Sierra Metals (SMTSF) 40-F/A 2017 FY Annual report (Canada) (amended)

Exhibit 99.2

SIERRA METALS INC.

Consolidated Financial Statements

Years ended December 31, 2017 and 2016

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March 20, 2018

Management’s Responsibility for Financial Reporting

Management is responsible for the preparation of the consolidated financial statements. The consolidated financial statements were prepared in accordance with International Financing Reporting Standards (“IFRS”) and reflect management’s best estimates and judgments based on information currently available.

Management maintains accounting systems and internal controls to produce reliable consolidated financial statements and provide reasonable assurance that assets are properly safeguarded.

The consolidated financial statements have been audited by PricewaterhouseCoopers LLP and their report outlines the scope of their examination and gives their opinion on the consolidated financial statements.

The Board of Directors of the Company is responsible for ensuring that Management fulfills its responsibilities for financial reporting. The Board of Directors carries out this responsibility through its Audit Committee, which is composed of three members. The committee meets various times during the year and at least once per year with the external auditors, with and without Management being present, to review the consolidated financial statements and to discuss audit and internal control related matters.

The Board of Directors approved the Company’s audited consolidated financial statements.

“Igor Gonzales”	“Ed Guimaraes”
Igor Gonzales	Ed Guimaraes
President and Chief Executive Officer	Chief Financial Officer

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March 20, 2018

Independent Auditor’s Report

To the Shareholders of Sierra Metals Inc.

We have audited the accompanying consolidated financial statements of Sierra Metals Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and 2016 and the consolidated statements of loss, comprehensive loss, changes in equity, and cash flows for each of the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sierra Metals Inc. and its subsidiaries as at December 31, 2017 and 2016 and their financial performance and their cash flows for each of the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

signed “PricewaterhouseCoopers LLP”

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

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Sierra Metals Inc.

Consolidated Statements of Financial Position

December 31, 2017 and 2016

(In thousands of United States dollars)

		December 31, 2017			December 31, 2016
	Note	$			$
ASSETS
Current assets:
Cash and cash equivalents			23,878			42,145
Trade and other receivables	5		27,876			17,854
Income tax receivable			220			281
Prepaid expenses			1,130			873
Inventories	6		20,799			21,309
			73,903			82,462
Non-current assets:
Property, plant and equipment	7		266,240			281,828
Other assets			-			234
Deferred income tax	9		458			288
Total assets			340,601			364,812
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities	8		32,319			29,828
Income taxes payable			9,440			2,357
Deferred revenue	11		-			4,904
Loans payable	10		28,977			29,378
Decommissioning liability	12		1,372			1,910
Other liabilities			8,579			4,509
			80,687			72,886
Non-current liabilities:
Loans payable	10		35,883			49,304
Deferred income tax	9		30,341			43,569
Decommissioning liability	12		11,899			11,942
Other liabilities	13		1,113			1,149
Total liabilities			159,923			178,850
EQUITY
Share capital	14		230,283			228,326
Accumulated deficit			(88,121	)		(80,775	)
Other reserves			12,409			12,717
Equity attributable to owners of the Company			154,571			160,268
Non-controlling interest	15		26,107			25,694
Total equity			180,678			185,962
Total liabilities and equity			340,601			364,812

Contingencies (note 24)

Approved on behalf of the Board and authorized for issue on March 20, 2018:

“Alberto Arias”	“Doug Cater”
Alberto Arias	Doug Cater
Chairman of the Board	Chairman 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 (Loss)

For the years ended December 31, 2017 and 2016

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

		2017			2016
	Note	$			$
Revenue			205,118			143,180
Cost of sales
Mining costs	16		(100,979	)		(81,832	)
Depletion, depreciation and amortization	16		(58,175	)		(44,568	)
			(159,154	)		(126,400	)
Gross profit from mining operations			45,964			16,780
General and administrative expenses	16		(20,339	)		(14,869	)
Selling expenses			(7,543	)		(6,965	)
Exploration and evaluation expenditures			-			(1,103	)
Income (loss) from operations			18,082			(6,157	)
Other income	17		818			1,574
Foreign currency exchange gain (loss)			(1,737	)		1,295
Interest expense and other finance costs	18		(3,263	)		(3,676	)
Loss on spin out of Plexmar net assets	25		(4,412	)		-
Income (loss) before income taxes			9,488			(6,964	)
Income tax (expense) recovery:
Current tax expense	9		(23,416	)		(9,629	)
Deferred tax recovery	9		13,068			3,872
			(10,348	)		(5,757	)
Net income (loss)			(860	)		(12,721	)
Net income (loss) attributable to:
Shareholders of the Company			(4,645	)		(12,265	)
Non-controlling interests			3,785			(456	)
			(860	)		(12,721	)
Weighted average shares outstanding (000s)
Basic			162,554			161,908
Diluted			162,554			161,908
Basic earnings (loss) per share			(0.03	)		(0.08	)
Diluted earnings (loss) per share			(0.03	)		(0.08	)

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

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Sierra Metals Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the years ended December 31, 2017 and 2016

(In thousands of United States dollars)

	2017			2016
	$			$
Net income (loss)		(860	)		(12,721	)
Other comprehensive income (loss)
Items that may be subsequently classified to net income (loss):
Currency translation adjustments on foreign operations		450			785
Total comprehensive income (loss)		(410	)		(11,936	)
Total comprehensive income (loss) attributable to shareholders		(4,195	)		(11,480	)
Non-controlling interests		3,785			(456	)
Total comprehensive income (loss) attributable to shareholders		(410	)		(11,936	)

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, 2017 and 2016

(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, 2017		162,073,293		228,326		12,718			(80,776	)		160,268			25,694			185,962
Exercise of RSUs		739,471		1,957		(1,957	)		-			-			-			-
Share-based compensation expense		-		-		1,198			-			1,198			-			1,198
Dividends paid to non-controlling interest		-		-		-			-			-			(3,372	)		(3,372	)
Distribution of capital of Plexmar net assets		-		-		-			(2,700	)		(2,700	)		-			(2,700	)
Total comprehensive income (loss)		-		-		450			(4,645	)		(4,195	)		3,785			(410	)
Balance at December 31, 2017		162,812,764		230,283		12,409			(88,121	)		154,571			26,107			180,678

	Common Shares				Other			Retained earnings			Total attributable			Non-controlling			Total
	Shares		Amounts		reserves			(accumulated deficit)			to shareholders			Interest			shareholders' equity
			$		$			$			$			$			$
Balance at January 1, 2016		161,746,240		227,969		11,471			(68,511	)		170,929			26,645			197,574
Exercise of RSUs		327,053		357		(357	)		-			-			-			-
Share-based compensation expense		-		-		819			-			819			-			819
Dividends paid to non-controlling interest		-		-		-			-			-			(495	)		(495	)
Total comprehensive income (loss)		-		-		785			(12,265	)		(11,480	)		(456	)		(11,936	)
Balance at December 31, 2016		162,073,293		228,326		12,718			(80,776	)		160,268			25,694			185,962

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, 2017 and 2016
(In thousands of United States dollars)

		2017			2016
	Note	$			$
Cash flows from operating activities
Net income (loss) from operations			(860	)		(12,721	)
Adjustments for:
Items not affecting cash:
Depletion, depreciation and amortization			58,236			45,711
Share-based compensation			1,198			819
Interest expense and other finance costs			3,726			3,676
Loss on spin out of Plexmar net assets			4,412			-
NRV adjustment to inventory			2,106			-
Current income tax expense			23,416			9,629
Deferred income tax recovery			(13,068	)		(3,872	)
Unrealized foreign currency exchange gain (loss)			619			1,061
Operating cash flows before movements in working capital			79,785			44,303
Net changes in non-cash working capital items	23		(7,899	)		(1,523	)
Cash received from deferred revenue	11		-			4,904
Decomissioning liabilities settled	12		(1,423	)		(468	)
Income taxes paid			(15,994	)		(3,576	)
Cash generated from operating activities			54,469			43,640
Cash flows from investing activities
Capital expenditures			(51,607	)		(25,352	)
Cash used in investing activities			(51,607	)		(25,352	)
Cash flows from (used in) financing activities
Proceeds from issuance of notes payable	10		14,750			3,750
Proceeds from issuance of loans and credit facilities	10		15,000			20,000
Repayment of loans and credit facilities	10		(44,516	)		(20,545	)
Loans interest paid	10		(2,953	)		(3,674	)
Dividends paid to non-controlling interest			(3,372	)		(495	)
Cash from (used in) financing activities			(21,091	)		(964	)
Effect of foreign exchange rate changes on cash and cash equivalents			(38	)		(281	)
Increase (decrease) in cash and cash equivalents			(18,267	)		17,043
Cash and cash equivalents, beginning of year			42,145			25,102
Cash and cash equivalents, end of year			23,878			42,145
Supplemental cash flow information	23

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, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

1 Description of business and nature of operations

Sierra Metals Inc. (“Sierra Metals” or the “Company”) was incorporated under the Canada Business Corporations Act on April 11, 1996, and is a Canadian and Peruvian listed mining company focused on the production, exploration and development of precious and base metals in Peru and Mexico. The Company’s key priorities are to generate strong cash flows and to maximize shareholder value.

The Company’s shares are listed on the TSX, NYSE American Exchange, and the Bolsa de Valores de Lima (“BVL”) and its registered office is 79 Wellington St W, Suite 2100, Toronto, Ontario, M5K 1H1, 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 20, 2018.

(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.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

The principal subsidiaries of the Company and their geographical locations as at December 31, 2017 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
Exploraciones Mineras Dia Bras, S. A. de C. V.		100	%	México
EXMIN, S. A. de C. V.		100	%	México

¹The Company, through its wholly owned subsidiary Dia Bras Peru, holds an 81.84% interest in Corona, which represents 92.33% of the voting shares. The Company consolidates Corona's financial results and records a non-controlling interest for the 18.16% that it does not own.

(c) Foreign currency translation

(i) Functional currency

Items included in the financial statements of each of the Company’s subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).

The functional currency of Sierra Metals Inc., the parent entity, is the Canadian dollar (“C$”). The functional currency of the Mexican and Peruvian subsidiaries is the United States dollar.

(ii) Presentation currency

The financial statements of entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities – at the closing rate at the date of the statement of financial position, income and expenses – at the average rate of the period (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting differences are recognized in other comprehensive income as cumulative translation adjustments.

(iii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the consolidated statement of loss.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

(d) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less.

(e) Financial Instruments

(i) Initial measurement

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument.

(ii) Classification and subsequent measurement

Subsequent measurement of financial assets and liabilities depends on the classification of such as assets and liabilities:

· Classified at Fair Value Through Profit or Loss (“FVTPL”):A financial asset or liability is measured at fair value with changes in fair values recognized in the consolidated statement of income (loss) in the period in which they arise. A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term. Transaction costs directly attributable to financial assets and liabilities classified as at FVTPL are expensed in the period in which they are incurred. Generally, the Company does not acquire financial assets for the purpose of selling in the short term. Derivatives are also included in this category unless they are designated as hedges. When the Company enters into derivative contracts these are designed to reduce the Company’s risk exposure related to assets, liabilities or anticipated transactions.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to their host contracts. Commodity-based embedded derivatives resulting from provisional sales prices of metals in concentrate are recognised in revenue as described in note 2(l).

· Loans and receivables:Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest rate method less any provision for impairment.

The effective interest rate method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating the interest income or interest expense over the term of the financial asset or financial liability, respectively. The interest rate used in the calculation, is the rate that exactly discounts estimated future cash receipts or payments throughout the term of the financial instrument to the net carrying amount of the financial asset or liability.

· Other financial liabilities:other financial liabilities are initially measured at fair value net of transaction costs incurred and are subsequently stated at amortised cost using the effective interest rate method.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

(iii) Impairment of financial assets

At each reporting date, the Company assesses whether there is objective evidence that a financial asset (other than a financial asset classified as FVTPL) is impaired. A financial asset is impaired and impairment losses are recognized when there is objective evidence of impairment as a result of one or more events that have occurred after initial recognition of the asset and these have a negative impact on the estimated future cash flows of the financial asset, which can be reliably estimated. An impairment loss is recognized in net income (loss) for the period measured as the difference between the financial assets’ carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s effective interest rate at initial recognition.

Impairment losses on financial assets carried at amortized cost can be reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

(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. 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.

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.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

(h) Exploration and evaluation expenditure

Exploration and evaluation expenditure comprises 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 and these costs are expensed in the period incurred. Evaluation expenditures are costs incurred in determining the technical feasibility and commercial viability of a mineral resource. Evaluation expenditures are capitalized when there is a high degree of confidence in the project’s viability and thus it is probable that future economic benefits will flow to the Company. Any items of property, plant and equipment used for exploration and evaluation are capitalised within property, plant and equipment. Capitalized 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:

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

Useful lives	Years
Vehicles, furniture and other assets	3 to 10
Machinery and equipment	5 to 20
Bulidings and other constructions	5 to 50

Mineral properties are depleted over the life of the mine using the units of production method. In applying the units of production method, depletion is normally calculated using the quantity of material to be extracted in current and future periods based on proven and probable reserves or measured and indicated resources. Such non-reserve material may be included in depletion calculations in limited circumstances and where there is a high degree of confidence in its economic extraction.

The Company conducts an annual review of residual values, useful lives, depletion and depreciation methods used for property, plant and equipment. Changes to estimated residual values or useful lives are accounted for prospectively.

(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.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

(l) Revenue recognition

Revenue from the sale of concentrates is recognized when the significant risks and rewards of ownership have been transferred to the customer; the sales price and costs can be measured reliably,

the Company has no significant continuing involvement and it is probable that the economic benefits will flow to the Company. The risks and rewards of ownership are transferred when title and insurance risk have passed to the customer and the concentrate has been delivered to a contractually agreed location.

Revenue from the sale of concentrate is recorded net of charges for shipping, refining and smelting. Revenue from the sale of material by-products is included within revenue.

Revenues from metal concentrates are provisionally priced based upon provisional assays and quoted metal prices. Revenues are recorded at the time title passes to the buyer. The Company records adjustments to revenues at each reporting period based on the quoted forward prices for the expected settlement period. Accordingly, the value of the concentrate receivable changes as the underlying commodity prices change. This pricing mechanism gives rise to an embedded derivative in accounts receivable that is recognized at fair value with changes in value recorded in revenue. Adjustments for weights and assays are recorded when results are determinable or on final settlement.

(m) Deferred revenue

The Company recognizes deferred revenue on the statement of financial position when it has received cash in return for an obligation to deliver concentrate in a future reporting period. As product is delivered under such an agreement, the deferred revenue balance is reduced as revenue is recognized on the statement of income.

(n) Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issuance of the shares are recognized as a deduction from equity.

(o) Share-based payments

The fair value of the estimated number of stock options and restricted share units (“RSUs”) awarded to employees, officers and directors that will eventually vest, determined as of the date of grant, is recognized as share-based compensation expense over the vesting period of the stock options and RSUs, with a corresponding increase to equity. The fair value of each tranche is determined using the Black-Scholes option pricing model with market related inputs as of the date of grant. The fair value of RSUs is the market value of the underlying shares as of the date of grant. The number of awards expected to vest is reviewed at least annually, with any change in the estimate recognized immediately in share-based payments expense with a corresponding adjustment to equity.

(p) Share repurchases

The Company deducts from contributed surplus any excess of consideration paid over book value where the Company has repurchased any of its own common shares. Book value is calculated as the weighted average price of the shares issued and outstanding prior to the cancellation date.

15 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

(q) Earnings (loss) per share

Basic earnings (loss) per share (“EPS”) is calculated by dividing the net income (loss) for the period attributable to the shareholders of the Company by the weighted average number of common shares outstanding during the period.

Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method. The Company’s potentially dilutive common shares comprise stock options granted to employees. In periods of loss, basic and diluted EPS are the same, as the effect of dilutive instruments is anti-dilutive.

(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.

(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 out flows.

16 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

2 Significant accounting policies(continued)

The initial decommissioning and restoration provision together with other movements resulting from changes in estimated cash flows or the credit adjusted risk free rates is capitalized within property, plant and equipment and amortized over the life of the asset to which it relates except where it relates to a closed mine where the expenses are recognized in the statement of loss. Provision is made for the estimated present value of costs of environmental clean-up obligations outstanding as at the date of the statement of financial position, and these costs are charged to the income statement as an operating cost.

The amortization or unwinding of the discount applied in establishing the net present value of provision is accreted to the income statement in each accounting period with each interest charge included as a financing cost rather than as an operating cost.

3 Significant accounting estimates and judgments

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

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

(a) Impairment review of asset carrying values

In accordance with the Company’s accounting policy (note 2(j)), at every reporting period, the Company assesses whether there are any indicators that the carrying value of its assets or Cash Generating Units (“CGUs”) may be impaired, which is a significant management judgment. Where there is an indication that the carrying amount of an asset may not be recoverable, the Company prepares a formal estimate of the recoverable amount by analyzing discounted cash flows. The resulting valuations are particularly sensitive to changes in estimates such as long term commodity prices, exchange rates, sales volume, operating costs, and discount rates. In the event of impairment, if there is a subsequent adverse change in any of the assumptions or estimates used in the discounted cash flow model, this could result in a further impairment of the asset. Also, in accordance with the Company’s accounting policy (note 2(h)), the Company capitalizes evaluation expenditures when there is a high degree of confidence that these costs are recoverable and have a probable future benefit. As at December 31, 2017 the Company assessed the carrying value of its long-lived assets and exploration and evaluation expenditures and determined that no impairment was required.

17 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

3 Significant accounting estimates and judgments(continued)

(b) Mineral reserves and resources

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

(c) Deferred tax assets and liabilities

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

(d) Decommissioning and restoration liabilities costs

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

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

18 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

(e) Functional currency

The functional currency for each of the Company’s subsidiaries is the currency of the primary economic environment in which the entity operates. The Company has determined that the functional currency of each entity is the U.S. dollar. Determination of functional currency may involve certain judgements to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions which determined the primary economic environment.

4 Adoption of new accounting standards and future accounting changes

Future accounting changes

The following standards and amendments to existing standards have been published and are mandatory for annual periods beginning January 1, 2018, or later periods:

IFRS 9, Financial Instruments: Recognition and measurement (“IFRS 9”)

The IASB issued its completed version of IFRS 9, Financial Instruments (“IFRS 9”) in July 2014. The completed standard provides revised guidance on the recognition and measurement of financial assets and liabilities. It also introduces a new expected credit loss model for calculating impairment for financial assets and liabilities. The new hedging guidance that was issued in November 2013 is incorporated into this new final standard.

This final version of IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company is currently evaluating the extent of the impact of the adoption of this standard and does not foresee a material impact upon adopting this standard.

IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

IFRS 15, was issued in May 2014, which covers principles for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the extent of the impact of the adoption of this standard and does not foresee a material impact upon adopting this standard.

IFRS 16, Leases (“IFRS 16”)

In January 2016, the IASB issued this standard which is effective for periods beginning on or after January 1, 2019, which replaces the current guidance in IAS 17,Leases, and is to be applied either retrospectively or a modified retrospective approach. Early adoption is permitted, but only in conjunction with IFRS 15,Revenue from Contracts with Customers. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflective of future lease payments and a “right-of-use asset” for virtually all lease contracts. The Company has not yet determined the effect of adoption of IFRS 16 on its consolidated financial statements.

Adoption of new accounting standards

Amendments to IAS 7, Statements of Cash Flows (“IAS 7”)

The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. The amendments apply prospectively for annual periods beginning on or after January 1, 2017, with earlier application permitted. The Company has determined that there is no impact from adopting the amendments to IAS 7 on its consolidated financial statements.

19 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

5 Trade and other receivables

	December 31,		December 31,
	2017		2016
	$		$
Trade receivables		20,613		12,840
Sales tax receivables		7,210		4,617
Other receivables		53		397
		27,876		17,854

6 Inventories

	December 31,		December 31,
	2017		2016
	$		$
Stockpiles		1,554		1,585
Concentrates		3,839		6,647
Supplies and spare parts		15,406		13,077
		20,799		21,309

Cost of sales are comprised of production costs of sales and depletion, depreciation and amortization, and represent the cost of inventories recognized as an expense for the years ended December 31, 2017 and 2016 of $159,154 and $126,400, respectively. Supplies and spare parts inventory as at December 31, 2017 is stated net of a provision of $1,663 (2016 - $1,384) to write inventories down due to obsolescence. Supplies and spare parts inventory held at NRV at December 31, 2017 was $9,045 (2016 - $6,561). During the year ended December 31, 2017, the Company wrote down stockpile and concentrate inventory to its NRV, recording a charge of $2,106 (2016 - $1,365). Stockpile and concentrate inventory held at NRV as at December 31, 2017 was $794 (2016 - $375).

20 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

7 Property, plant and equipment

Cost	Plant and equipment			Mining properties		Assets under construction			Exploration and evaluation expenditure			Total $
Balance as of January 1, 2016		192,566			418,334		23,873			38,911			673,684
Additions		4,130			6,490		8,649			6,600			25,869
Disposals		(325	)		-		-			-			(325	)
Foreign exchange revaluation		-			-		-			(158	)		(158	)
Transfers		6,316			379		(6,316	)		(379	)		-
Balance as of December 31, 2016		202,687			425,203		26,206			44,974			699,070
Additions		8,632			6,959		20,595			15,758			51,944
Disposals		(1,038	)		-		-			(9,417	)		(10,455	)
Transfers		12,948			-		(12,948	)		-			-
Balance as of December 31, 2017		223,229			432,162		33,853			51,315			740,559
Balance as of January 1, 2016		106,436			252,381		-			13,041			371,858
Depletion, depreciation and amortization		15,818			29,616		-			-			45,434
Disposals		(50	)		-		-			-			(50	)
Balance as of December 31, 2016		122,204			281,997		-			13,041			417,242
Depletion, depreciation and amortization		20,799			37,176		-			-			57,975
Disposals		(898	)		-		-			-			(898	)
Balance as of December 31, 2017		142,105			319,173		-			13,041			474,319
Net Book Value - December 31, 2017		81,124			112,989		33,853			38,274			266,240
Net Book Value - December 31, 2016		80,483			143,206		26,206			31,933			281,828
Net Book Value - December 31, 2015		86,130			165,953		23,873			25,870			301,826

For the year ended December 31, 2017, depletion and depreciation expense of $57,975 (2016: $45,434) has been charged to depletion, depreciation and amortization in property, plant, and equipment. Additionally, depletion and depreciation expense of $1,133 (2016: $1,159) has been capitalized to inventory.

During the year ended December 31, 2017, the Company has capitalized borrowing costs amounting to $349 (2016 – $491) on qualifying assets. Borrowing costs were capitalized at the weighted average rate of 5.25%.

21 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

8 Accounts payable and accrued liabilities

	December 31,		December 31,
	2017		2016
	$		$
Trade payables		19,004		18,428
Other payables and accrued liabilities		13,315		11,400
		32,319		29,828

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

	2017			2016
	$			$
Current Tax Expense
Current income tax		23,416			9,629
		23,416			9,629
Deferred Tax Recovery
Deferred Tax Recovery		(13,068	)		(3,872	)
		(13,068	)		(3,872	)
Total tax expense		10,348			5,757

22 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

9 Current and deferred income tax liability(Continued)

(b) Tax rate reconciliation

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

	2017			2016
	$			$
Income (loss) before income taxes		9,488			(6,964	)
Expected Tax Rate @ 26.50% (2016 - 26.00%)		2,555			(1,780	)
Effect of tax rate differences		(512	)		2,365
Stock based compensation costs		258			195
Other Non-deductible expenses		449			(8,531	)
Unrealized foreign exchange income		148			42
Inflation Adjustment for Mexico tax purposes		(420	)		(214	)
Change in benefit of other temporary differences not recognized		2,280			8,273
Foreign exchange and other		(807	)		2,506
Mining royalties and other		6,397			2,901
		10,348			5,757

(c) Deferred tax asset and liability

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

	2017			2016
	$			$
Non-capital and capital losses		35,512			25,777
Property, plant and equipment		60			38
Mineral properties		2,445			9,889
Other		(385	)		(87	)
		37,632			35,617

The significant components and movements of the Company’s net deferred tax assets and liabilities are as follows:

	Balance						Balance						Balance
	January 1, 2016			Change in 2016			December 31, 2016			Change in 2017			December 31, 2017
	$			$			$			$			$
Inventory		390			66			456			98			554
Other items		(364	)		243			(121	)		26			(95	)
Provisions		672			257			929			293			1,222
Decommissioning liabilities		3,714			380			4,094			(166	)		3,928
Non-capital losses		9,910			(3,235	)		6,675			1,373			8,048
Property, Plant, and equipment		(4,583	)		648			(3,935	)		2,138			(1,797	)
Mining assets		(53,926	)		3,624			(50,302	)		8,261			(42,041	)
Inventory		(3,287	)		348			(2,939	)		922			(2,017	)
Other items		1,832			(791	)		1,041			589			1,630
Deferred revenue		-			1,471			1,471			(1,471	)		-
Provisions		(1,498	)		(32	)		(1,530	)		974			(556	)
Mining royalties		1,003			(125	)		878			363			1,241
		(46,137	)		2,854			(43,283	)		13,400			(29,883	)

23 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

9 Current and deferred income tax liability(continued)

(d) Tax losses

In Canada, the Company has aggregate tax losses not recognized of $27,153 (December 31, 2016 – $26,051) expiring in periods from 2025 to 2036. Deferred tax assets have not been recognized in respect of these losses because it is not probable that future taxable profit will be available against which the company can utilise the benefits there from.

Also, the Company has $8,578 of capital losses that are without expiry as at December 31, 2017 (December 31, 2016 - $8,578).

(e) Unrecognized deferred tax liabilities

As at December 31, 2017, the Company has taxable temporary difference of $16,315 (2016 - $13,477) 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

	December 31,		December 31,
	2017		2016
	$		$
Current
Acquisition loan with Banco de Credito del Peru (a)		6,141		5,784
Operating loan with Banco de Credito del Peru (b)		6,309		6,211
Revolving credit facility with Banco de Credito del Peru (c)		15,000		-
Notes payable to Scotiabank and Interbank in Peru (d)		-		14,750
Other credit facilities (e)		-		1,179
Loan with FIFOMI (f)		1,527		1,454
		28,977		29,378
Non-current
Acquisition loan with Banco de Credito del Peru (a)		34,236		40,036
Operating loan with Banco de Credito del Peru (b)		-		6,238
Loan with FIFOMI (f)		1,647		3,030
		35,883		49,304
Total loans payable		64,860		78,682

24 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

10 Loans payable(continued)

(a) Corona Acquisition Loan with Banco de Credito del Peru S.A. (“BCP”)

On May 24, 2011, the Company’s wholly owned subsidiary Dia Bras Peru entered into a loan agreement with BCP amounting to $150,000. After deducting financing costs of $3,750, the net proceeds were $146,250. The proceeds from this loan were used to fund a portion of the purchase consideration for the acquisition of the Company’s 81.84% interest in Corona in Peru. The loan was repayable over 5 years ending on May 24, 2016 and carried interest at a rate of LIBOR plus 4.5% per annum, payable quarterly in arrears.

On August 7, 2015, Dia Bras Peru signed an amended agreement with BCP for the then outstanding debt balance of $48,000. The most significant amendments to the agreement were:

· The remaining $48M due on the facility was split into 2 tranches

· Tranche 1, in the amount of $24M has quarterly principal repayments of $1.5M beginning in November 2016 and ending in August 2020

· Tranche 2, in the amount of $24M has no quarterly principal repayments and to be repaid in full in August 2020

· One year principal repayment grace period

· Reduced Interest rate equal to 3.65% plus 3M LIBOR vs previous rate of 4.15% plus 3M LIBOR

· Term of the Facility extended for 5 Years

These amendments did not trigger the de-recognition rules under IAS 39 - Financial Instruments.

Principal repayments totalling $6,000 have been made for the year ended December 31, 2017 (2016 - $1,500).

The loan is recorded at amortized cost and is being accreted to face value over 5 years using an effective interest rate of 4.71%. An amortization expense related to the transaction costs for $217 has been recorded for the year ended December 31, 2017 (2016 - $300). Interest payments totalling $2,141 have been made for the year ended December 31, 2017 (2016 - $2,084).

The loan with BCP is secured by a pledge over Dia Bras Peru’s interest in Corona voting shares and is guaranteed by the Company. The Company is in compliance with all financial covenants as at December 31, 2017.

(b) Corona Operating Loan with BCP

On October 17, 2013, the Company’s subsidiary Corona, in which the Company has an interest of 81.84%, entered into a credit facility with BCP for up to $60,000. The credit facility is for a 5 year term and the funds can be drawn within the first 3 years in tranches of up to $40,000 during the first year, up to $30,000 during the second year and up to $20,000 during the third year. The loan bears interest of LIBOR plus 4.5% and the loan principal and interest are payable in quarterly installments over the term of the loan with the first payment due 15 months after the closing of the credit facility. The loan is guaranteed by the collection rights and future cash flows generated from the sale of ore concentrates and other products. The loan contains certain financial covenants, events of default and other provisions which are customary for a transaction of this nature. These covenants include maintaining an equity balance at the Corona level higher than $30 million, maintaining a Debt Service Coverage ratio higher than 1.1x, and maintaining a Net Financial Debt/EBITDA ratio lower than 2.0x.

25 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

10 Loans payable(continued)

The Company is in compliance with all financial covenants as at December 31, 2017.

On June 29, 2016, $5,000 was drawn from this facility bearing an interest rate of three months LIBOR plus 4.5%.

Principal repayments totalling $6,250 have been made for the year ended December 31, 2017 (2016 – $3,750). Interest payments totalling $827 have been made for the year ended December 31, 2017 (2016 – $716).

(c) DBP Credit Facility with BCP

On August 9, 2017, the Company’s subsidiary DBP, entered into a credit facility with BCP for up to $15,000. The credit facility is for a 1 year term and is being used to fund short term working capital requirements. On August 9, 2017, the Company drew $8,000 from this facility at an interest rate of LIBOR plus 0.95%. On August 31, 2017, the Company drew the remaining $7,000 from this facility at an interest rate of LIBOR plus 1.05%. The credit facility will be repaid in full on the anniversary date of August 9^th, while interest payments must be made quarterly. The credit facility is guaranteed by the common shares of DBP’s subsidiary Sociedad Minera Corona.

(d) Corona Notes payable with Scotiabank and Interbank Peru

In order to fund its short term working capital needs, Corona repaid and drew down the following notes payable:

· On May 6, 2016 a $15,000 revolving credit facility with Scotiabank was obtained. The credit facility bears an interest rate of three month LIBOR plus 1.90%. During the year ended December 31, 2017, $11,000 was drawn and subsequently repaid from this facility.

· On February 8, 2017, $3,750 was drawn from a revolving credit facility from Interbank Peru, bearing interest of three month LIBOR plus 1.90%, which matured on August 7, 2017.

During the year ended December 31, 2017 the Company repaid all of the notes payable amounts previously outstanding from the Scotiabank and Interbank facilities.

(e) Other credit facilities

· Pre-Export Finance Facility (“the Pre-Export Finance Facility”):On March 2, 2016, Dia Bras Mexicana (“DBM”) entered into a $4,000 Pre-Export Finance Facility with METAGRI S.A de C.V (“METAGRI”), to whom DBM sells all of its lead concentrate. The $4,000 facility was drawn down on March 2, 2016 and bore interest of 5.0% plus 1 year LIBOR.

Repayment took place against deliveries of lead concentrate for the period of April 2016 up to and including June 2017. METAGRI deducted seven hundred dollars per dry metric ton of material from the purchase price payable to DBM in the provisional payment for each dry metric ton of the material delivered to METAGRI under the sales contract, subject to a minimum monthly deduction of two hundred and seventy thousand dollars (“the minimum monthly deduction”) plus the accrued interest. If DBM failed to deliver the material during any month from April 2016 until and including June 2017, and/or the value of the material during any month is lower than the minimum monthly deduction plus the accrued interest, DBM would have repaid METAGRI the short-fall within two business days after METAGRI’s written notice.

26 |Page

Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

10 Loans payable(continued)

The deductions were made until such time as the Pre-Export Finance Facility had been fully amortized and the interest had been fully serviced. DBM had agreed that METAGRI could set-off any final payment deferred under the sales contract against any outstanding Pre-Export Finance Facility or interest to ensure full amortization of the principal and service the interest.

During the year ended December 31, 2017, DBM made repayments totaling $1,178 (2016 - $2,822).

(f) FIFOMI loan

· During January 2015, the Company’s Mexican Subsidiary, Dia Bras Mexicana S.A. de C.V, received a loan of MXP$120 million from Nacional Financiera, Sociedad Fiduciaria del Fideicomiso de Fomento Minero (“FIFOMI”) to be used for working capital purposes and capital expenditures, specifically the expansion of the Piedras Verdes Plant.

On February 2, 2015, DBM drew MXP$120 million (US$7,995). After deducting transaction costs of US$124, net proceeds were US$7,871.

Monthly principal repayments have taken place over four years beginning in January 2016 at an interest rate of TIIE + 3%. Interest payments began in February 2015 and during the year ended December 31, 2017, DBM has made interest payments of $366 (MXP$6,918) (2016 – $357 (MXP$6,659)). Principal payments of $1,588 (MXP$30,000) (2016 - $1,473 (MXP$27,500) have been made during the year ended December 31, 2017.

11 Deferred revenue

During December 2016 the Company received a payment of $4,904 for copper concentrate stockpiled at the Piedras Verdes Plant which was awaiting a new filter in order to further process and dry the concentrate. The Company entered into an agreement with their customer, Trafigura Mexico S.A. de C.V. (“Trafigura”) who agreed to pay for the concentrate in advance with certain stipulations. The Company had to pay interest to Trafigura on the advance payment at the LIBOR 3-month rate plus 3% from the date the advance payment was made to the date when the first provisional payment for the product was otherwise due. The 4,100 DMT of copper concentrate stockpiled had to be delivered according to the following schedule: 705 DMT during January 2017, 1,200 DMT during February 2017, 1,200 DMT during March 2017 and 950 DMT during April 2017. Since the copper concentrate inventory was not shipped to Trafigura during 2016, and the advance payment was received during 2016, as per the terms of the agreement and holding certificate granted, the payment was recorded as deferred revenue. The amount has been subsequently drawn down as the concentrate was shipped to Trafigura, which resulted in revenues being recognized in the first four months of 2017. Interest was accrued according with the terms of the agreement and was paid in full during the first four months of 2017.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

12 Decommissioning liability

	December 31,			December 31,
	2017			2016
	$			$
Balance, beginning of period		13,852			13,977
Liabilities settled during the period		(1,424	)		(468	)
Interest cost		843			343
Revisions and new estimated cash flows		-			-
Balance, end of period		13,271			13,852
Less: current portion		(1,372	)		(1,910	)
Long-term decommissioning liability		11,899			11,942

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 2017 and 2016, the decommissioning liability was calculated based on the following key assumptions:

	2017				2016
	Mexico		Peru		Mexico		Peru
Estimated undiscounted cash flows ($)		1,021		15,203		1,021		16,206
Discount rate (%)		6.0		4.5		6.0		4.5
Settlement period  (years)		6		5-10		6		5-10

13 Other liabilities

	December 31,		December 31,
	2017		2016
	$		$
Current
Profit-sharing and other employee related obligations (a)		8,579		4,509
Non-current
Other employee related obligations		1,113		1,149

(a) Profit sharing and other employee related obligations

As at December 31, 2017, there is a provision amounting to $5,487 for employee profit sharing in Peru and $3,092 for wages, salaries and other employee benefits outstanding (December 31, 2016 - $2,356 and $2,153, respectively).

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

14 Share capital and share-based payments

(a) Authorized capital

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

(b) Stock options

The changes in stock options outstanding during the years ended December 31, 2017 and December 31, 2016 was as follows:

	December 31,				December 31,
	2017				2016
			Weighted					Weighted
			average					average
	Number		exercise		Number			exercise
	of options		price C$		of options			price C$
Outstanding, beginning of period		-		-		7,116			3.40
Granted		-		-		-			-
Exercised		-		-		-			-
Forfeited		-		-		-			-
Expired		-		-		(7,116	)		3.40
Outstanding, end of period		-		-		-			-
Exercisable, end of period		-		-		-			-

There were no stock options outstanding or exercisable as at December 31, 2017.

(c) Restricted share units (“RSUs”)

The changes in RSU’s issued during the years ended December 31, 2017 and 2016 was as follows:

	December 31,			December 31,
	2017			2016
Outstanding, beginning of period		1,771,877			874,788
Granted		1,126,254			1,278,753
Exercised		(739,471	)		(327,053	)
Forfeited		(842,346	)		(54,611	)
Outstanding, end of period		1,316,314			1,771,877

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

14 Share capital and share-based payments(continued)

On June 29, 2012, the Company’s shareholders approved the RSU plan, whereby RSUs may be granted to directors, officers, consultants or employees at the discretion of the Board of Directors. The RSU plan provides for the issuance of common shares from treasury upon the exercise of vested RSUs at no additional consideration. There is no cash settlement related to the vesting of RSU’s as they are all settled with equity. The current maximum number of common shares authorized for issue under the RSU plan is 8,000,000. The RSUs have vesting conditions determined by the Board of Directors.

During the year ended December 31, 2017, the Company granted one tranche of RSU’s totalling 1,126,254 which had a fair value of C$3.67 based on the closing share price at grant date. RSUs exercised during the year ended December 31, 2017 had a weighted average fair value of C$3.49 and the RSUs expired had a weighted average fair value of C$2.43 (2016 – C$1.51 and C$1.52, respectively). As at December 31, 2017, the weighted average fair value of the RSUs outstanding is C$2.45 (2016 – C$1.16).

The total RSU expense recognized during the year ended December 31, 2017 was $1,198 with a corresponding credit to other reserves (2016 - $819).

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

15 Non-controlling interest

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

Summarized balance sheet
	December 31,			December 31,
	2017			2016
	$			$
Current
Assets		67,867			62,731
Liabilities		(39,466	)		(42,147	)
Total current net assets		28,401			20,584
Non-current
Assets		155,259			180,196
Liabilities		(39,404	)		(58,801	)
Total non-current net assets		115,855			121,395
Net assets		144,256			141,979

Summarized income statement
	For the year ended December 31,
	2017			2016
	$			$
Revenue		154,153			97,290
Income before income tax		30,855			1,400
Income tax expense		(10,014	)		(3,913	)
Total income (loss)		20,841			(2,513	)
Total income (loss) attributable to non-controlling interests		3,785			(456	)
Dividends paid to non-controlling interests		3,372			495

Summarized cash flows
	For the year ended December 31,
	2017			2016
	$			$
Cash flows from operating activities
Cash generated from operating activities		76,269			34,902
Net changes in non cash working capital items		(3,968	)		(5,885	)
Decomissioning liabilities settled		(1,423	)		(331	)
Income taxes paid		(15,994	)		(3,562	)
Net cash generated from operating activities		54,884			25,124
Net cash used in investing activities		(18,740	)		(11,587	)
Net cash from (used in) financing activities		(53,126	)		1,516
Effect of foreign exchange rate changes on cash and cash equivalents		13			4
Increase (decrease) in cash and cash equivalents		(16,969	)		15,057
Cash and cash equivalents, beginning of year		36,877			21,820
Cash and cash equivalents, end of period		19,908			36,877

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

16 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 year ended December 31, 2017 and 2016 relate to the Yauricocha, Bolivar and Cusi Mines.

(a) Mining costs

	2017		2016
	$		$
Employee compensation and benefits		23,046		17,857
Third party and contractors costs		43,041		36,473
Depreciation		58,175		44,568
Consumables		27,659		25,999
Changes in inventory and other		7,233		1,503
		159,154		126,400

(b) General and administrative expenses

	2017		2016
	$		$
Salaries and benefits		6,405		6,851
Consulting and professional fees		6,583		3,043
Other		1,581		368
Office expenses		1,604		1,384
Marketing and communication expenses		925		478
Share-based compensation expense		1,162		807
Listing and filing fees		390		199
Director expenses		1,168		1,446
Travelling expense		521		293
		20,339		14,869

17 Other income (expenses)

	2017		2016
	$		$
Gain on sale of supplies and fixed assets		58		59
Interest income		36		89
Reversal of legal accrual		-		704
Miscellaneous income (expenses)		724		722
		818		1,574

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

18 Interest expense and other finance costs

	2017		2016
	$		$
Interest expense on BCP loan		2,370		2,084
Interest expense on other liabilities		4		920
Amortization of loan transaction costs		46		329
Interest cost on decommissioning liability		843		343
		3,263		3,676

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

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

19 Segment reporting(continued)

The following is a summary of the reported amounts of net income (loss) and the carrying amounts of assets and liabilities by operating segment:

	Peru			Mexico						Canada
	Yauricocha Mine			Bolivar Mine			Mexico			Corporate			Total
Year ended December 31, 2017	$			$			Cusi Mine			$			$
Revenue		154,153			44,949			6,016			-			205,118
Production cost of sales		(67,542	)		(27,418	)		(6,019	)		-			(100,979	)
Depletion of mineral property		(31,448	)		(3,163	)		(690	)		-			(35,301	)
Depreciation and amortization of property, plant and equipment		(12,783	)		(8,275	)		(1,816	)		-			(22,874	)
Cost of sales		(111,773	)		(38,856	)		(8,525	)		-			(159,154	)
Gross profit (loss) from mining operations		42,380			6,093			(2,509	)		-			45,964
Income (loss) from operations		29,428			(1,328	)		(3,818	)		(6,200	)		18,082
Loss on spin out of Plexmar net assets		-			-			-			(4,412	)		(4,412	)
Interest expense and other finance costs		(2,801	)		-			(462	)		-			(3,263	)
Other income (expense)		1,156			(910	)		(153	)		725			818
Foreign currency exchange loss		222			(723	)		(128	)		(1,108	)		(1,737	)
Income (loss) before income tax		28,005			(2,961	)		(4,561	)		(10,995	)		9,488
Income tax expense		(10,047	)		(269	)		(32	)		-			(10,348	)
Net income (loss) from operations		17,958			(3,230	)		(4,593	)		(10,995	)		(860	)

December 31, 2017	Peru		Mexico		Canada
Total assets		205,233		132,826		2,542	340,601
Non-current assets		155,401		111,212		85	266,698
Total liabilities		134,323		24,086		1,514	159,923

	Peru			Mexico						Canada
	Yauricocha Mine			Bolivar Mine			Mexico			Corporate			Total
Year ended December 31, 2016	$			$			Cusi Mine			$			$
Revenue		97,290			33,267			12,623			-			143,180
Production cost of sales		(53,705	)		(23,064	)		(5,063	)		-			(81,832	)
Depletion of mineral property		(24,384	)		(3,426	)		(752	)		-			(28,562	)
Depreciation and amortization of property, plant and equipment		(7,812	)		(6,719	)		(1,475	)		-			(16,006	)
Cost of sales		(85,901	)		(33,209	)		(7,290	)		-			(126,400	)
Gross profit from mining operations		11,389			58			5,333			-			16,780
Income (loss) from operations		1,149			(7,125	)		3,757			(3,938	)		(6,157	)
Interest expense and other finance costs		(3,093	)		(335	)		(583	)		335			(3,676	)
Other income		919			540			119			(4	)		1,574
Foreign currency exchange gain (loss)		(312	)		1,578			346			(317	)		1,295
Income (loss) before income tax		(1,337	)		(5,342	)		3,639			(3,924	)		(6,964	)
Income tax (expense) recovery		(3,913	)		(1,511	)		(333	)		-			(5,757	)
Net income (loss) from operations		(5,250	)		(6,853	)		3,306			(3,924	)		(12,721	)

December 31, 2016	Peru		Mexico		Canada
Total assets		238,181		117,402		9,229	364,812
Non-current assets		180,260		97,329		8,341	285,930
Total liabilities		142,981		33,170		2,699	178,850

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

19 Segment reporting(continued)

For the year ended December 31, 2017, 75% of the revenues ($154,153) were from two customers based in Peru and the remaining 25% of the revenues ($50,965) were from two customers based in Mexico. In Peru, the two customers accounted for 73% and 27% of the revenues. In Mexico, the two customers accounted for 88% and 12% of the revenues.

For the year ended December 31, 2016, 68% of the revenues ($97,290) were from two customers based in Peru and the remaining 32% of the revenues ($45,890) were from two customers based in Mexico. In Peru, the two customers accounted for 65% and 35% of the revenues. In Mexico, the two customers accounted for 73% and 27% of the revenues.

As at December 31, 2017, the trade receivable balance of $20,613 includes amounts outstanding of $4,616 and $15,997 from two customers in Mexico and two customers in Peru, respectively.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

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

	Loans and receivables		FVTPL		Available for  sale		Other financial liabilities		Total
At December 31, 2017	$		$		$		$		$
Financial assets
Cash and cash equivalents		23,878		-		-		-		23,878
Trade receivables(1)		20,613		-		-		-		20,613
Total Financial assets		44,491		-		-		-		44,491
Financial liabilities
Accounts payable		-		-		-		19,004		19,004
Loans payable		-		-		-		64,860		64,860
Total Financial liabilities		-		-		-		83,864		83,864

	Loans and receivables		FVTPL		Available for sale		Other financial liabilities		Total
At December 31, 2016	$		$		$		$		$
Financial assets
Cash and cash equivalents		42,145		-		-		-		42,145
Trade receivables(1)		12,840		-		-		-		12,840
Total Financial assets		54,985		-		-		-		54,985
Financial liabilities
Accounts payable		-		-		-		18,428		18,428
Loans payable		-		-		-		78,682		78,682
Total Financial liabilities		-		-		-		97,110		97,110

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

(b) Fair value of financial instruments

As at December 31, 2017 and 2016, 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)

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

20 Financial instruments and financial risk management(continued)

The Company’s metal concentrate sales are subject to provisional pricing with the selling prices adjusted at the end of the quotational period. The Company’s trade receivables are marked-to-market at each reporting period based on quoted forward prices for which there exists an active commodity market.

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

At December 31, 2017 and 2016, the levels in the fair value hierarchy into which the Company’s financial assets and liabilities are measured and recognized on the Consolidated Statement of Financial Position are categorized as follows:

	December 31, 2017								December 31, 2016
	Level 1		Level 2		Level  3		Total		Level 1		Level 2		Level  3		Total
Recurring measurements	$		$		$		$		$		$		$		$
Trade receivables(1)		-		20,613		-		20,613		-		12,840		-		12,840
		-		20,613		-		20,613		-		12,840		-		12,840

⁽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, 2017 and 2016.

(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.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

20 Financial instruments and financial risk management(continued)

i) Market Risk

(1) Currency risk

Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in foreign exchange rates. The Company and its subsidiaries’ financial instruments are exposed to currency risk where those instruments are denominated in currencies that are not the same as their functional currency; exchange gains and losses in these situations impact net income or loss. The Company’s sales of silver, copper, lead and zinc are denominated in United States dollars and the Company’s costs are incurred in Canadian dollars, United States dollars, Mexican pesos and Peruvian Nuevo Soles. The United States dollar is the functional currency of the Peruvian and Mexican entities. The Canadian dollar is the functional currency of all other entities. The company also holds cash and cash equivalents, trade and other receivables and accounts payable that are subject to currency risk.

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

	December 31, 2017
	CAN dollar			Mexican Peso			Peruvian Nuevo Soles			Total $
Cash and cash equivalents		132			167			634			933
Income tax and other receivables		158			9,618			918			10,694
		290			9,785			1,552			11,627
Accounts payable and other liabilities		(1,461	)		(30,674	)		(21,838	)		(53,973	)
Total		(1,171	)		(20,889	)		(20,286	)		(42,346	)

	December 31, 2016
	CAN dollar			Mexican Peso			Peruvian Nuevo Soles			Total $
Cash and cash equivalents		244			67			1,857			2,168
Income tax and other receivables		411			8,933			457			9,801
		655			9,000			2,314			11,969
Accounts payable and other liabilities		(1,086	)		(24,234	)		(12,539	)		(37,859	)
Total		(431	)		(15,234	)		(10,225	)		(25,890	)

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, 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, 2017, 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, 2017, with all the other variables held constant, would have resulted in an increase to the Company’s net loss of $4,118 (increase in loss in 2016 of $2,500).

A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial assets and liabilities held at December 31, 2017 and 2016, 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, 2017 on its loans and notes payable in Peru was 4.31% (2016 – 4.47%). With all other variables unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $541 (2016 - $635). The interest rate paid by the Company during the year ended December 31, 2017 on its loans payable in Mexico was 5.74% (2016 – 5.83%). With all other variables unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $60 (2016 - $65).

(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, 2017 and 2016, 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:

	2017			2016
Commodity	$			$
10% decrease in silver prices		(27	)		(32	)
10% decrease in copper prices		(456	)		(213	)
10% decrease in lead prices		(1	)		(1	)
10% decrease in gold prices		(87	)		(84	)

As at December 31, 2017 and 2016, 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, 2017 and 2016
(In thousands of United States dollars, 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, 2017 of the Company’s financial liabilities and operating and capital commitments:

	Within 1 year		1-2 years		2-5 years		After 5 years		Total		As at December 31, 2017
	$		$		$		$		$		$
Accounts payable and accrued liabilities		32,319		-		-		-		32,319		32,319
Loans payable		28,770		7,520		28,430		-		64,720		64,860
Interest on loans payable		207		197		250		-		654		777
Other liabilities		8,579		1,113		-		-		9,692		9,692
Total Commitments		69,875		8,830		28,680		-		107,385		107,648

In the opinion of management, the working captial at December 31, 2017, together with future cash flows from operations and available loan facilities, is sufficient to support the Company’s commitments through 2018.

iii) Credit risk

Credit risk is the risk that the counterparty to a financial instrument might fail to discharge its obligations under the terms of a financial contract. Credit risk is primarily associated with trade receivables; however, it also arises on cash and cash equivalents. The Company sells its concentrate to large international organizations. The Company is exposed to significant concentration of credit risk given that all of its revenues from Peru and Mexico were from two customers at each of the locations. At December 31, 2017 the Company has not recorded an allowance against trade receivables because it is confident that all of the balances will be collected in full when due and there have not been any issues collecting balances owed to the Company in the past.

The Company’s policy is to keep its cash and cash equivalents only with highly rated financial institutions and to only invest in government securities. The Company considers the risk of loss associated with cash and cash equivalents to be low. The counterparty to the financial asset is a large international financial institution with strong credit ratings and thus the credit risk is considered to be low.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

20 Financial instruments and financial risk management(continued)

The Company’s maximum exposure to credit risk is as follows:

	December 31,		December 31,
	2017		2016
	$		$
Cash and cash equivalents		23,878		42,145
Trade receivables		20,613		12,840
		44,491		54,985

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,
	2017			2016
	$			$
Equity attributable to owners of the Company		154,571			160,268
Loans payable		64,860			78,682
		219,431			238,950
Less: Cash and cash equivalents		(23,878	)		(42,145	)
		195,553			196,805

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, 2017, 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, 2017, the Company was in compliance with the external capital requirements.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

22 Related party transactions

(a) Related party transactions

During the year ended December 31, 2017, the Company recorded consulting fees of $200 (2016 - $200) to companies related by common directors or officers. At December 31, 2017, accounts payable and accrued liabilities include $Nil (2016 – $Nil) with these related parties. Related party transactions occurred in the normal course of business. As at December 31, 2017, the Company has accounts receivable outstanding from these related parties of $Nil (2016 - $284).

(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, 2017 and 2016 are as follows:

	2017		2016
	$		$
Salaries and other short term employment benefits		2,968		3,847
Share-based payments		2,753		897
Total compensation		5,720		4,744

23 Supplemental cash flow information

Changes in working capital

	2017			2016
	$			$
Trade and other receivables		(10,092	)		(3,134	)
Financial and other assets		(427	)		209
Income tax receivable		61			1,050
Inventories		(1,624	)		(4,874	)
Accounts payable and accrued liabilities		5,116			4,164
Income taxes payable		(339	)		(115	)
Other liabilities		(594	)		1,177
		(7,899	)		(1,523	)

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

24 Contingencies

The Company and its subsidiaries have been named as defendants in certain actions incurred in the normal course of business. In all cases the Company and its subsidiaries will continue to vigorously defend the actions and an accrual has been made in the consolidated financial statements for matters that are probable and can be reasonably estimated.

The contingencies outstanding associated with our Mexican subsidiaries are as follows:

a) In October 2009, Polo y Ron Minerals, S.A. de C.V. (“P&R”) sued the Company and one of its subsidiaries, Dia Bras Mexicana S.A. de C.V. P&R claimed damages for the cancellation of an option agreement (the “Option Agreement”) regarding the San Jose properties in Chihuahua, Mexico (the “San Jose Properties”). The Company believes that it has complied with all of its obligations pertaining to the Option Agreement. In October 2011, the 8th Civil Court of the Judicial District of Morelos in Chihuahua issued a resolution that absolved the Company from the claims brought against it by P&R on the basis that P&R did not provide evidence to support any of its claims. P&R appealed this resolution to the State Court, which overruled the previous resolution and ordered the Company to: (i) transfer to P&R 17 mining concessions from the Company’s Bolivar project, including the mining concessions where both mine operations and mineral reserves estimates are located; and (ii) pay $422,674 to P&R. In February 2013, a Federal Court in the State of Chihuahua granted the Company a temporary suspension of the adverse resolution issued by the State Court of Chihuahua, Mexico. On February 12, 2016 The Second Federal Collegiate Court of Civil and Labor Matters, of the Seventeenth circuit in the State of Chihuahua, ("the Federal Court") issued a new judgment ruling that the State Court lacked jurisdiction to rule on issues concerning mining titles, and that no previous rulings by the State Court against the Company shall stand. They ordered the cancellation of the previous adverse resolution by the state Court. The Company will continue to vigorously defend this claim. Sierra Metals continues to believe that the original claim is without merit.

b) In 2009, a personal action was filed in Mexico against DBM by an individual, Ambrosio Bencomo Muñoz as administrator of the intestate succession of Ambrosio Bencomo Casavantes y Jesus Jose Bencomo Muñoz, claiming the annulment and revocation of the purchase agreement of two mining concessions, Bolívar III and IV between Minera Senda de Plata S.A. de C.V. and Ambrosio Bencomo Casavantes, and with this, the nullity of purchase agreement between DBM and Minera Senda de Plata S.A. de C.V. In June 2011, the Sixth Civil Court of Chihuahua, Mexico, ruled that the claim was unfounded and dismissed the case, the plaintiff appealed to the State Court. The process is in the appealing court. The Company will continue to vigorously defend this action and is confident that the claim is of no merit.

25 Distribution of Cautivo Mining Inc. Shares

On August 8, 2017, the Company announced the completion of the previously announced distribution of Cautivo Mining Inc.’s (“Cautivo”) common shares, issuance of rights pursuant to Cautivo’s rights offering, and listing of the Cautivo Shares and the Rights on the Canadian Securities Exchange (the “CSE”).

The distribution was completed by distributing to holders of Sierra common shares (other than ineligible holders) of record on July 26, 2017 all of the issued and outstanding Cautivo Shares, being 3,253,588 Cautivo Shares, as a return of capital, reducing Sierra’s shareholdings in Cautivo from 100% to nil. The Cautivo Shares were distributed pursuant to a spin-off by Sierra and Sierra did not receive any proceeds from the distribution. Immediately following this distribution, Cautivo issued 11,904,761 Rights pursuant to the Rights Offering, whereby holders of Sierra common shares received 3.6589638 Rights for every Sierra common share held. For every whole Right held, a holder is entitled to subscribe for one Cautivo Share at a price of C$0.84 per share at any time from August 8, 2017 to August 29, 2017.

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Sierra Metals Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2017 and 2016
(In thousands of United States dollars, unless otherwise stated)

25 Distribution of Cautivo Mining Inc. Shares(continued)

Effective August 8, 2017, the Cautivo Shares and the Rights commenced trading on the CSE under the trading symbols “CAI” and “CAI.RT”, respectively.

On July 26, 2017, the company disposed of Plexmar Resources and Cautivo Mining Inc. to the shareholders of the company as a return of capital.

A total of 3,253,588 shares were issued, as well as rights to subscribe for up to 11,904,761 shares at $0.84 per share. As a result of this transaction the Company realized a non-cash loss on distribution of the net assets of Plexmar of $4,412 and a distribution of capital of $2,700 to shareholders relating to the fair value of the assets distributed.

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