1, 2019 | 239,921 | 436,810 | 47,482 | 64,524 | 788,737 | |||||||||||||||
| Additions | 14,455 | 6,249 | 26,046 | 8,751 | 55,501 | |||||||||||||||
| Change in estimate of decomissioning liability | 3,713 | - | - | - | 3,713 | |||||||||||||||
| Disposals | (11,768 | ) | - | (28 | ) | - | (11,796 | ) | ||||||||||||
| Transfers | 23,348 | 4,016 | (23,348 | ) | (4,016 | ) | - | |||||||||||||
| Balance as of December 31, 2019 | 269,669 | 447,075 | 50,152 | 69,259 | 836,155 | |||||||||||||||
| Additions | 1,842 | 2,053 | 1,968 | 5,372 | 11,235 | |||||||||||||||
| Disposals | (9 | ) | - | - | (202 | ) | (211 | ) | ||||||||||||
| Transfers | 14,107 | 5,753 | (14,107 | ) | (5,753 | ) | - | |||||||||||||
| Balance as of March 31, 2020 | 285,609 | 454,881 | 38,013 | 68,676 | 847,179 | |||||||||||||||
| Accumulated depreciation | Plant and equipment | Mining properties | Assets under construction | Exploration and evaluation expenditure | Total $ | |||||||||||||||
| Balance as of January 1, 2019 | 156,223 | 335,960 | - | 13,041 | 505,224 | |||||||||||||||
| Depletion, depreciation and amortization | 21,447 | 15,093 | - | - | 36,540 | |||||||||||||||
| Disposals | (10,724 | ) | - | - | - | (10,724 | ) | |||||||||||||
| Balance as of December 31, 2019 | 166,946 | 351,053 | - | 13,041 | 531,040 | |||||||||||||||
| Depletion, depreciation and amortization | 5,958 | 3,744 | - | - | 9,702 | |||||||||||||||
| Disposals | (9 | ) | - | - | - | (9 | ) | |||||||||||||
| Balance as of March 31, 2020 | 172,895 | 354,797 | - | 13,041 | 540,733 | |||||||||||||||
| Net Book Value - March 31, 2020 | 112,714 | 100,084 | 38,013 | 55,635 | 306,446 | |||||||||||||||
| Net Book Value - December 31, 2019 | 102,723 | 96,022 | 50,152 | 56,218 | 305,115 | |||||||||||||||
| Net Book Value - December 31, 2018 | 83,698 | 100,850 | 47,482 | 51,483 | 283,513 | |||||||||||||||
The Company performs impairment indicators assessments for its property, plant and equipment at all sites, using life of mine plans at the end of each quarter. These life of mine plans incorporate current operational practices, long term metal prices based on recent analyst consensus and productivity assumptions, based on recent operating experience at the mines. The life of mine plan is not a National Instrument 43-101 technical report, but management's best estimate at quarter ends.As at March 31, 2020, management assessed its mining property assets and exploration and evaluation expenditures for impairment after identifying impairment indicators and determined that no impairment charges were required.
| 7 | Accounts payable and accrued liabilities |
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Trade payables | 22,539 | 30,422 | ||||||
| Other payables and accrued liabilities | 12,356 | 14,488 | ||||||
| 34,895 | 44,910 | |||||||
All accounts payable and accrued liabilities are expected to be settled within 12 months
| 11 | P a g e |
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| 8 | Loans payable |
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Non-current | ||||||||
| Senior Secured Corporate Credit Facility with Banco de Credito del Peru | 99,474 | 99,814 | ||||||
| Total loans payable | 99,474 | 99,814 | ||||||
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 provided the Company with additional liquidity and 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 |
12 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
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 March 31, 2020.
The loan is recorded at amortized cost and is being accreted to face value over 6 years using an effective interest rate of 5.75%.
| 9 | Share capital and share-based payments |
| (a) | Authorized capital |
The Company has an unlimited amount of authorized common shares with no par value.
| (b) | Restricted share units (“RSUs”) |
The changes in RSU’s issued during the three months ended March 31, 2020 and the year ended December 31, 2019 was as follows:
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Outstanding, beginning of period | 1,630,423 | 1,380,085 | ||||||
| Granted | - | 1,356,418 | ||||||
| Exercised | (695,175 | ) | (700,698 | ) | ||||
| Forfeited | - | (405,382 | ) | |||||
| Outstanding, end of period | 935,248 | 1,630,423 | ||||||
On June 29, 2012, the Company’s shareholders approved the RSU plan, whereby RSUs may be granted to directors, officers, consultants or employees at the discretion of the Board of Directors. The RSU plan provides for the issuance of common shares from treasury upon the exercise of vested RSUs at no additional consideration. There is no cash settlement related to the vesting of RSU’s as they are all settled with equity. The current maximum number of common shares authorized for issue under the RSU plan is 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 three months ended March 31, 2020 and March 31, 2019, the Company did not grant any tranches of RSU’s. RSUs exercised during the three months ended March 31, 2020 had a weighted average fair value of C$2.60. As at March 31, 2020, the weighted average fair value of the RSUs outstanding is C$1.82 (As at December 31, 2019 – C$2.34).
13 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| (c) | Share re-purchase |
On December 11, 2018, the Company approved a share repurchase program in the form of a normal course issuer bid (the “NCIB”) in the open market through the facilities of the Toronto Stock Exchange (the "TSX") and other Canadian marketplaces / alternative trading systems. Pursuant to the NCIB, the Company proposed to repurchase for cancellation up to 1,500,000 common shares of the Company which represented approximately 0.92% of the issued and outstanding common shares as at December 11, 2018.
In connection with its implementation of the NCIB, Sierra Metals obtained TSX approval of its notice of intention to make a normal course issuer bid (the “Notice”). The Notice provided that the Company may purchase up to 1,500,000 common shares through the facilities of the TSX and other Canadian marketplaces / alternative trading systems during the 12-month period commencing on December 17, 2018 and ending on or before December 16, 2019. Any common share purchases made pursuant to the NCIB will be at the prevailing market price at the time of the transaction, purchased in accordance with the policies of the TSX and conducted by CIBC. In accordance with TSX rules, any daily purchases made under the NCIB are limited to a maximum of 4,214 common shares, which represents 25% of the average daily trading volume of 16,858 common shares on the TSX for the six months ended November 30, 2018. However, the Company may make one block purchase per calendar week which exceeds the daily repurchase restriction, up to and including the maximum annual aggregate limit of 1,500,000 common shares. Once the block purchase exception has been relied on, the Company may not make any further purchases under the NCIB for the remainder of that calendar day.
The NCIB terminated on December 16, 2019 and hence no shares were purchased during the three months ended March 31, 2020. During the three months ended March 31, 2019, the Company purchased 40,112 shares under the NCIB for total consideration of $100 and a book value of $50.
14 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| 10 | 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.
| Summarized balance sheet | ||||||||
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Current | ||||||||
| Assets | 83,912 | 90,438 | ||||||
| Liabilities | (21,241 | ) | (27,863 | ) | ||||
| Total current net assets | 62,671 | 62,575 | ||||||
| Non-current | ||||||||
| Assets | 174,339 | 171,884 | ||||||
| Liabilities | (41,813 | ) | (39,915 | ) | ||||
| Total non-current net assets | 132,526 | 131,969 | ||||||
| Net assets | 195,197 | 194,544 | ||||||
| Summarized income statement | ||||||||
| For the three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Revenue | 33,718 | 35,338 | ||||||
| Income before income tax | 4,691 | 8,636 | ||||||
| Income tax expense | (4,023 | ) | (2,202 | ) | ||||
| Total income | 668 | 6,434 | ||||||
| Total income attributable to non-controlling interests | 121 | 1,168 | ||||||
15 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| Summarized cash flows | ||||||||
| For the three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Cash flows from operating activities | ||||||||
| Cash generated from operating activities | 10,056 | 13,136 | ||||||
| Net changes in non cash working capital items | (1,214 | ) | (1,638 | ) | ||||
| Decomissioning liabilities settled | (39 | ) | (49 | ) | ||||
| Income taxes paid | (5,110 | ) | (8,896 | ) | ||||
| Net cash generated from operating activities | 3,693 | 2,553 | ||||||
| Net cash used in investing activities | (7,843 | ) | (4,521 | ) | ||||
| Net cash used in financing activities | (335 | ) | (2,690 | ) | ||||
| Effect of foreign exchange rate changes on cash and cash equivalents | (24 | ) | 17 | |||||
| Decrease in cash and cash equivalents | (4,509 | ) | (4,641 | ) | ||||
| Cash and cash equivalents, beginning of period | 35,004 | 17,898 | ||||||
| Cash and cash equivalents, end of period | 30,495 | 13,257 | ||||||
| 11 | Mining costs |
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 three months ended March 31, 2020 and 2019 relate to the Yauricocha, Bolivar and Cusi Mines.
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Employee compensation and benefits | 6,423 | 6,152 | ||||||
| Third party and contractors costs | 17,769 | 13,265 | ||||||
| Depreciation | 9,593 | 8,118 | ||||||
| Consumables | 10,937 | 9,244 | ||||||
| Changes in inventory and other | 2,619 | 2,138 | ||||||
| 47,341 | 38,917 | |||||||
| 12 | 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.”
16 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
The reporting segments identified are the following:
| · | Peru – Yauricocha Mine |
| · | Mexico – Bolivar and Cusi Mines |
The following is a summary of the reported amounts of net income (loss) and the carrying amounts of assets and liabilities by operating segment:
| Peru | Mexico | Mexico | Canada | |||||||||||||||||
| Yauricocha Mine | Bolivar Mine | Cusi Mine | Corporate | Total | ||||||||||||||||
| Three months ended March 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
| Revenue(1) | 33,718 | 18,560 | 3,280 | - | 55,558 | |||||||||||||||
| Production cost of sales | (21,694 | ) | (9,880 | ) | (6,174 | ) | - | (37,748 | ) | |||||||||||
| Depletion of mineral property | (3,948 | ) | (1,031 | ) | (739 | ) | - | (5,718 | ) | |||||||||||
| Depreciation and amortization of property, plant and equipment | (1,247 | ) | (1,967 | ) | (661 | ) | - | (3,875 | ) | |||||||||||
| Cost of sales | (26,889 | ) | (12,878 | ) | (7,574 | ) | - | (47,341 | ) | |||||||||||
| Gross profit (loss) from mining operations | 6,829 | 5,682 | (4,294 | ) | - | 8,217 | ||||||||||||||
| Income (loss) from operations | 3,629 | 2,981 | (5,018 | ) | (1,463 | ) | 129 | |||||||||||||
| Interest expense and other finance costs | (1,035 | ) | (5 | ) | (6 | ) | (386 | ) | (1,432 | ) | ||||||||||
| Other income (expense) | (10 | ) | 157 | 33 | 136 | 316 | ||||||||||||||
| Foreign currency exchange gain (loss) | 61 | 2,372 | 486 | 525 | 3,444 | |||||||||||||||
| Income (loss) before income tax | 2,645 | 5,505 | (4,505 | ) | (1,188 | ) | 2,457 | |||||||||||||
| Income tax expense | (4,144 | ) | (51 | ) | (10 | ) | - | (4,205 | ) | |||||||||||
| Net income (loss) from operations | (1,499 | ) | 5,454 | (4,515 | ) | (1,188 | ) | (1,748 | ) | |||||||||||
| Peru | Mexico | Canada | Total | |||||||||||||
| March 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Total assets | 236,425 | 156,915 | 5,966 | 399,306 | ||||||||||||
| Non-current assets | 174,472 | 132,909 | 74 | 307,455 | ||||||||||||
| Total liabilities | 132,681 | 25,853 | 30,864 | 189,398 | ||||||||||||
(1) Includes provisional pricing adjustments of: $127 for Yauricocha, $(283) for Bolivar, and $161 for Cusi.
17 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
| Peru | Mexico | Mexico | Canada | |||||||||||||||||
| Yauricocha Mine | Bolivar Mine | Cusi Mine | Corporate | Total | ||||||||||||||||
| Three months ended March 31, 2019 | $ | $ | $ | $ | $ | |||||||||||||||
| Revenue(1) | 35,338 | 11,823 | 2,019 | - | 49,180 | |||||||||||||||
| Production cost of sales | (18,869 | ) | (9,783 | ) | (2,147 | ) | - | (30,799 | ) | |||||||||||
| Depletion of mineral property | (3,206 | ) | (1,013 | ) | (222 | ) | - | (4,441 | ) | |||||||||||
| Depreciation and amortization of property, plant and equipment | (1,151 | ) | (2,071 | ) | (455 | ) | - | (3,677 | ) | |||||||||||
| Cost of sales | (23,226 | ) | (12,867 | ) | (2,824 | ) | - | (38,917 | ) | |||||||||||
| Gross profit (loss) from mining operations | 12,112 | (1,044 | ) | (805 | ) | - | 10,263 | |||||||||||||
| Income (loss) from operations | 9,148 | (2,335 | ) | (1,033 | ) | (1,550 | ) | 4,230 | ||||||||||||
| Interest expense and other finance costs | (924 | ) | - | (251 | ) | - | (1,175 | ) | ||||||||||||
| Other income (expense) | 38 | (428 | ) | (75 | ) | (250 | ) | (715 | ) | |||||||||||
| Foreign currency exchange gain (loss) | (541 | ) | 85 | 15 | (210 | ) | (651 | ) | ||||||||||||
| Income (loss) before income tax | 7,721 | (2,678 | ) | (1,344 | ) | (2,010 | ) | 1,689 | ||||||||||||
| Income tax expense | (2,202 | ) | (36 | ) | (7 | ) | - | (2,245 | ) | |||||||||||
| Net income (loss) from operations | 5,519 | (2,714 | ) | (1,351 | ) | (2,010 | ) | (556 | ) | |||||||||||
| Peru | Mexico | Canada | Total | |||||||||||||||||
| March 31, 2019 | $ | $ | $ | $ | ||||||||||||||||
| Total assets | 209,626 | 148,708 | 1,861 | 360,195 | ||||||||||||||||
| Non-current assets | 163,544 | 123,723 | 100 | 287,367 | ||||||||||||||||
| Total liabilities | 126,535 | 29,060 | 896 | 156,491 | ||||||||||||||||
(1) Includes provisional pricing adjustments of: $392 for Yauricocha, $(42) for Bolivar, and $(7) for Cusi.
For the three months ended March 31, 2020, 61% of the revenues ($33,718) were from five customers based in Peru and the remaining 39% of the revenues ($21,836) were from one customer based in Mexico. In Peru, two of the five customers accounted for 44% and 29% of the revenues.
For the three months ended March 31, 2019, 72% of the revenues ($35,338) were from two customers based in Peru and the remaining 28% of the revenues ($13,842) were from two customers based in Mexico. In Peru, the two customers accounted for 74% and 26% of the revenues. In Mexico, the two customers accounted for 85% and 15% of the revenues.
As at March 31, 2020, the trade receivable balance of $14,609 includes amounts outstanding of $3,281 and $11,328 from the customers in Mexico and Peru, respectively.
| 12 | 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) | Fair value of financial instruments |
As at March 31, 2020 and December 31, 2019, the fair value of the financial instruments approximates their carrying value.
| (b) | 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)
16 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
The Company’s metal concentrate sales are subject to provisional pricing with the selling prices adjusted at the end of the quotational period. The Company’s trade receivables are marked-to-market at each reporting period based on quoted forward prices for which there exists an active commodity market.
Level 3 – inputs for the asset or liability that are not based on observable market data.
At March 31, 2020 and December 31, 2019, 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:
| March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Recurring measurements | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Trade receivables(1) | - | 14,609 | - | 14,609 | - | 20,549 | - | 20,549 | ||||||||||||||||||||||||
| - | 14,609 | - | 14,609 | - | 20,549 | - | 20,549 | |||||||||||||||||||||||||
(1)Trade receivables exclude sales and income tax receivables.
There were no transfers between level 1 and level 2 during the three months ended March 31, 2020 and 2019.
| 14 | Supplemental cash flow information |
Changes in working capital
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Trade and other receivables | 7,435 | 3,980 | ||||||
| Financial and other assets | 217 | (184 | ) | |||||
| Income tax receivable | - | 36 | ||||||
| Inventories | 176 | (398 | ) | |||||
| Accounts payable and accrued liabilities | (9,996 | ) | (568 | ) | ||||
| Income taxes payable | (40 | ) | (174 | ) | ||||
| Other liabilities | (1,559 | ) | (3,908 | ) | ||||
| (3,767 | ) | (1,216 | ) | |||||
| 15 | Revenues from mining operations |
The Company has recognized the following amounts related to revenue in the consolidated statements of income:
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||
| $ | ||||||||
| Revenues from contracts with customers | 55,553 | 48,837 | ||||||
| Provisional pricing adjustments on concentrate sales | 5 | 343 | ||||||
| Total revenues | 55,558 | 49,180 | ||||||
17 | Page
Sierra Metals Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated, unaudited)
The following table sets out the disaggregation of revenue by metals and form of sale:
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||
| $ | ||||||||
| Revenues from contracts with customers: | ||||||||
| Silver | 11,053 | 8,069 | ||||||
| Copper | 22,414 | 18,590 | ||||||
| Lead | 5,603 | 5,794 | ||||||
| Zinc | 11,317 | 14,512 | ||||||
| Gold | 5,166 | 1,872 | ||||||
| Total revenues from contracts with customers | 55,553 | 48,837 | ||||||
| 16 | Contingencies |
The Company and its subsidiaries have been named as defendants in certain actions incurred in the normal course of business. In all cases the Company and its subsidiaries will continue to vigorously defend the actions and an accrual has been made in the consolidated financial statements for matters that are probable and can be reasonably estimated.
The contingencies outstanding associated with our Mexican subsidiaries are as follows:
| a) | In 2009, a personal action was filed in Mexico against DBM by an individual, Ambrosio Bencomo Muñoz as administrator of the intestate succession of Ambrosio Bencomo Casavantes y Jesus Jose Bencomo Muñoz, claiming the annulment and revocation of the purchase agreement of two mining concessions, Bolívar III and IV between Minera Senda de Plata S.A. de C.V. and Ambrosio Bencomo Casavantes, and with this, the nullity of purchase agreement between DBM and Minera Senda de Plata S.A. de C.V. In June 2011, the Sixth Civil Court of Chihuahua, Mexico, ruled that the claim was unfounded and dismissed the case, the plaintiff appealed to the State Court. The process is in the appealing court. The Company will continue to vigorously defend this action and is confident that the claim is of no merit. |
| 17 | Subsequent Events |
Grant of RSU’s
During April 2020, the Board of Directors approved the granting of 898,857 RSU’s pursuant to the Company’s RSU Plan to directors, officers and employees of the Company. The vesting conditions of the RSU’s granted are consistent with all previous grants and will vest in three tranches starting approximately one year from the grant date.
18 | Page
