Sierra Metals (SMTSF) 40-F 2020 FY Annual report (Canada)

Exhibit 99.3

SIERRA METALS INC.

Consolidated Financial Statements

Years ended December 31, 2020 and 2019

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March 15, 2021 

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

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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, 2020 and 2019, and the related consolidated statements of income, comprehensive income, 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, 2020 and 2019, 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 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 15, 2021

We have served as the Company's auditor since 1997.

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Sierra Metals Inc.

Consolidated Statements of Financial Position

December 31, 2020 and 2019

(In thousands of United States dollars)

	Note		December 31, 2020			December 31, 2019
			$			$
ASSETS
Current assets:
Cash and cash equivalents				71,473			42,980
Trade and other receivables		5		38,694			31,892
Income tax receivable				438			1,471
Prepaid expenses				1,968			1,904
Inventories		6		23,476			26,053
				136,049			104,300
Non-current assets:
Property, plant and equipment		7		301,786			305,115
Deferred income tax		9		1,757			2,032
Total assets				439,592			411,447
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities		8		30,317			44,910
Income tax payable				7,545			1,355
Loans payable		10		18,480			-
Decommissioning liability		11		1,260			865
Other liabilities		12		7,562			7,248
				65,164			54,378
Non-current liabilities:
Loans payable		10		80,903			99,814
Deferred income tax		9		29,903			27,653
Decommissioning liability		11		21,207			16,029
Other liabilities		12		2,207			1,554
Total liabilities				199,384			199,428
EQUITY
Share capital				230,980			230,456
Accumulated deficit				(41,820	)		(65,239	)
Other reserves				11,840			11,566
Equity attributable to owners of the Company				201,000			176,783
Non-controlling interest		14		39,208			35,236
Total equity				240,208			212,019
Total liabilities and equity				439,592			411,447

Contingencies (notes 10 and 25)

Approved on behalf of the Board and authorized for issue on March 15, 2021: 

“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.

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Sierra Metals Inc.

Consolidated Statements of Income

For the years ended December 31, 2020 and 2019

(In thousands of United States dollars, except per share amounts)

	Year Ended December 31,
	Note		2020			2019
			$			$
Revenue		24		246,888			229,038
Cost of sales
Mining costs		15(a)		(123,649	)		(135,192	)
Depletion, depreciation and amortization		15(a)		(41,654	)		(36,084	)
				(165,303	)		(171,276	)
Gross profit from mining operations				81,585			57,762
General and administrative expenses		15(b)		(20,270	)		(19,515	)
Selling expenses				(10,195	)		(9,741	)
Income from operations				51,120			28,506
Other expenses and losses		16		(665	)		(710	)
Foreign currency exchange gain (loss)				2,911			(976	)
Interest expense and other finance costs		17		(4,293	)		(4,875	)
Derivative instruments gains		18		904			-
Income before income tax				49,977			21,945
Income tax (expense) recovery:
Current tax expense		9		(20,535	)		(17,416	)
Deferred tax recovery (expense)		9		(2,051	)		4,888
				(22,586	)		(12,528	)
Net income				27,391			9,417
Net income attributable to:
Shareholders of the Company				23,419			4,431
Non-controlling interests		14		3,972			4,986
				27,391			9,417
Weighted average shares outstanding (000s)
Basic				162,638			163,075
Diluted				164,047			164,705
Basic earnings per share				0.14			0.03
Diluted earnings per share				0.14			0.03

The accompanying notes are an integral part of the consolidated financial statements.

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Sierra Metals Inc.

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2020 and 2019

(In thousands of United States dollars) 

	Year Ended December 31,
	2020		2019
	$		$
Net income		27,391		9,417
Other comprehensive income
Items that may be subsequently classified to net income:
Currency translation adjustments on foreign operations		130		667
Total comprehensive income		27,521		10,084
Total comprehensive income attributable to shareholders		23,549		5,098
Non-controlling interests		3,972		4,986
Total comprehensive income  attributable to shareholders		27,521		10,084

The accompanying notes are an integral part of the consolidated financial statements.

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Sierra Metals Inc.

Consolidated Statements of Changes in Equity

For the years ended December 31, 2020 and 2019

(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, 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

	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		163,427,335			231,792			10,870			(69,307	)		173,355			30,250		203,605
Exercise of RSUs		700,698			1,145			(1,145	)		-			-			-		-
Share-based compensation expense		-			-			1,174			-			1,174			-		1,174
Shares repurchased and cancelled		(2,012,654	)		(2,481	)		-			(363	)		(2,844	)		-		(2,844	)
Total comprehensive income		-			-			667			4,431			5,098			4,986		10,084
Balance at December 31, 2019		162,115,379			230,456			11,566			(65,239	)		176,783			35,236		212,019

The accompanying notes are an integral part of the consolidated financial statements.

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Sierra Metals Inc.

Consolidated Statements of Cash Flows

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars)

	Year Ended December 31,
	Note		2020			2019
			$			$
Cash flows from operating activities
Net income				27,391			9,417
Adjustments for items not affecting cash:
Depletion, depreciation and amortization				41,916			36,084
Share-based compensation				668			1,174
Loss on disposals and write-offs				1,571			1,072
Change in supplies inventory reserve				176			238
Revisions in estimates of decomissioning liability at closed mine				-			144
Interest expense and other finance costs				4,592			5,055
Net realizable value adjustment to inventory				1,248			-
Current income tax expense				20,535			17,416
Deferred income taxes expense (recovery)				2,051			(4,888	)
Unrealized foreign currency exchange (gain) loss				(1,143	)		647
Operating cash flows before movements in working capital				99,005			66,359
Net changes in non-cash working capital items		23		(18,239	)		(3,680	)
Decomissioning liabilities settled				(405	)		(914	)
Income tax paid				(13,380	)		(22,178	)
Cash generated from operating activities				66,981			39,587
Cash (used in) investing activities
Capital expenditures				(35,972	)		(54,621	)
Proceeds from sale of property, plant and equipment				901			-
Proceeds from insurance claim				822			-
Cash (used in) investing activities				(34,249	)		(54,621	)
Cash from (used in) financing activities
Proceeds from issuance of loans, net of transaction costs				-			99,814
Repayment of loans and credit facilities				-			(56,193	)
Loan interest paid		10		(4,066	)		(4,615	)
Cash paid to repurchase shares		13		-			(2,844	)
Cash generated from (used in) financing activities				(4,066	)		36,162
Effect of foreign exchange rate changes on cash and cash equivalents				(173	)		20
Increase in cash and cash equivalents				28,493			21,148
Cash and cash equivalents, beginning of the year				42,980			21,832
Cash and cash equivalents, end of the year				71,473			42,980

The accompanying notes are an integral part of these consolidated financial statements.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

1 Description of business and nature of operations

Sierra Metals Inc. (“Sierra Metals” or the “Company”) was incorporated under the Canada Business Corporations Act on April 11, 1996 and is a 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 15, 2021.

(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, 2020 and 2019 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

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.

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Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

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 and other receivables are classified as financial assets at fair value through profit or loss and measured at fair value.

Financial Liabilities

Financial liabilities, including accounts payable and accrued liabilities, as well as debt and financing obligations are accounted for at amortized cost.

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Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

2 Significant accounting policies (continued)

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 Incomes 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 President and Chief Executive Officer of the Company.

(g) Inventories

Inventories consist of concentrates, ore stockpiles, supplies and spare parts. Concentrates include stockpiled concentrates at milling operations or at warehouses. Stockpiled ore is comprised of in-process mineralized material awaiting processing at milling facilities and materials for use in milling operations. Concentrates and stockpiled ore are valued at the lower of average production cost and net realizable value (“NRV”). Concentrates and stockpiled ore inventory costs include all direct costs incurred in production including direct labor and materials, freight and amortization, and directly attributable overhead costs. NRV is calculated as the estimated price at the time of sale based on prevailing metal market prices less estimated future costs to convert the inventories into saleable form and estimated costs to sell. The supplies and spare parts inventories will be used for exploration and production and are valued at the lower of average cost and net realizable value. Cost includes acquisition, freight and other directly attributable costs. If the carrying value of inventory exceeds NRV, a write-down is recognized as production costs of sales in the consolidated statement of income (loss). If there is a subsequent increase in the value of the inventory, the previous write-downs to NRV are reversed up to cost to the extent that the related inventory has not been sold.

(h) Exploration and evaluation expenditure

Exploration and evaluation expenditures 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

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.

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Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

2 Significant accounting policies (continued)

Capitalized exploration and evaluation expenditures are considered to be tangible assets as they form part of the underlying mineral property and are recorded within property, plant and equipment - exploration and evaluation expenditures.

(i) Property, plant and equipment

Property, plant and equipment is stated at cost, less accumulated depreciation and impairment losses. The cost of an item of property, plant and equipment comprises its purchase price, any costs directly attributable to bringing the assets to the location and condition necessary for it to be capable of operating in the manner intended by management and the estimated close down and restoration costs associated with the asset, and for qualifying assets, the associated borrowing costs. Once a mining project has been established as commercially viable, expenditure other than on land, buildings, plant and equipment is capitalized under ‘Mining properties’ together with any amount capitalized relating to that mining project from ‘Exploration and evaluation’.

Where an item of property, plant and equipment is comprised of major components with different useful lives, the components are accounted for as separate items of property, plant and equipment and depreciated over their estimated useful lives.

Costs associated with commissioning new assets, in the period before they are capable of operating in the manner intended by management, are capitalized. Revenue generated during the development stage from the sale of concentrate and related costs can be deducted from capitalized costs only if the production of the saleable material is directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the manner intended by management.

Development costs incurred after the commencement of production are capitalised to the extent they are expected to give rise to future economic benefits and these costs can be measured reliably. Repairs and maintenance costs are charged to the consolidated statement of income (loss) during the period in which they are incurred.

Property, plant and equipment is depreciated over its useful life, or over the remaining life of the mine if shorter. Depreciation commences when the asset is available for use. Land is not depreciated. The major categories of property, plant and equipment are depreciated on a straight-line basis using the following average estimated useful lives below:

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.

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.

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Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

2 Significant accounting policies (continued)

(j) Impairment of non-financial assets

Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is assessed at the level of cash generating units (‘CGUs’). The recoverable amount is the higher of an asset’s fair value less costs to sell or value in use.

Fair value less costs to sell is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction. The best evidence of fair value is the value obtained from an active market or binding sales agreement. Where this information is not available, fair value can be estimated as the present value of future cash flows expected to be realized from the continued use of the asset including expansion projects. Value in use is determined as the present value of expected future cash flows to be realized from the continued use of the asset in its present condition and from its ultimate disposal.

Capitalized exploration expenditures are reviewed for indicators of impairment, which included a decision to discontinue activities in a specific area and the existence of sufficient data indicating that the carrying amount of an exploration and evaluation asset is unlikely to be recovered from the development or sale of the asset.

Non-financial assets that have suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed.

(k) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalized and included in the carrying amounts of those assets until they are ready for their intended use. All other borrowing costs are recognized as an expense in the period incurred.

(l) Revenue recognition

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.

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.

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Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

2 Significant accounting policies (continued)

(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.

(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.

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Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

2 Significant accounting policies (continued)

(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 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.

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.

16 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

2 Significant accounting policies (continued)

(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.

3 Significant accounting estimates and judgments

In the application of the Company’s accounting policies, which are described in note 2, management is required to make judgements, estimates and assumptions about the effects of uncertain future events on the carrying amounts of assets and liabilities. The estimates and associated assumptions are based on management’s best knowledge of the relevant facts and circumstances and historical experience. Actual results may differ from these estimates, potentially having a material future effect on the Company’s consolidated financial statements. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the significant judgements that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements:

(a) Impairment review of asset carrying values

In accordance with the Company’s accounting policy (note 2(j)), at every reporting period, the Company assesses whether there are any indicators that the carrying value of its assets or Cash Generating Units (“CGUs”) may be impaired, which is a significant management judgment. Where there is an indication that the carrying amount of an asset may not be recoverable, the Company prepares a formal estimate of the recoverable amount by analyzing discounted cash flows. The resulting valuations are particularly sensitive to changes in estimates such as long-term commodity prices, exchange rates, sales volume, operating costs, and discount rates. In the event of impairment, if there is a subsequent adverse change in any of the assumptions or estimates used in the discounted cash flow model, this could result in a further impairment of the asset. Also, in accordance

17 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

3 Significant accounting estimates and judgments (continued)

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, 2020 and 2019, the Company made an assessment of its long-lived assets and exploration and evaluation expenditures and determined that there were no indicators of impairment.

(b) Mineral reserves and resources

The Company estimates mineral reserves and resources based on information prepared by qualified persons as defined in accordance with the Canadian Securities Administrators’ National Instrument (“NI”) 43-101. These estimates form the basis of the Company’s life of mine (“LOM”) plans, which are used for a number of important and significant accounting purposes, including: the calculation of depletion expense and impairment charges, forecasting the timing of the payment of decommissioning costs and future taxes. There are significant uncertainties inherent in the estimation of mineral reserves and the assumptions used, including commodity prices, production costs, recovery rates and exchange rates. These assumptions may change significantly when new information becomes available and could result in mineral reserves being revised, which in turn would impact depletion expense, asset carrying values and the provision for decommissioning costs.

(c) Deferred tax assets and liabilities

The Company’s management makes significant estimates and judgments in determining the Company’s tax expense for the period and the deferred tax assets and liabilities. Management interprets tax legislation in a variety of jurisdictions and makes estimates of the expected timing of the reversal of deferred tax assets and liabilities. In addition, management makes estimates related to expectations of future taxable income based on cash flows from operations and the application of existing tax laws in each jurisdiction. Assumptions used in the cash flow forecast are based on management’s estimates of future production and sales volume, commodity prices, operating costs, capital expenditures, dividends, and decommissioning and reclamation expenditures. These estimates are subject to risk and uncertainty and could result in an adjustment to the deferred tax provision and a corresponding credit or charge to the statement of loss. The Company is subject to assessments by various tax authorities who may interpret the tax laws differently. These differences may impact the final amount or the timing of the payment of taxes. The Company provides for such differences where known based on management’s best estimates of the probable outcome of these matters.

(d) Decommissioning and restoration liabilities costs

The Company’s provision for decommissioning and restoration costs is based on management’s best estimate of the present value of the future cash outflows required to settle the liability. In determining the liability, management makes estimates about the future costs, inflation, foreign exchange rates, risks associated with the cash flows, and the applicable risk-free interest rates for discounting future cash flows. Changes in any of these estimates could result in a change in the provision recognized by the Company. Also, the ultimate costs of environmental disturbance are uncertain and cost estimates can vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other mine sites.

Changes in decommissioning and restoration liabilities are recorded with a corresponding change to the carrying amounts of the assets to which they relate. Adjustments made to the carrying amounts of the asset can result in a change to the depreciation charged in the consolidated statement of loss.

18 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

3 Significant accounting estimates and judgments (continued)

(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 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 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, as a result of which the Yauricocha mine operated at reduced capacity, maintaining an essential crew at site. The mine started ramping up its operations in June 2020 after the inclusion of mining and related activities in phase 2 of the government’s economic recovery plan. Similarly, on March 31, 2020, the Mexican Federal Government also announced suspension of all non-essential services, causing the Company to slow down its mining operations at Bolivar and placing Cusi under care and maintenance. In June, the Company resumed normal operations at Bolivar as the Government deemed mining to be an essential service effective June 1, 2020. After remaining under care and maintenance throughout the second quarter, the Cusi Mine resumed operations and production on July 28, 2020. Despite lifting of restrictions in these countries, the Company continues to experience challenges related to movement of manpower and supplies, which is impacting operations, development and exploration activities at mine sites. Additionally, the Company has incurred additional costs related to COVID-19 such as cleaning and sanitization activities, purchase of disinfectants and quarantine costs for employees and contractors.

The Company continues to act to protect the safety and health of its employees, contractors and the communities in which it operates in accordance with guidance from governments and public health authorities. These above-mentioned challenges and measures taken by the Company, combined with commodity market fluctuations resulting from COVID-19 have affected our financial results for the year ended December 31, 2020.

4 Adoption of new accounting standards and future accounting changes

A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2020, and have not been early adopted in preparing these financial statements. These new standards, and amendments to standards and interpretations are either not applicable or are not expected to have a significant impact on the Company’s financial statements.

19 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

5 Trade and other receivables

	December 31,		December 31,
	2020		2019
	$		$
Trade receivables		28,750		20,549
Sales tax  and other receivables		9,944		11,343
		38,694		31,892

6 Inventories

	December 31,		December 31,
	2020		2019
	$		$
Stockpiles		1,047		4,096
Concentrates		4,185		4,376
Supplies and spare parts		18,244		17,581
		23,476		26,053

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, 2020 and 2019 of $165,303 and $171,276, respectively. Supplies and spare parts inventory as at December 31, 2020 is stated net of a provision of $3,808 (2019 - $3,632) to write inventories down due to obsolescence or infrequent use. During the year ended December 31, 2020, the Company wrote down stockpiles and concentrates inventory to its NRV, recording a charge of $1,248 (2019 - $804). Stockpiles and concentrates inventory held at NRV as at December 31, 2020 was $nil (2019 - $468).

20 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

7 Property, plant and equipment

									Exploration
	Plant and			Mining		Assets under			and evaluation
	equipment			properties		construction			expenditure			Total
Cost	$			$		$			$			$
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		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

7 Property, plant and equipment (continued)

								Exploration
	Plant and			Mining		Assets under		and evaluation
	equipment			properties		construction		expenditure			Total
Accumulated depreciation	$			$		$		$			$
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		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
Net Book Value - December 31, 2020		97,107			113,660		52,461		38,558			301,786
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

21 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

8 Accounts payable and accrued liabilities

	December 31,		December 31,
	2020		2019
	$		$
Trade payables		16,949		30,422
Other payables and accrued liabilities		13,368		14,488
		30,317		44,910

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

	2020		2019
	$		$
Current Tax Expense
Current income tax		20,535		17,416
		20,535		17,416
Deferred Tax Recovery
Deferred Tax Expense (recovery)		2,051		(4,888	)
		2,051		(4,888	)
Total tax expense		22,586		12,528

22 | Page 

Sierra Metals Inc. 

Notes to the Condensed Interim Consolidated Financial Statements 

For the three and nine months ended September 30, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

9 Current and deferred income tax liability (continued)

(b) Tax rate reconciliation

A reconciliation between income tax expense and the product of loss before income taxes multiplied by the combined Canadian federal and provincial income tax rate for the period ended December 31, 2020 is as follows:

	2020			2019
	$			$
Income before income taxes		49,977			21,945
Expected Tax Rate @ 26.50% (2019 - 26.50%)		13,244			5,776
Effect of tax rate differences		1,838			567
Stock based compensation costs		177			291
Other Non-deductible expenses		909			616
Unrealized foreign exchange income		(175	)		412
Inflation adjustment for Mexico tax purposes		150			(224	)
Expired losses		-			720
Change in benefit of other temporary differences not recognized		3,896			1,925
Foreign exchange and other		(3,326	)		(1,391	)
Mining royalties and other		5,873			3,836
		22,586			12,528

(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, 2019			Change in 2019			December 31, 2019			Change in 2020			December 31, 2020
	$			$			$			$			$
Property, Plant, and equipment		(1,666	)		850			(816	)		341			(475	)
Inventory		(2,098	)		920			(1,178	)		(2,892	)		(4,070	)
Provisions		2,756			970			3,726			(194	)		3,532
Decommissioning liabilities		3,904			1,098			5,002			1,632			6,634
Mining royalties		1,464			151			1,615			103			1,718
Mining assets		(41,965	)		(589	)		(42,554	)		157			(42,397	)
Other items		316			1,982			2,298			(1,000	)		1,298
Non-capital losses		6,552			(266	)		6,286			(672	)		5,614
		(30,737	)		5,116			(25,621	)		(2,525	)		(28,146	)

Deferred tax assets have not been recognized in respect of the following temporary differences:

	2020			2019
	$			$
Non-capital and capital losses		62,250			46,364
Property, plant and equipment		83			49
Mineral properties		2,280			2,236
Other		(37	)		(56	)
		64,576			48,593

23 | Page 

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

9 Current and deferred income tax liability (continued)

(d) Tax losses

In Canada, the Company has aggregate tax losses not recognized of $37,771 (December 31, 2019 – $30,517) expiring in periods from 2027 to 2040. 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, 2020 (December 31, 2019 - $1,403).

(e) Unrecognized deferred tax liabilities

As at December 31, 2020, the Company has taxable temporary difference of $77,582 (2019 - $77,703) relating to investments in subsidiaries that has not been recognized because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.

10 Loans payable and notes payable

	December 31,		December 31,
	2020		2019
	$		$
Senior Secured Corporate Credit Facility with Banco de Credito del Peru
Current Portion		18,480		-
Long term Portion		80,903		99,814
		99,383		99,814

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, 2020.

The Company drew down $21.4 million on March 11, 2019, $48.6 million on May 8, 2019 and the balance $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, 2020, DBP made interest payments of $4,066 (2019 - $2,910).

23 | Page 

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

10 Loans payable and notes payable (continued)

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 will begin in June 2021. The loan is recorded at amortized cost and is being accreted to face value over 6 years using an effective interest rate of 4.45%.

11 Decommissioning liability

	December 31,			December 31,
	2020			2019
	$			$
Balance, beginning of year		16,894			13,304
Liabilities settled during the year		(405	)		(914	)
Interest cost		551			647
Revisions and new estimated cash flows		5,427			3,857
Balance, end of year		22,467			16,894
Current portion		1,260			865
Long-term portion		21,207			16,029

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 2020 and 2019, the decommissioning liability was calculated based on the following key assumptions:

	2020				2019
	Mexico		Peru		Mexico		Peru
Estimated undiscounted cash flows ($)		1,182		24,297		949		20,249
Discount rate (%)		5.6		4.1		7.0		5.0
Settlement period  (years)		4		3-14		4		4-15
Inflation (%)		4.0		2.0		4.0		2.0

12 Other liabilities

	December 31,		December 31,
	2020		2019
	$		$
Current
Profit-sharing and other employee related obligations (a)		7,267		7,248
Current portion of lease liabilities		295		-
		7,562		7,248
Non-current
Other employee related obligations		1,426		1,297
Lease Liabiilities		781		257
		2,207		1,554

24 | Page 

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

12 Other liabilities (continued)

(a) Profit sharing and other employee related obligations

As at December 31, 2020, there is a provision amounting to $2,244 for employee profit sharing in Peru and $4,929 for wages, salaries and other employee benefits outstanding (December 31, 2019 - $4,118 and $3,130, respectively).

13 Share capital and share-based payments

(a) Authorized capital

The Company has an unlimited amount of authorized common shares with no par value.

(b) Restricted share units (“RSUs”)

The changes in RSU’s issued during the years ended December 31, 2020 and 2019 was as follows:

	December 31,			December 31,
	2020			2019
Outstanding, beginning of period		1,630,423			1,380,085
Granted		898,857			1,356,418
Exercised		(695,174	)		(700,698	)
Forfeited		(425,048	)		(405,382	)
Outstanding, end of period		1,409,058			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 8,000,000. The RSUs have vesting conditions determined by the Board of Directors, and the vesting conditions are non-market conditions and are not performance based.

During the year ended December 31, 2020, the Company granted RSU’s totalling 898,857 which had a fair value of C$1.11 based on the closing share price at grant date. RSUs exercised during the year ended December 31, 2020 had a weighted average fair value of C$2.60 (2019 – C$2.62) and the RSUs forfeited had a weighted average fair value of C$1.88 (2019 – C$2.68). As at December 31, 2020, the weighted average fair value of the RSUs outstanding is C$1.57 (2019 – C$2.34).

The total RSU expense recognized during the year ended December 31, 2020 was $668 with a corresponding credit to other reserves (2019 - $1,174).

(c)Share re-purchase

There were no share purchases during the twelve months ended December 31, 2020. During the year ended December 31, 2019, the Company purchased 2,012,654 shares under a normal course issuer bid for total consideration of $2,844 and a book value of $2,481.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

14 Non-controlling interest

Set out below is the summarized financial information of our subsidiary Corona which has a material non-controlling interest (note 2(b)). The information below is before intercompany eliminations and after fair value adjustments on acquisition of the entity.

	December 31,			December 31,
	2020			2019
	$			$
Current
Assets		118,045			90,438
Liabilities		(26,890	)		(27,863	)
Total current net assets		91,155			62,575
Non-current
Assets		170,277			171,884
Liabilities		(45,145	)		(39,915	)
Total non-current net assets		125,132			131,969
Net assets		216,287			194,544

	For the year ended December 31,
	2020			2019
	$			$
Revenue		146,941			155,983
Income before income tax		39,809			41,796
Income tax expense		(17,934	)		(14,338	)
Total income		21,875			27,458
Total income attributable to non-controlling interests		3,972			4,986

Summarized cash flows

	For the year ended December 31,
	2020			2019
	$			$
Cash flows from operating activities
Cash generated from operating activities		64,797			63,887
Net changes in non cash working capital items		(2,992	)		(2,895	)
Decomissioning liabilities settled		(405	)		(915	)
Income taxes paid		(12,824	)		(21,885	)
Net cash generated from operating activities		48,576			38,192
Net cash used in investing activities		(19,205	)		(25,882	)
Net cash from (used in) financing activities		705			4,775
Effect of foreign exchange rate changes on cash and cash equivalents		(53	)		21
Increase in cash and cash equivalents		30,023			17,106
Cash and cash equivalents, beginning of period		35,004			17,898
Cash and cash equivalents, end of period		65,027			35,004

26 | Page 

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

15 Expenses by nature

Mining costs include mine production costs, milling and transport costs, royalty expenses, site administration costs but not the primary mine development costs which are capitalized and depreciated over the specific useful life or reserves related to that development and ore included in depreciation and amortization. The mining costs for the years ended December 31, 2020 and 2019 relate to the Yauricocha, Bolivar and Cusi Mines.

(a) Mining costs

	Year ended December 31,
	2020		2019
	$		$
Employee compensation and benefits		26,472		28,986
Third party and contractors costs		52,616		60,905
Depreciation		41,654		36,084
Consumables		30,850		39,515
Changes in inventory and other costs		13,711		5,786
		165,303		171,276

(b) General and administrative expenses

	2020		2019
	$		$
Salaries and benefits		10,835		9,763
Consulting and professional fees		2,922		2,705
Office expenses		2,182		1,539
Marketing and communication expenses		815		807
Share-based compensation expense		668		1,174
Listing and filing fees		257		318
Director expenses		1,307		1,282
Travelling expense		237		596
Other		1,047		1,331
		20,270		19,515

16 Other income (expenses)

	2020			2019
	$			$
Loss on sale of supplies and fixed assets		(124	)		(162	)
Exploration expenditure written off		(1,829	)		-
Allowance for inventory obsolescence		(176	)		(238	)
Miscellaneous income (expense)		1,464			(310	)
		(665	)		(710	)

17 Interest expense and other finance costs

	2020			2019
	$			$
Interest expense on loans		4,046			4,431
Interest cost on decommissioning liability		547			647
Interest income		(300	)		(203	)
		4,293			4,875

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

18 Derivative instruments

The Company had no outstanding derivative instruments at December 31, 2020.

For the year ended December 31, 2020, the Company received $904 ($nil for the year ended December 31, 2019), in settlement of the derivative instruments that matured in the period.

19 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

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, 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, 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.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

19 Segment reporting (continued)

As at December 31, 2020, the trade receivable balance of $28,750 includes amounts outstanding of $10,957 and $17,793 from the customers in Mexico and Peru, respectively.

	Peru			Mexico			Mexico			Canada
	Yauricocha Mine			Bolivar Mine			Cusi Mine			Corporate			Total
Year ended December 31, 2019	$			$			$			$			$
Revenue (1)		155,983			60,402			12,653			-			229,038
Production cost of sales		(79,339	)		(45,491	)		(10,362	)		-			(135,192	)
Depletion of mineral property		(10,631	)		(2,177	)		(2,314	)		-			(15,122	)
Depreciation and amortization of property, plant and equipment		(10,346	)		(8,147	)		(2,469	)		-			(20,962	)
Cost of sales		(100,316	)		(55,815	)		(15,145	)		-			(171,276	)
Gross profit from mining operations		55,667			4,587			(2,492	)		-			57,762
Income (loss) from operations		39,879			(4,918	)		(1,079	)		(5,376	)		28,506
Interest expense and other finance costs		(4,422	)		(34	)		(8	)		(412	)		(4,875	)
Other income (expense)		(839	)		105			25						(710	)
Foreign currency exchange loss		(170	)		(21	)		(5	)		(780	)		(976	)
Income (loss) before income tax		34,448			(4,868	)		(1,067	)		(6,568	)		21,945
Income tax (expense) recovery		(14,297	)		1,450			319			-			(12,528	)
Net income (loss) from operations		20,151			(3,418	)		(748	)		(6,568	)		9,417
December 31, 2019		Peru			Mexico						Canada			Total
		$						$			$			$
Total assets		241,839			162,657						6,951			411,447
Non-current assets		175,246			131,810						91			307,147
Total liabilities		137,146			31,130						31,152			199,428
(1) Includes provisional pricing adjustments of: $216 for Bolivar

For the year ended December 31, 2019, 68% of the revenues ($155,983) were from two customers based in Peru and the remaining 32% of the revenues ($73,055) were from two customers based in Mexico. In Peru, the two customers accounted for 53% and 47% of the revenues. In Mexico, the two customers accounted for 82% and 18% of the revenues.

20 Financial instruments and financial risk management

The Company’s financial instruments include cash and cash equivalents, trade receivables, financial assets, accounts payable and loans payable.

(a) Financial assets and liabilities by category

At December 31, 2020	Amortized Cost		FVTPL		Total
	$		$		$
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		30,317		-		30,317
Loans payable		99,383		-		99,383
Total Financial liabilities		129,700		-		129,700

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

20 Financial instruments and financial risk management (continued)

At December 31, 2019	Amortized Cost		FVTPL		Total
	$		$		$
Financial assets
Cash and cash equivalents		42,980		-		42,980
Trade receivables (1)		-		20,549		20,549
Total Financial assets		42,980		20,549		63,529
Financial liabilities
Accounts payable		44,910		-		44,910
Loans payable		99,814		-		99,814
Total Financial liabilities		144,724		-		144,724

⁽¹⁾Trade receivables exclude sales and income tax receivables.

(b) Fair value of financial instruments

As at December 31, 2020 and 2019, 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.

Level 3 – inputs for the asset or liability that are not based on observable market data.

At December 31, 2020 and 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:

Recurring measurements	Level 1		Level 2		Level  3		Total		Level 1		Level 2		Level  3		Total
	$		$		$		$		$		$		$		$
Trade receivables (1)		-		28,750		-		28,750		-		20,549		-		20,549
		-		28,750		-		28,750		-		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 years ended December 31, 2020 and 2019.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

20 Financial instruments and financial risk management (continued)

(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.

The following are the most significant areas of exposure to currency risk:

	December 31, 2020
	CAN dollar			Mexican Peso			Peruvian Nuevo 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	)

	December 31, 2019
	CAN dollar			Mexican Peso			Peruvian Nuevo Soles			Total $
Cash and cash equivalents		113			73			2,473			2,659
Income tax and other receivables		45			13,262			1,683			14,990
		158			13,335			4,156			17,649
Accounts payable and other liabilities		(724	)		(30,208	)		(15,357	)		(46,289	)
Total		(566	)		(16,873	)		(11,201	)		(28,640	)

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

20 Financial instruments and financial risk management (continued)

The Company manages and monitors this risk with the objective of mitigating the potential adverse effect that fluctuations in currencies against the Canadian dollar and US dollar could have on the Company’s Consolidated Statement of Financial Position and Consolidated Statement of income (loss). As at December 31, 2020, 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, 2020, with all the other variables held constant, would have resulted in an increase to the Company’s net income of $1,965 (increase in income in 2019 of $2,053).

A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial assets and liabilities held at December 31, 2020 and 2019, 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, 2020 on its loans and notes payable in Peru was 4.07% (2019 – 5.58%). With all other variables unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $708 (2019 - $690).

⁽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, 2020 and 2019, the Company had certain amounts related to the sales of concentrates that have only been provisionally priced. Commodity price risk exists solely in Mexico as the Company fixes metal prices with the purchaser of its concentrates for specific sales for which concentrates have been delivered. The Company’s exposure to commodity price risk is as follows:

	2020			2019
Commodity	$			$
10% decrease in silver prices		(471	)		(97	)
10% decrease in copper prices		(743	)		-
10% decrease in zinc prices		(354	)		-
10% decrease in lead prices		(105	)		-
10% decrease in gold prices		(928	)		(323	)

As at December 31, 2020 and 2019, the Company did not have any forward contracts outstanding.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

20 Financial instruments and financial risk management (continued)

ii)Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligation as they fall due. The Company has in place planning, budgeting and forecasting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and its expansion and development plans. The Company tries to ensure that it has sufficient committed credit facilities to meet its short-term operating needs, note 10.

In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following table summarizes the remaining contractual maturities and undiscounted cash flows as at December 31, 2020 of the Company’s financial liabilities and operating and capital commitments:

	Within 1 year		1-2 years		3-5 years		After 5 years		As at December 31,
									2020
	$		$		$		$		$
Accounts payable and accrued liabilities		30,317		-	��	-		-		30,317
Loans payable		18,750		25,000		56,250		-		100,000
Interest on loans payable		3,334		2,513		2,464		-		8,311
Asset retirement obligations		1,284		4,816		4,819		14,321		25,240
Other liabilities		7,562		2,207		-		-		9,769
Total Commitments		61,247		34,536		63,533		14,321		173,637

In the opinion of management, the working capital at December 31, 2020, together with future cash flows from operations and available loan facilities, is sufficient to support the Company’s commitments through 2021.

iii)Credit risk

Credit risk is the risk that the counterparty to a financial instrument might fail to discharge its obligations under the terms of a financial contract. Credit risk is primarily associated with trade receivables; however, it also arises on cash and cash equivalents. The Company sells its concentrate to large international organizations. The Company is exposed to significant concentration of credit risk given that all of its revenues from Peru and Mexico were from two customers at each of the locations. There are no significant provisions recorded for expected credit losses as at December 31, 2020 and 2019.

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,
	2020		2019
	$		$
Cash and cash equivalents		71,473		42,980
Trade receivables		28,750		20,549
		100,223		63,529

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

21 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,
	2020			2019
	$			$
Equity attributable to owners of the Company		201,000			176,783
Loans payable		99,383			99,814
		300,383			276,597
Less: Cash and cash equivalents		(71,473	)		(42,980	)
		228,910			233,617

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, 2020, 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, 2020, the Company was in compliance with the external capital requirements.

22 Related party transactions

(a) Related party transactions

During the year ended December 31, 2020, the Company recorded consulting fees of $200 (2019 - $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, 2020 and 2019 are as follows:

	2020		2019
	$		$
Salaries and other short term employment benefits		2,289		3,304
Share-based payments		496		1,581
Total compensation		2,785		4,885

^{(1) calculated at fair value on day of the grant}

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

23 Changes in working capital

	Year ended December 31,
	2020			2019
	$			$
Trade and other receivables		(6,802	)		(5,885	)
Financial and other assets		(63	)		(563	)
Income tax receivable		-			(282	)
Inventories		670			(3,849	)
Accounts payable and accrued liabilities		(12,600	)		6,752
Other liabilities		556			147
		(18,239	)		(3,680	)

24 Revenues from mining operations

The Company has recognized the following amounts related to revenue in the consolidated statements of income:

	Year Ended		Year Ended
	December 31, 2020		December 30, 2019
	$		$
Revenues from contracts with customers		243,698		228,822
Provisional pricing adjustments on concentrate sales		3,190		216
Total revenues		246,888		229,038

The following table sets out the disaggregation of revenue by metals and form of sale:

	Year Ended		Year Ended
	December 31, 2020		December 30, 2019
	$		$
Revenues from contracts with customers:
Silver		54,641		42,450
Copper		96,159		88,128
Lead		22,068		28,073
Zinc		49,102		58,163
Gold		21,728		12,008
Total revenues from contracts with customers		243,698		228,822

25 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.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020 and 2019
(In thousands of United States dollars, except per share amounts and unless otherwise stated)

25 Contingencies (continued)

These matters include a personal action filed in Mexico against Dia Bras Mexicana S.A de C.V (“DBM”) by an individual, Ambrosio Bencomo Muñoz, in 2009, 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. On November 3, 2014, the Sixth Civil Court of Chihuahua ruled against the plaintiff, noting that the legal route by which the plaintiff presented his claim was not admissible. On February 17, 2017 the State Court issued a ruling dismissing the arguments of the plaintiff.

Carlos Emilio Seijas Bencomo, a relative of Ambrosio Bencomo Casavantes and Ambrosio Bencomo Muñoz, following the steps of the Ambrosio lawsuit, filed a similar personal action to claim annulment and revocation of the purchase of the two mining concessions. In May 31, 2019, the Second Federal Civil Court issued a resolution ordering: a) the annulment and revocation of the purchase agreement of the 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., and b) the payment of a sum of money pending to be defined by concept of restitution of the benefits of those two mining concessions. In June 2019, a Federal Court in Chihuahua granted Sierra Metals a suspension of this adverse resolution. On January 14, 2021, the Third Federal Collegiate Court of Civil and Labor Matters of the Seventeenth Circuit in Chihuahua issued a resolution on the appeal (writ of amparo) presented by the Company, declaring the adverse ruling as void and ordered the lower court to issue a new resolution. On March 12, 2021, the first Civil Court of Chihuahua complied with the order of the Collegiate Court absolving DBM of all claims raised by the plaintiff. While the plaintiff has fifteen days to appeal against this judgement, the Company believes that this new development has reduced the possibilities of reversal of the March 12, 2021 ruling.

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