EX-4.2



 Exhibit 4.2 
  

SIERRA METALS INC. 

Consolidated Financial Statements 

Years ended December 31, 2016 and 2015 







 March 28, 2017 

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
Chartered Accountants 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. 
  

					
			
	“Mark Brennan”	 		 	“Ed Guimaraes”
	Mark Brennan	 		 	Ed Guimaraes
	President and Chief Executive Officer	 		 	Chief Financial Officer


  
  

2  |  Page 








 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, 2016 and December 31, 2015 and the consolidated statements of income (loss), comprehensive income (loss), changes in equity and cash flows for 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 (IASB), 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, 2016 and December 31, 2015 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the IASB. 

signed “PricewaterhouseCoopers LLP” 

Chartered Professional Accountants, Licensed Public Accountants 

Toronto, Ontario 
 March 28, 2017 

  
  

3  |  Page 









 Sierra Metals Inc. 

Consolidated Statements of Financial Position 

December 31, 2016 and 2015 
 (In thousands of
United States dollars) 
  
  


													
	 	  	 	 	  	December 31, 2016	 	 	December 31, 2015	 
	 	  	Note	 	  	$	 	 	$	 
	 ASSETS
	  				  				 			
				
	 Current assets:
	  				  				 			
	 Cash and cash equivalents
	  				  	 	42,145	 	 	 	25,102	 
	 Trade and other receivables
	  	 	5	 	  	 	17,854	 	 	 	14,720	 
	 Income tax receivable
	  				  	 	281	 	 	 	5,060	 
	 Prepaid expenses
	  				  	 	873	 	 	 	1,082	 
	 Inventories
	  	 	6	 	  	 	21,309	 	 	 	16,435	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	 	82,462	 	 	 	62,399	 
		  				  	  
	  
	 	 	  
	  
	 
	 Non-current assets:
	  				  				 			
	 Property, plant and equipment
	  	 	7	 	  	 	281,828	 	 	 	301,826	 
	 Other assets
	  				  	 	234	 	 	 	234	 
	 Deferred income tax
	  	 	10	 	  	 	288	 	 	 	4,066	 
		  				  	  
	  
	 	 	  
	  
	 
	 Total assets
	  				  	 	364,812	 	 	 	368,525	 
		  				  	  
	  
	 	 	  
	  
	 
				
	 LIABILITIES
	  				  				 			
				
	 Current liabilities:
	  				  				 			
	 Accounts payable and accrued liabilities
	  	 	9	 	  	 	29,828	 	 	 	26,165	 
	 Income taxes payable
	  				  	 	2,357	 	 	 	430	 
	 Deferred revenue
	  	 	12	 	  	 	4,904	 	 	 	—  	 
	 Loans payable
	  	 	11	 	  	 	29,378	 	 	 	17,516	 
	 Decommissioning liability
	  	 	13	 	  	 	1,910	 	 	 	1,879	 
	 Other liabilities
	  				  	 	4,509	 	 	 	2,828	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	 	72,886	 	 	 	48,818	 
		  				  	  
	  
	 	 	  
	  
	 
	 Non-current liabilities:
	  				  				 			
	 Loans payable
	  	 	11	 	  	 	49,304	 	 	 	58,570	 
	 Deferred income tax
	  	 	10	 	  	 	43,569	 	 	 	50,147	 
	 Decommissioning liability
	  	 	13	 	  	 	11,942	 	 	 	12,098	 
	 Other liabilities
	  	 	14	 	  	 	1,149	 	 	 	1,318	 
		  				  	  
	  
	 	 	  
	  
	 
	 Total liabilities
	  				  	 	178,850	 	 	 	170,951	 
		  				  	  
	  
	 	 	  
	  
	 
				
	 EQUITY
	  				  				 			
	 Share capital
	  	 	15	 	  	 	228,326	 	 	 	227,969	 
	 Accumulated deficit
	  				  	 	(80,775	) 	 	 	(68,511	) 
	 Other reserves
	  				  	 	12,717	 	 	 	11,471	 
		  				  	  
	  
	 	 	  
	  
	 
	 Equity attributable to owners of the Company
	  				  	 	160,268	 	 	 	170,929	 
		  				  	  
	  
	 	 	  
	  
	 
	 Non-controlling interest
	  	 	16	 	  	 	25,694	 	 	 	26,645	 
		  				  	  
	  
	 	 	  
	  
	 
	 Total equity
	  				  	 	185,962	 	 	 	197,574	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  				 			
		  				  	  
	  
	 	 	  
	  
	 
	 Total liabilities and equity
	  				  	 	364,812	 	 	 	368,525	 
		  				  	  
	  
	 	 	  
	  
	 

 Contingencies (note 25), Subsequent events (note 26) 

Approved on behalf of the Board and authorized for issue on March 28, 2017: 

 

					
			
	“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. 

  
  

4  |  Page 









 Sierra Metals Inc. 

Consolidated Statements of Income (Loss) 

For the years ended December 31, 2016 and 2015 

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

 
  


													
	 	  	 	 	  	2016	 	 	2015	 
	 	  	Note	 	  	$	 	 	$	 
	 Revenue
	  				  	 	143,180	 	 	 	134,052	 
				
	 Cost of sales
	  				  				 			
	 Mining costs
	  	 	17	 	  	 	(81,832	) 	 	 	(79,988	) 
	 Depletion, depreciation and amortization
	  	 	17	 	  	 	(44,568	) 	 	 	(46,733	) 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	 	(126,400	) 	 	 	(126,721	) 
		  				  	  
	  
	 	 	  
	  
	 
		  				  				 			
		  				  	  
	  
	 	 	  
	  
	 
	 Gross profit (loss) from mining operations
	  				  	 	16,780	 	 	 	7,331	 
		  				  	  
	  
	 	 	  
	  
	 
				
	 General and administrative expenses
	  	 	17	 	  	 	(14,869	) 	 	 	(13,903	) 
	 Selling expenses
	  				  	 	(6,965	) 	 	 	(7,312	) 
	 Exploration and evaluation expenditures
	  				  	 	(1,103	) 	 	 	(2,004	) 
	 Other operating expenses
	  				  	 	—  	 	 	 	(588	) 
	 Impairment charge
	  	 	8	 	  	 	—  	 	 	 	(19,000	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Income (loss) from operations
	  				  	 	(6,157	) 	 	 	(35,476	) 
		  				  	  
	  
	 	 	  
	  
	 
				
	 Other income
	  	 	18	 	  	 	1,574	 	 	 	603	 
	 Foreign currency exchange gain
	  				  	 	1,295	 	 	 	1,513	 
	 Interest expense and other finance costs
	  	 	19	 	  	 	(3,676	) 	 	 	(4,776	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Income (loss) before income taxes
	  				  	 	(6,964	) 	 	 	(38,136	) 
		  				  	  
	  
	 	 	  
	  
	 
				
	 Income tax (expense) recovery:
	  				  				 			
	 Current tax expense
	  	 	10	 	  	 	(9,629	) 	 	 	(6,841	) 
	 Deferred tax recovery
	  	 	10	 	  	 	3,872	 	 	 	9,664	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	 	(5,757	) 	 	 	2,823	 
		  				  	  
	  
	 	 	  
	  
	 
	 Net income (loss)
	  				  	 	(12,721	) 	 	 	(35,313	) 
		  				  	  
	  
	 	 	  
	  
	 
				
	 Net income (loss) attributable to:
	  				  				 			
	 Shareholders of the Company
	  				  	 	(12,265	) 	 	 	(33,302	) 
	 Non-controlling interests
	  				  	 	(456	) 	 	 	(2,011	) 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	 	(12,721	) 	 	 	(35,313	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Weighted average shares outstanding (000s)
	  				  				 			
	 Basic
	  				  	 	161,908	 	 	 	161,013	 
	 Diluted
	  				  	 	161,908	 	 	 	161,013	 
				
	 Basic earnings (loss) per share
	  				  	 	(0.08	) 	 	 	(0.21	) 
	 Diluted earnings (loss) per share
	  				  	 	(0.08	) 	 	 	(0.21	) 

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

  
  

5  |  Page 









 Sierra Metals Inc. 

Consolidated Statements of Comprehensive Income (Loss) 

For the years ended December 31, 2016 and 2015 

(In thousands of United States dollars) 
  

 


									
	 	  	2016	 	 	2015	 
	 	  	$	 	 	$	 
	 Net income (loss)
	  	 	(12,721	) 	 	 	(35,313	) 
			
	 Other comprehensive income (loss)
	  				 			
	 Items that may be subsequently classified to net income (loss):
	  				 			
	 Currency translation adjustments on foreign operations
	  	 	785	 	 	 	(2,035	) 
		  	  
	  
	 	 	  
	  
	 
	 Total comprehensive income (loss)
	  	 	(11,936	) 	 	 	(37,348	) 
		  	  
	  
	 	 	  
	  
	 
			
	 Total comprehensive income (loss) attributable to shareholders
	  	 	(11,480	) 	 	 	(35,337	) 
	 Non-controlling interests
	  	 	(456	) 	 	 	(2,011	) 
		  	  
	  
	 	 	  
	  
	 
	 Total comprehensive income (loss) attributable to shareholders
	  	 	(11,936	) 	 	 	(37,348	) 
		  	  
	  
	 	 	  
	  
	 

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

  
  

6  |  Page 









 Sierra Metals Inc. 

Consolidated Statements of Changes in Equity 

For the years ended December 31, 2016 and 2015 

(In thousands of United States dollars) 
  

 


																													
	 	  	Common Shares	 	  	 Other

reserves
	 	 	 Retained
earnings

(accumulated
deficit)
	 	 	 Total
attributable

to shareholders
	 	 	 Non-controlling

Interest
	 	 	 Total

shareholders’
equity
	 
	 	  	Shares	 	  	Amounts	 	  	 	 	 	 
	 	  	  	$	 	  	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	 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 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	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 
							
	 	  	Common Shares	 	  	 Other

reserves
	 	 	 Retained
earnings

(accumulated
deficit)
	 	 	 Total
attributable

to shareholders
	 	 	 Non-controlling

Interest
	 	 	 Total

shareholders’
equity
	 
	 	  	Shares	 	  	Amounts	 	  	 	 	 	 
	 	  	  	$	 	  	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	 Balance at January 1, 2015
	  	 	160,015,045	 	  	 	225,963	 	  	 	14,195	 	 	 	(35,209	) 	 	 	204,949	 	 	 	29,544	 	 	 	234,493	 
								
	 Exercise of RSUs
	  	 	1,731,195	 	  	 	2,006	 	  	 	(2,006	) 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 
	 Share-based compensation expense
	  	 	—  	 	  	 	—  	 	  	 	1,317	 	 	 	—  	 	 	 	1,317	 	 	 	—  	 	 	 	1,317	 
	 Dividends paid to non-controlling interest
	  	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(888	) 	 	 	(888	) 
	 Total comprehensive loss
	  	 	—  	 	  	 	—  	 	  	 	(2,035	) 	 	 	(33,302	) 	 	 	(35,337	) 	 	 	(2,011	) 	 	 	(37,348	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Balance at December 31, 2015
	  	 	161,746,240	 	  	 	227,969	 	  	 	11,471	 	 	 	(68,511	) 	 	 	170,929	 	 	 	26,645	 	 	 	197,574	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 

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

  
  

7  |  Page 









 Sierra Metals Inc. 

Consolidated Statements of Cash Flows 
 For
the years ended December 31, 2016 and 2015 
 (In thousands of United States dollars) 

 
  


													
	 	  	 	 	  	2016	 	 	2015	 
	 	  	Note	 	  	$	 	 	$	 
	 Cash flows from operating activities
	  				  				 			
	 Net income (loss) from operations
	  				  	 	(12,721	) 	 	 	(35,313	) 
	 Adjustments for:
	  				  				 			
	 Items not affecting cash:
	  				  				 			
	 Depletion, depreciation and amortization
	  				  	 	45,711	 	 	 	46,840	 
	 Share-based compensation
	  				  	 	819	 	 	 	1,317	 
	 Impairment charge
	  	 	8	 	  	 	—  	 	 	 	19,000	 
	 Loss on sale of supplies
	  				  	 	—  	 	 	 	11	 
	 Interest expense and other finance costs
	  				  	 	3,676	 	 	 	4,776	 
	 Current income tax expense
	  				  	 	9,629	 	 	 	6,841	 
	 Deferred income tax recovery
	  				  	 	(3,872	) 	 	 	(9,664	) 
	 Unrealized foreign currency exchange gain (loss)
	  				  	 	1,061	 	 	 	(1,333	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Operating cash flows before movements in working capital
	  				  	 	44,303	 	 	 	32,475	 
	 Net changes in non-cash working capital items
	  	 	24	 	  	 	(1,523	) 	 	 	10,417	 
	 Cash received from deferred revenue
	  	 	12	 	  	 	4,904	 	 	 	—  	 
	 Decomissioning liabilities settled
	  	 	13	 	  	 	(468	) 	 	 	(434	) 
	 Income taxes paid
	  				  	 	(3,576	) 	 	 	(11,151	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Cash generated from operating activities
	  				  	 	43,640	 	 	 	31,307	 
				
	 Cash flows from investing activities
	  				  				 			
	 Capital expenditures
	  				  	 	(25,352	) 	 	 	(37,601	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Cash used in investing activities
	  				  	 	(25,352	) 	 	 	(37,601	) 
		  				  	  
	  
	 	 	  
	  
	 
				
	 Cash flows from (used in) financing activities
	  				  				 			
	 Proceeds from issuance of notes payable
	  	 	11	 	  	 	3,750	 	 	 	—  	 
	 Proceeds from issuance of loans and credit facilities
	  	 	11	 	  	 	20,000	 	 	 	18,995	 
	 Repayment of loans and credit facilities
	  	 	11	 	  	 	(20,545	) 	 	 	(23,864	) 
	 Loans interest paid
	  	 	11	 	  	 	(3,674	) 	 	 	(3,417	) 
	 Dividends paid to non-controlling interest
	  				  	 	(495	) 	 	 	(888	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Cash from (used in) financing activities
	  				  	 	(964	) 	 	 	(9,174	) 
		  				  	  
	  
	 	 	  
	  
	 
				
	 Effect of foreign exchange rate changes on cash and cash equivalents
	  				  	 	(281	) 	 	 	(703	) 
				
	 Increase (decrease) in cash and cash equivalents
	  				  	 	17,043	 	 	 	(16,171	) 
	 Cash and cash equivalents, beginning of period
	  				  	 	25,102	 	 	 	41,273	 
		  				  	  
	  
	 	 	  
	  
	 
	 Cash and cash equivalents, end of period
	  				  	 	42,145	 	 	 	25,102	 
		  				  	  
	  
	 	 	  
	  
	 
				
	 Supplemental cash flow information
	  	 	24	 	  				 			

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

  
  

8  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

(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 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 condensed interim 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 28, 2017. 
  

	 	(b)	 Basis of consolidation 



These consolidated financial statements include the accounts of the Company and its subsidiaries, which are entities
controlled by the Company. Control exists when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are
consolidated from the date that control commences until the date that control ceases. 
 Non-controlling interests represent
equity interests in subsidiaries owned by outside parties. Changes in the parent company’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions. 

  
  

9  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

(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, 2016 are as follows: 

 

					
	 Name of the subsidiary
	  	Ownership interest	  	Location
	 Dia Bras EXMIN Resources Inc.
	  	100%	  	Canada
	 Plexmar 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
	 Sociedad Minera San Miguelito, S. A. C.
	  	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 noncontrolling 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 exchange rates of monetary assets and liabilities denominated in currencies other than an entities’
functional currency are recognized in the consolidated statement of loss. 

  
  

10  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

(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. 



  
  

11  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

(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. 

  
  

12  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

(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: 

  
  

13  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	2	 Significant accounting policies (continued) 



 

					
	 Useful lives
	    	Years	 
	 Vehicles, furniture and other assets
	    	 	3 to10	 
	 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. 
 Non-financial assets that have suffered impairment are tested for possible reversal of
the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. 
  

	 	(k)	 Borrowing costs 



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

	 	(l)	 Revenue recognition 



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. 

  
  

14  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	2	 Significant accounting policies (continued) 



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 stock based compensation 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, 2016 and 2015 

(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, 2016 and 2015 

(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, 2015, management assessed its exploration and evaluation expenditures for impairment and recognized an impairment charge of $19,000 (note 8) related to its Cusi Mine. As at December 31, 2016 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, 2016 and 2015 

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

 
  


	3	 Significant accounting estimates and judgments (continued) 



 

	 	(b)	 Mineral reserves and resources 



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

	 	(c)	 Deferred tax assets and liabilities 



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

	 	(d)	 Decommissioning and restoration liabilities costs 



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

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

	 	(e)	 Functional currency 



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

  
  

18  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	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. 

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 has not yet determined the potential impact of adopting this standard on its consolidated financial
statements. 
 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. 

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 intends to
adopt the amendments to IAS 7 in its financial statements for the annual period beginning on January 1, 2017. The Company is in the process of determining the impact of 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, 2016 and 2015 

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

 
  


	5	 Trade and other receivables 



 

									
	 	  	December 31,
2016
$	 	  	December 31,
2015
$	 
	 Trade receivables
	  	 	12,840	 	  	 	8,562	 
	 Sales tax receivables
	  	 	4,617	 	  	 	5,936	 
	 Other receivables
	  	 	397	 	  	 	222	 
		  	  
	  
	 	  	  
	  
	 
		  	 	17,854	 	  	 	14,720	 
		  	  
	  
	 	  	  
	  
	 

  

	6	 Inventories 



 

									
	 	  	December 31,
2016
$	 	  	December 31,
2015
$	 
	 Stockpiles
	  	 	1,585	 	  	 	2,870	 
	 Concentrates
	  	 	6,647	 	  	 	3,631	 
	 Supplies and spare parts
	  	 	13,077	 	  	 	9,934	 
		  	  
	  
	 	  	  
	  
	 
		  	 	21,309	 	  	 	16,435	 
		  	  
	  
	 	  	  
	  
	 

 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, 2016 and 2015 of $126,400 and $126,721, respectively. Supplies and spare parts inventory as at December 31, 2016 is stated net of
a provision of $1,384 (2015 – $1,224) to write inventories down due to obsolescence. Supplies and spare parts inventory held at NRV at December 31, 2016 was $6,561 (2015 – $5,134). During the year ended December 31, 2016, the
Company wrote down stockpile and concentrate inventory to its NRV, recording a charge of $1,365 (2015- $1,088). Stockpile and concentrate inventory held at NRV as at December 31, 2016 was $375 (2015 – $212). 

  
  

20  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	7	 Property, plant and equipment 



 

																					
	 	  	 	 	  	 	 	  	 	 	  	Exploration and	 	  	 	 
	 	  	Plant and	 	  	Mining	 	  	Assets under	 	  	evaluation	 	  	 	 
	 Cost
	  	equipment	 	  	properties	 	  	construction	 	  	expenditure	 	  	Total $	 
	 Balance as of January 1, 2015
	  	 	165,605	 	  	 	409,433	 	  	 	33,529	 	  	 	29,874	 	  	 	638,441	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
						
	 Additions
	  	 	4,149	 	  	 	7,342	 	  	 	16,558	 	  	 	9,053	 	  	 	37,102	 
	 Change in estimate of decomissioning liability
	  	 	(2,040	) 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(2,040	) 
	 Borrowing costs
	  	 	—  	 	  	 	—  	 	  	 	491	 	  	 	—  	 	  	 	491	 
	 Disposals
	  	 	(294	) 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(294	) 
	 Foreign exchange revaluation
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(16	) 	  	 	(16	) 
	 Transfers
	  	 	25,146	 	  	 	1,559	 	  	 	(26,705	) 	  	 	—  	 	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Balance as of December 31, 2015
	  	 	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	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
						
	 	  	 	 	  	 	 	  	 	 	  	Exploration and	 	  	 	 
	 	  	Plant and	 	  	Mining	 	  	Assets under	 	  	evaluation	 	  	 	 
	 Accumulated depreciation
	  	equipment	 	  	properties	 	  	construction	 	  	expenditure	 	  	Total $	 
	 Balance as of January 1, 2015
	  	 	92,828	 	  	 	215,294	 	  	 	—  	 	  	 	—  	 	  	 	308,122	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
						
	 Depletion, depreciation and amortization
	  	 	13,837	 	  	 	31,128	 	  	 	—  	 	  	 	—  	 	  	 	44,965	 
	 Impairment charge (Note 8)
	  	 	—  	 	  	 	5,959	 	  	 	—  	 	  	 	13,041	 	  	 	19,000	 
	 Disposals
	  	 	(229	) 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	(229	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Balance as of December 31, 2015
	  	 	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	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  				  				  				  				  			
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 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	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Net Book Value – December 31, 2014
	  	 	72,777	 	  	 	194,139	 	  	 	33,529	 	  	 	29,874	 	  	 	330,319	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

 For the year ended December 31, 2016, depletion and depreciation expense of $45,711
(2015: $46,840) has been charged to depletion, depreciation and amortization and $1,159 (2015: $1,318) has been capitalized to inventory. 

During the year ended December 31, 2016, the Company has capitalized borrowing costs amounting to $491 (2015 – $127)
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, 2016 and 2015 

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

 
  


	8	 Impairment of mining interests 



As at December 31, 2015, impairment indicators were specifically identified for the Cusi Mine as a result of declining
metal prices and the current capital expenditure program related to the development of the property and mine exploration costs not yet resulting in the addition of recoverable silver ounces to the property. In accordance with the Company’s
accounting policy, the Company performed an impairment assessment for the Cusi Mine cash generating unit (“CGU”) as at December 31, 2015. The recoverable amount of the Cusi Mine was determined based on the after-tax discounted cash
flows expected to be derived from the property’s fair-market value less estimated costs to sell (“FVLCS”). As a result of impairment tests performed as at December 31, 2015, the Company recorded an impairment loss of $19,000
which was allocated entirely against capitalized exploration and evaluation expenditures on the Cusi Mine. Management’s estimate of the FVLCS is classified as Level 3 under the fair value hierarchy. As at December 31, 2016, management
assessed its mining property assets and exploration and evaluation expenditures for impairment indicators and determined that no impairment was required. 
  

	9	 Accounts payable and accrued liabilities 



 

									
	 	  	December 31,	 	  	December 31,	 
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Trade payables
	  	 	18,428	 	  	 	14,619	 
	 Other payables and accrued liabilities
	  	 	11,400	 	  	 	11,546	 
		  	  
	  
	 	  	  
	  
	 
		  	 	29,828	 	  	 	26,165	 
		  	  
	  
	 	  	  
	  
	 

 All accounts payable and accrued liabilities are expected to be settled within 12 months. 

 

	10	 Current and deferred income tax liability 



 

	 	(a)	 Income and resource taxes 



 

									
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Current Tax Expense
	  				  			
			
	 Current income tax
	  	 	9,629	 	  	 	6,841	 
		  	  
	  
	 	  	  
	  
	 
		  	 	9,629	 	  	 	6,841	 
		  	  
	  
	 	  	  
	  
	 
	 Deferred Tax Recovery
	  				  			
			
	 Deferred Tax Recovery
	  	 	(3,872	) 	  	 	(9,664	) 
		  	  
	  
	 	  	  
	  
	 
		  	 	(3,872	) 	  	 	(9,664	) 
		  	  
	  
	 	  	  
	  
	 
		  				  			
		  	  
	  
	 	  	  
	  
	 
	 Total tax expense (recovery)
	  	 	5,757	 	  	 	(2,823	) 
		  	  
	  
	 	  	  
	  
	 


  
  

22  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	10	 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: 
  

									
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Income (loss) before income taxes
	  	 	(6,964	) 	  	 	(38,136	) 
			
	 Expected Tax Rate @ 26.00% (2015 – 26.00%)
	  	 	(1,780	) 	  	 	(10,283	) 
	 Effect of tax rate differences
	  	 	2,365	 	  	 	(1,763	) 
	 Stock based compensation costs
	  	 	195	 	  	 	310	 
	 Other Non-deductible expenses
	  	 	(8,531	) 	  	 	829	 
	 Unrealized foreign exchange income
	  	 	42	 	  	 	(271	) 
	 Inflation Adjustment for Mexico tax purposes
	  	 	(214	) 	  	 	(312	) 
	 Expired losses
	  	 	—  	 	  	 	354	 
	 Change in benefit of other temporary differences not recognized
	  	 	8,273	 	  	 	6,627	 
	 Foreign exchange and other
	  	 	2,506	 	  	 	(629	) 
	 Mining royalties
	  	 	2,901	 	  	 	2,315	 
		  	  
	  
	 	  	  
	  
	 
		  	 	5,757	 	  	 	(2,823	) 
		  	  
	  
	 	  	  
	  
	 

  

	 	(c)	 Deferred tax asset and liability 



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

 

									
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Non-capital losses
	  	 	25,777	 	  	 	32,732	 
	 Property, plant and equipment
	  	 	38	 	  	 	19	 
	 Mineral properties
	  	 	9,889	 	  	 	12,358	 
	 Other
	  	 	(87	) 	  	 	192	 
		  	  
	  
	 	  	  
	  
	 
		  	 	35,617	 	  	 	45,301	 
		  	  
	  
	 	  	  
	  
	 

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

																					
	 	  	Balance	 	  	 	 	  	Balance	 	  	 	 	  	Balance	 
	 	  	January 1,	 	  	Change in	 	  	December 31,	 	  	Change in	 	  	December 31,	 
	 	  	2015	 	  	2015	 	  	2015	 	  	2016	 	  	2016	 
	 	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 
	 Mining assets
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Inventory
	  	 	424	 	  	 	(34	) 	  	 	390	 	  	 	66	 	  	 	456	 
	 Other items
	  	 	(41	) 	  	 	(323	) 	  	 	(364	) 	  	 	243	 	  	 	(121	) 
	 Provisions
	  	 	934	 	  	 	(262	) 	  	 	672	 	  	 	257	 	  	 	929	 
	 Decommissioning liabilities
	  	 	4,034	 	  	 	(320	) 	  	 	3,714	 	  	 	380	 	  	 	4,094	 
	 Non-capital losses
	  	 	12,011	 	  	 	(2,101	) 	  	 	9,910	 	  	 	(3,235	) 	  	 	6,675	 
	 Property, Plant, and equipment
	  	 	(5,462	) 	  	 	879	 	  	 	(4,583	) 	  	 	648	 	  	 	(3,935	) 
	 Mining assets
	  	 	(67,581	) 	  	 	13,655	 	  	 	(53,926	) 	  	 	3,626	 	  	 	(50,300	) 
	 Inventory
	  	 	(2,229	) 	  	 	(1,058	) 	  	 	(3,287	) 	  	 	348	 	  	 	(2,939	) 
	 Other items
	  	 	237	 	  	 	1,595	 	  	 	1,832	 	  	 	(791	) 	  	 	1,041	 
	 Deferred revenue
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	1,471	 	  	 	1,471	 
	 Provisions
	  	 	1,936	 	  	 	(3,434	) 	  	 	(1,498	) 	  	 	(32	) 	  	 	(1,530	) 
	 Mining royalties
	  	 	1,090	 	  	 	(87	) 	  	 	1,003	 	  	 	(125	) 	  	 	878	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	 	(54,647	) 	  	 	8,510	 	  	 	(46,137	) 	  	 	2,856	 	  	 	(43,281	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 


  
  

23  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	10	 Current and deferred income tax liability (continued) 



 

	 	(d)	 Tax losses 



In Canada, the Company has aggregate tax losses not recognized of $26,051 (December 31, 2015 – $21,581) 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, 2016 (December 31,
2015 – $8,578). 
  

	 	(e)	 Unrecognized deferred tax liabilities 



As at December 31, 2016, the Company has taxable temporary difference of $13,477 (2015 – $16,069) 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. 

 

	11	 Loans payable 



 

									
	 	  	December 31,	 	  	December 31,	 
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Current
	  				  			
			
	 Acquisition loan with Banco de Credito del Peru (a)
	  	 	5,784	 	  	 	1,257	 
	 Operating loan with Banco de Credito del Peru (b)
	  	 	6,211	 	  	 	3,659	 
	 Note payable to Scotiabank in Peru (c)
	  	 	14,750	 	  	 	11,000	 
	 Other credit facilities (d)
	  	 	1,179	 	  	 	—  	 
	 Loan with FIFOMI (e)
	  	 	1,454	 	  	 	1,600	 
		  	  
	  
	 	  	  
	  
	 
		  	 	29,378	 	  	 	17,516	 
		  	  
	  
	 	  	  
	  
	 
	 Non-current
	  				  			
			
	 Acquisition loan with Banco de Credito del Peru (a)
	  	 	40,036	 	  	 	45,762	 
	 Operating loan with Banco de Credito del Peru (b)
	  	 	6,238	 	  	 	7,428	 
	 Loan with FIFOMI (e)
	  	 	3,030	 	  	 	5,380	 
		  	  
	  
	 	  	  
	  
	 
		  	 	49,304	 	  	 	58,570	 
		  	  
	  
	 	  	  
	  
	 
		  				  			
		  	  
	  
	 	  	  
	  
	 
	 Total loans payable
	  	 	78,682	 	  	 	76,086	 
		  	  
	  
	 	  	  
	  
	 


  
  

24  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	11	 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 $1,500 have been made for the year ended December 31, 2016 (2015 – $6,858). 

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 $300 has been recorded for the year ended December 31, 2016 (2015 – $372). Interest payments totalling $2,084 have been made for the year ended December 31, 2016
(2015 – $2,140). 
 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, 2016. 
  

	 	(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 the 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, 2016 and 2015 

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

 
  


	11	 Loans payable (continued) 



The Company is in compliance with all financial covenants as at December 31, 2016. 

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 $3.750 have been made for the year ended December 31, 2016 (2015 – $3,750). Interest
payments totalling $716 have been made for the year ended December 31, 2016 (2015 – $656). 
  

	 	(c)	 Corona Notes payable with Scotiabank Peru 



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

 

	 	•	 	 A revolving credit facility from Scotiabank Peru for $11,000 bearing an annual interest rate of 1.99% matured
and was repaid in full on May 6, 2016. 


  

	 	•	 	 On May 6, 2016 a new $15,000 revolving credit facility with Scotiabank was obtained. $11,000 was drawn to
repay the $11,000 that was outstanding on the previous facility. The new credit facility bears an interest rate of three month LIBOR plus 2.00%. 


  

	 	•	 	 On February 8, 2016, $3,750 was drawn from this facility which bears an interest rate of LIBOR plus 1.9%.



  

	 	(d)	 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 bears
interest of 5.0% plus 1 year LIBOR. 


 Repayment will take place against deliveries of lead
concentrate for the period of April 2016 up to and including June 2017. METAGRI will deduct 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 fails 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 will repay METAGRI the short-fall within two business days
after METAGRI’s written notice. 
 The deductions will be made until such time as the Pre-Export Finance Facility has
been fully amortized and the interest had been fully serviced. DBM has agreed that METAGRI can 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, 2016, DBM has made
repayments totaling $2,822 (2015 – $2,256). 

  
  

26  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	11	 Loans payable (continued) 



 

	 	(e)	 FIFOMI loan 



 

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



 On February 2, 2015, DBM drew MXP$120 million (US$7,995). After deducting transaction costs of
US$124, net proceeds were US$7,871. 
 Monthly principal repayments will take 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, 2016, DBM has made interest payments of $357 (MXP$6,659) (2015 – $324). Principal payments of $1,473
(MXP$27,500) (2015 – $Nil) have been made during the year ended December 31, 2016. 
  

	12	 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 must 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 is otherwise
due. The 4,100 DMT of copper concentrate stockpiled must 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 has not been 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 and will be drawn
down monthly once the concentrate is shipped to Trafigura during 2017. Interest has been accrued according with the terms of the agreement and has been recorded in accrued liabilities. 

  
  

27  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	13	 Decommissioning liability 



 

									
	 	  	December 31,
2016
$	 	  	December 31,
2015
$	 
	 Balance, beginning of period
	  	 	13,977	 	  	 	14,825	 
			
	 Liabilities settled during the period
	  	 	(468	) 	  	 	(434	) 
	 Interest cost
	  	 	343	 	  	 	1,694	 
	 Revisions and new estimated cash flows
	  	 	—  	 	  	 	(2,108	) 
		  	  
	  
	 	  	  
	  
	 
	 Balance, end of period
	  	 	13,852	 	  	 	13,977	 
		  	  
	  
	 	  	  
	  
	 
	 Less: current portion
	  	 	(1,910	) 	  	 	(1,879	) 
		  	  
	  
	 	  	  
	  
	 
	 Long-term decommissioning liability
	  	 	11,942	 	  	 	12,098	 
		  	  
	  
	 	  	  
	  
	 

 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 2016 and 2015, the decommissioning liability was
calculated based on the following key assumptions: 
  

																	
	 	  	2016	 	  	2015	 
	 	  	Mexico	 	  	Peru	 	  	Mexico	 	  	Peru	 
	 Estimated undiscounted cash flows ($)
	  	 	1,021	 	  	 	16,206	 	  	 	1,124	 	  	 	15,848	 
	 Discount rate (%)
	  	 	6.0	 	  	 	4.5	 	  	 	5.0	 	  	 	6.0	 
	 Settlement period (years)
	  	 	6	 	  	 	5-10	 	  	 	7	 	  	 	4-6	 

  

	14	 Other liabilities 



 

									
	 	  	December 31,
2016
$	 	  	December 31,
2015
$	 
	 Current
	  				  			
	 Profit-sharing and other employee related obligations (a)
	  	 	4,509	 	  	 	2,828	 
		  	  
	  
	 	  	  
	  
	 
	 Non-current
	  				  			
	 Other employee related obligations
	  	 	1,149	 	  	 	1,318	 
		  	  
	  
	 	  	  
	  
	 

  

	 	(a)	 Profit sharing and other employee related obligations 



As at December 31, 2016, there is a provision amounting to $2,356 for employee profit sharing in Peru and $2,153 for
wages, salaries and other employee benefits outstanding (December 31, 2015 – $1,580 and $1,248, respectively). 

  
  

28  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	15	 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, 2016 and December 31, 2015 was as
follows: 
  

																	
	 	  	December 31, 2016	 	  	December 31, 2015	 
	 	  	Number
of
options	 	  	Weighted
average
exercise
price C$	 	  	Number
of options	 	  	Weighted
average
exercise
price C$	 
	 Outstanding, beginning of period
	  	 	7,116	 	  	 	3.40	 	  	 	110,202	 	  	 	2.42	 
	 Granted
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Exercised
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Forfeited
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Expired
	  	 	(7,116	) 	  	 	3.40	 	  	 	(103,086	) 	  	 	2.36	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Outstanding, end of period
	  	 	—  	 	  	 	—  	 	  	 	7,116	 	  	 	3.40	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Exercisable, end of period
	  	 	—  	 	  	 	—  	 	  	 	7,116	 	  	 	3.40	 

 The following table summarizes information relating to stock options outstanding and
exercisable as at December 31, 2016: 
  

																	
	 	  	December 31, 2016	 	  	December 31, 2015	 
	 	  	Options outstanding	 	  	Options exercisable	 
	 Exercise prices (C$)
	  	Options
outstanding	 	  	Weighted
average
remaining
contractual
life years	 	  	Options
exercisable	 	  	Weighted
average
remaining
contractual
life years	 
					
	 2.31 – 3.40
	  	 	—  	 	  	 	—  	 	  	 	7,116	 	  	 	0.9	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 


  
  

29  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	15	 Share capital and share-based payments (continued) 



 

	 	(c)	 Restricted share units (“RSUs”) 



The changes in RSU’s issued during the years ended December 31, 2016 and 2015 was as follows: 

 

									
	 	  	December 31,
2016	 	  	December 31,
2015	 
	 Outstanding, beginning of period
	  	 	874,788	 	  	 	1,693,373	 
	 Granted
	  	 	1,278,753	 	  	 	1,234,682	 
	 Exercised
	  	 	(327,053	) 	  	 	(1,731,195	) 
	 Forfeited
	  	 	(54,611	) 	  	 	(322,072	) 
		  	  
	  
	 	  	  
	  
	 
	 Outstanding, end of period
	  	 	1,771,877	 	  	 	874,788	 
		  	  
	  
	 	  	  
	  
	 

 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. 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, 2016, the Company granted one tranche of RSU’s totalling 1,278,753 which had a
fair value of C$1.02 based on the closing share price at grant date. RSUs exercised during the year ended December 31, 2016 had a weighted average fair value of C$1.51 and the RSUs expired had a weighted average fair value of C$1.52 (2015
– C$1.36 and C$1.69, respectively). As at December 31, 2016, the weighted average fair value of the RSUs outstanding is C$1.16 (2015 – C$1.52). 

The total RSU expense recognized during the year ended December 31, 2016 was $819 with a corresponding credit to other
reserves (2015 – $1,317). 

  
  

30  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	16	 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,
2016
$	 	  	December 31,
2015
$	 
	 Current
	  				  			
	 Assets
	  	 	62,731	 	  	 	43,047	 
	 Liabilities
	  	 	(42,147	) 	  	 	(30,930	) 
		  	  
	  
	 	  	  
	  
	 
	 Total current net assets
	  	 	20,584	 	  	 	12,117	 
		  	  
	  
	 	  	  
	  
	 
	 Non-current
	  				  			
	 Assets
	  	 	180,196	 	  	 	200,324	 
	 Liabilities
	  	 	(58,801	) 	  	 	(62,781	) 
		  	  
	  
	 	  	  
	  
	 
	 Total non-current net assets
	  	 	121,395	 	  	 	137,543	 
		  	  
	  
	 	  	  
	  
	 
	 Net assets
	  	 	141,979	 	  	 	149,660	 
		  	  
	  
	 	  	  
	  
	 
			
	 Summarized income statement
	  				  			
	 	  	For the year ended December 31,	 
	 	  	2016
$	 	  	2015
$	 
	 Revenue
	  	 	97,290	 	  	 	80,113	 
	 Income (loss) before income tax
	  	 	1,400	 	  	 	(12,077	) 
	 Income tax recovery (expense)
	  	 	(3,913	) 	  	 	1,003	 
		  	  
	  
	 	  	  
	  
	 
	 Total income (loss)
	  	 	(2,513	) 	  	 	(11,074	) 
		  	  
	  
	 	  	  
	  
	 
	 Total income (loss) attributable to non-controlling interests
	  	 	(456	) 	  	 	(2,011	) 
		  	  
	  
	 	  	  
	  
	 
	 Dividends paid to non-controlling interests
	  	 	495	 	  	 	888	 
		  	  
	  
	 	  	  
	  
	 
			
	 Summarized cash flows
	  				  			
	 	  	For the year ended December 31,	 
	 	  	2016
$	 	  	2015
$	 
	 Cash flows from operating activities
	  				  			
	 Cash generated from operating activities
	  	 	34,902	 	  	 	24,078	 
	 Net changes in non cash working capital items
	  	 	(5,885	) 	  	 	2,423	 
	 Decomissioning liabilities settled
	  	 	(331	) 	  	 	(423	) 
	 Income taxes paid
	  	 	(3,562	) 	  	 	(11,151	) 
		  	  
	  
	 	  	  
	  
	 
	 Net cash generated from operating activities
	  	 	25,124	 	  	 	14,927	 
		  	  
	  
	 	  	  
	  
	 
	 Net cash used in investing activities
	  	 	(11,587	) 	  	 	(12,119	) 
		  	  
	  
	 	  	  
	  
	 
	 Net cash from (used in) financing activities
	  	 	1,516	 	  	 	(9,299	) 
		  	  
	  
	 	  	  
	  
	 
	 Effect of foreign exchange rate changes on cash and cash
	  	 	4	 	  	 	(363	) 
		  	  
	  
	 	  	  
	  
	 
	 Increase in cash and cash equivalents
	  	 	15,057	 	  	 	(6,854	) 
		  	  
	  
	 	  	  
	  
	 
	 Cash and cash equivalents, beginning of year
	  	 	21,820	 	  	 	28,674	 
		  	  
	  
	 	  	  
	  
	 
	 Cash and cash equivalents, end of year
	  	 	36,877	 	  	 	21,820	 
		  	  
	  
	 	  	  
	  
	 


  
  

31  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	17	 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,
2016 and 2015 relate to the Yauricocha, Bolivar and Cusi Mines. 
  

	 	(a)	 Mining costs 



 

									
	 	  	2016
$	 	  	2015
$	 
	 Employee compensation and benefits
	  	 	17,857	 	  	 	14,966	 
	 Third party and contractors costs
	  	 	36,473	 	  	 	31,797	 
	 Depreciation
	  	 	44,568	 	  	 	46,733	 
	 Consumables
	  	 	25,999	 	  	 	23,978	 
	 Other
	  	 	1,503	 	  	 	9,247	 
		  	  
	  
	 	  	  
	  
	 
		  	 	126,400	 	  	 	126,721	 
		  	  
	  
	 	  	  
	  
	 

  

	 	(b)	 General and administrative expenses 



 

									
	 	  	2016
$	 	  	2015
$	 
	 Salaries and benefits
	  	 	6,851	 	  	 	6,861	 
	 Consulting and professional fees
	  	 	3,043	 	  	 	2,436	 
	 Other
	  	 	368	 	  	 	139	 
	 Office expenses
	  	 	1,384	 	  	 	1,014	 
	 Marketing and communication expenses
	  	 	478	 	  	 	852	 
	 Share-based compensation expense
	  	 	807	 	  	 	807	 
	 Listing and filing fees
	  	 	199	 	  	 	233	 
	 Director expenses
	  	 	1,446	 	  	 	1,190	 
	 Travelling expense
	  	 	293	 	  	 	371	 
		  	  
	  
	 	  	  
	  
	 
		  	 	14,869	 	  	 	13,903	 
		  	  
	  
	 	  	  
	  
	 

  

	18	 Other income (expenses) 



 

									
	 	  	2016
$	 	  	2015
$	 
	 Gain on sale of supplies and fixed assets
	  	 	59	 	  	 	210	 
	 Interest income
	  	 	89	 	  	 	67	 
	 Reversal of legal accrual
	  	 	704	 	  	 	—  	 
	 Miscellaneous income (expenses)
	  	 	722	 	  	 	326	 
		  	  
	  
	 	  	  
	  
	 
		  	 	1,574	 	  	 	603	 
		  	  
	  
	 	  	  
	  
	 


  
  

32  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	19	 Interest expense and other finance costs 



 

									
	 	  	2016
$	 	  	2015
$	 
	 Interest expense on BCP loan
	  	 	2,084	 	  	 	2,140	 
	 Interest expense on other liabilities
	  	 	920	 	  	 	409	 
	 Amortization of loan transaction costs
	  	 	329	 	  	 	533	 
	 Interest cost on decommissioning liability
	  	 	343	 	  	 	1,694	 
		  	  
	  
	 	  	  
	  
	 
		  	 	3,676	 	  	 	4,776	 
		  	  
	  
	 	  	  
	  
	 

  

	20	 Segment reporting 



The Company primarily manages its business on the basis of the geographical location of its operating mines. The
Company’s operating segments are based on the reports reviewed by the senior management group that are used to make strategic decisions. The Chief Executive Officer considers the business from a geographic perspective considering the
performance of the Company’s business units. The corporate division only earns income that is considered to be incidental to the activities of the Company and thus it does not meet the definition of an operating segment; as such it has been
included within “other reconciling items.” 
 The reporting segments identified are the following: 

 

	 	•	 	 Peru – Yauricocha Mine 



 

	 	•	 	 Mexico – Bolivar and Cusi Mines 



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

  
  

33  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	20	 Segment reporting (continued) 



 

																					
	 	  	Peru	 	  	Mexico	 	  	Mexico	 	  	Canada	 	  	 	 
	 	  	Yauricocha Mine	 	  	Bolivar Mine	 	  	Cusi Mine	 	  	Corporate	 	  	Total	 
	 Year ended December 31, 2016
	  	$	 	  	$	 	  	$	 	  	$	 
	 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	 
		  	  
	  
	 	  				  	  
	  
	 	  	  
	  
	 	  	  
	  
	 


  
  

34  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	20	 Segment reporting (continued) 



 

																					
	 	  	Peru	 	  	Mexico	 	  	Mexico	 	  	Canada	 	  	 	 
	 	  	Yauricocha Mine	 	  	Bolivar Mine	 	  	Cusi Mine	 	  	Corporate	 	  	Total	 
	 Year ended December 31, 2015
	  	$	 	  	$	 	  	$	 	  	$	 
	 Revenue
	  	 	80,113	 	  	 	41,839	 	  	 	12,100	 	  	 	—  	 	  	 	134,052	 
						
	 Production cost of sales
	  	 	(45,940	) 	  	 	(27,238	) 	  	 	(6,810	) 	  	 	—  	 	  	 	(79,988	) 
	 Depletion of mineral property
	  	 	(27,561	) 	  	 	(4,317	) 	  	 	(589	) 	  	 	—  	 	  	 	(32,467	) 
	 Depreciation and amortization of property, plant and equipment
	  	 	(6,793	) 	  	 	(5,978	) 	  	 	(1,495	) 	  	 	—  	 	  	 	(14,266	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Cost of sales
	  	 	(80,294	) 	  	 	(37,533	) 	  	 	(8,894	) 	  	 	—  	 	  	 	(126,721	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Gross profit (loss) from mining operations
	  	 	(181	) 	  	 	4,306	 	  	 	3,206	 	  	 	—  	 	  	 	7,331	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Income (loss) from operations
	  	 	(9,795	) 	  	 	(6,711	) 	  	 	(15,794	) 	  	 	(3,176	) 	  	 	(35,476	) 
	 Interest expense and other finance costs
	  	 	(4,294	) 	  	 	(386	) 	  	 	(96	) 	  	 	—  	 	  	 	(4,776	) 
	 Other income
	  	 	7	 	  	 	474	 	  	 	118	 	  	 	4	 	  	 	603	 
	 Foreign currency exchange gain (loss)
	  	 	(836	) 	  	 	85	 	  	 	21	 	  	 	2,243	 	  	 	1,513	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Income (loss) before income tax
	  	 	(14,918	) 	  	 	(6,538	) 	  	 	(15,751	) 	  	 	(929	) 	  	 	(38,136	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Income tax (expense) recovery
	  	 	(1,003	) 	  	 	3,252	 	  	 	574	 	  	 	—  	 	  	 	2,823	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Net income (loss) from operations
	  	 	(15,921	) 	  	 	(3,286	) 	  	 	(15,177	) 	  	 	(929	) 	  	 	(35,313	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
					
	 December 31, 2015
	  	 	 	  	 	 	  	 	 	  	 	 
	 Total assets
	  	 	244,093	 	  	 	116,250	 	  				  	 	8,182	 	  	 	368,525	 
	 Non-current assets(1)
	  	 	200,609	 	  	 	95,272	 	  				  	 	6,845	 	  	 	302,726	 
	 Total liabilities
	  	 	144,403	 	  	 	25,294	 	  				  	 	1,254	 	  	 	170,951	 
		  	  
	  
	 	  	  
	  
	 	  				  	  
	  
	 	  	  
	  
	 

 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. 
 For the year ended December 31, 2015, 60% of the revenues ($80,113) were from two customers based in Peru
and the remaining 40% of the revenues ($53,939) were from two customers based in Mexico. In Peru, the two customers accounted for 66% and 34% of the revenues. In Mexico, the two customers accounted for 78% and 22% of the revenues. 

As at December 31, 2016, the trade receivable balance of $12,840 includes amounts outstanding of $1,126 and $11,674 from
two customers in Mexico and two customers in Peru, respectively. 

  
  

35  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	21	 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	 	  	 	 	  	Available	 	  	Other
financial	 	  	 	 
	 	  	receivables	 	  	FVTPL	 	  	for sale	 	  	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	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
						
	 	  	Loans and	 	  	 	 	  	Available	 	  	Other
financial	 	  	 	 
	 	  	receivables	 	  	FVTPL	 	  	for sale	 	  	liabilities	 	  	Total	 
	 At December 31, 2015
	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 
	 Financial assets
	  				  				  				  				  			
	 Cash and cash equivalents
	  	 	25,102	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	25,102	 
	 Trade receivables (1)
	  	 	8,562	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	8,562	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Total Financial assets
	  	 	33,664	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	33,664	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
						
	 Financial liabilities
	  				  				  				  				  			
	 Accounts payable
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	14,619	 	  	 	14,619	 
	 Loans payable
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	76,086	 	  	 	76,086	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Total Financial liabilities
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	90,705	 	  	 	90,705	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  

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



 

	 	(b)	 Fair value of financial instruments 



As at December 31, 2016 and 2015, 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) 

  
  

36  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	21	 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, 2016 and 2015, 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, 2016	 	  	December 31, 2015	 
	 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 
	Recurring measurements	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 
	 Trade receivables (1)
	  	 	—  	 	  	 	12,840	 	  	 	—  	 	  	 	12,840	 	  	 	—  	 	  	 	8,562	 	  	 	—  	 	  	 	8,562	 
	 Property, Plant and Equipment(2)
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	42,000	 	  	 	42,000	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	 	—  	 	  	 	12,840	 	  	 	—  	 	  	 	12,840	 	  	 	—  	 	  	 	8,562	 	  	 	42,000	 	  	 	50,562	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  

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



	 	(2)	 2015 PP&E amount valued at fair value less cost to sell, while 2016 amount of the Cusi Mine is valued at
net book value. 


 There were no transfers between level 1 and level 2 during the years ended
December 31, 2016 and 2015. 
  

	 	(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. 

  
  

37  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	21	 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, 2016	 
	 	  	 	 	  	 	 	  	Peruvian	 	  	 	 
	 	  	 	 	  	Mexican	 	  	Nuevo	 	  	 	 
	 	  	CAN dollar	 	  	Peso	 	  	Soles	 	  	Total $	 
	 Cash and cash equivalents
	  	 	244	 	  	 	67	 	  	 	1,857	 	  	 	2,168	 
	 Trade 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
	  	 	(432	) 	  	 	(15,234	) 	  	 	(10,225	) 	  	 	(25,891	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		
	 	  	December 31, 2015	 
	 	  	 	 	  	 	 	  	Peruvian	 	  	 	 
	 	  	 	 	  	Mexican	 	  	Nuevo	 	  	 	 
	 	  	CAN dollar	 	  	Peso	 	  	Soles	 	  	Total $	 
	 Cash and cash equivalents
	  	 	218	 	  	 	365	 	  	 	1,093	 	  	 	1,676	 
	 Trade and other receivables
	  	 	154	 	  	 	12,794	 	  	 	351	 	  	 	13,299	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	 	372	 	  	 	13,159	 	  	 	1,444	 	  	 	14,975	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Accounts payable and other liabilities
	  	 	(522	) 	  	 	(29,976	) 	  	 	(8,478	) 	  	 	(38,976	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Total
	  	 	(151	) 	  	 	(16,817	) 	  	 	(7,034	) 	  	 	(24,001	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 


  
  

38  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	21	 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, 2016, 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, 2016, with all the other variables held constant, would have resulted in an increase to the Company’s net loss of $2,500 (increase in loss in
2015 of $618). 
 A 10% appreciation in the Canadian dollar exchange rate against the US dollar based on the financial
assets and liabilities held at December 31, 2016 and 2015, 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 11). 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, 2016 on its loans and notes payable in Peru was 4.47% (2015 – 4.28%). With all other variables unchanged a 1% increase in the interest rate would have
increased the Company’s net loss by $635 (2015 – $598). The interest rate paid by the Company during the year ended December 31, 2016 on its loans payable in Mexico was 5.83% (2014 – 5.78%). With all other variables
unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $65 (2015 – $54). 
  

	 	(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, 2016 and 2015, 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: 
  

									
	 	  	2016	 	  	2015	 
	 Commodity
	  	$	 	  	$	 
	 10% decrease in silver prices
	  	 	(32	) 	  	 	(68	) 
	 10% decrease in copper prices
	  	 	(213	) 	  	 	(1,679	) 
	 10% decrease in lead prices
	  	 	(1	) 	  	 	(1	) 
	 10% decrease in gold prices
	  	 	(84	) 	  	 	(198	) 

 As at December 31, 2016 and 2015, the Company did not have any forward contracts
outstanding. 

  
  

39  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	21	 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 11. 
 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, 2016 of the
Company’s financial liabilities and operating and capital commitments: 
  

																					
	 	  	Within
1 year	 	  	1-2
years	 	  	2-5
years	 	  	After
5 years	 	  	Total	 
	 	  	$	 	  	$	 	  	$	 	  	$	 	  	$	 
	 Accounts payable and accrued liabilities
	  	 	29,828	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	29,828	 
	 Loans payable(1)
	  	 	28,633	 	  	 	14,280	 	  	 	34,500	 	  	 	—  	 	  	 	77,413	 
	 Interest on loans payable
	  	 	745	 	  	 	274	 	  	 	250	 	  	 	—  	 	  	 	1,269	 
	 Other liabilities
	  	 	4,509	 	  	 	1,149	 	  	 	—  	 	  	 	—  	 	  	 	5,658	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Total Commitments
	  	 	63,715	 	  	 	15,703	 	  	 	34,750	 	  	 	—  	 	  	 	114,168	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  

	 	(1)	 Current portion includes $14.8 million of notes payable from Scotiabank Peru which are a revolving credit
facility 


 In the opinion of management, the working captial at December 31, 2016, together with
future cash flows from operations and available loan facilities, is sufficient to support the Company’s commitments through 2017. 
  

	 	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, 2016 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. 

  
  

40  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	21	 Financial instruments and financial risk management (continued) 



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

 

									
	 	  	December 31,	 	  	December 31,	 
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Cash and cash equivalents
	  	 	42,145	 	  	 	25,102	 
	 Trade receivables
	  	 	12,840	 	  	 	8,562	 
		  	  
	  
	 	  	  
	  
	 
		  	 	54,985	 	  	 	33,664	 
		  	  
	  
	 	  	  
	  
	 

  

	22	 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,	 
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Equity attributable to owners of the Company
	  	 	160,268	 	  	 	170,929	 
	 Loans payable
	  	 	78,682	 	  	 	76,086	 
		  	  
	  
	 	  	  
	  
	 
		  	 	238,950	 	  	 	247,015	 
	 Less: Cash and cash equivalents
	  	 	(42,145	) 	  	 	(25,102	) 
		  	  
	  
	 	  	  
	  
	 
		  	 	196,805	 	  	 	221,913	 
		  	  
	  
	 	  	  
	  
	 

 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, 2016, 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, 2016, the Company was in compliance with the external capital requirements. 

  
  

41  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	23	 Related party transactions 



 

	 	(a)	 Related party transactions 



During the year ended December 31, 2016, the Company recorded consulting fees of $200 (2015 – $250) to companies
related by common directors or officers. At December 31, 2016, accounts payable and accrued liabilities include $Nil (2015 – $Nil) with these related parties. Related party transactions occurred in the normal course of business. As at
December 31, 2016, the Company has accounts receivable outstanding from these related parties of $284 (2015 – $200). 
  

	 	(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, 2016 and 2015 are as follows: 
  

									
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Salaries and other short term employment benefits
	  	 	3,847	 	  	 	3,346	 
	 Share-based payments
	  	 	897	 	  	 	1,404	 
		  	  
	  
	 	  	  
	  
	 
	 Total compensation
	  	 	4,744	 	  	 	4,750	 
		  	  
	  
	 	  	  
	  
	 

  

	24	 Supplemental cash flow information 



Changes in working capital 
  

									
	 	  	2016	 	  	2015	 
	 	  	$	 	  	$	 
	 Trade and other receivables
	  	 	(3,134	) 	  	 	14,383	 
	 Financial and other assets
	  	 	209	 	  	 	32	 
	 Income tax receivable
	  	 	1,050	 	  	 	(5,060	) 
	 Inventories
	  	 	(4,874	) 	  	 	5,055	 
	 Accounts payable and accrued liabilities
	  	 	4,164	 	  	 	(116	) 
	 Income taxes payable
	  	 	(115	) 	  	 	758	 
	 Other liabilities
	  	 	1,177	 	  	 	(4,635	) 
		  	  
	  
	 	  	  
	  
	 
		  	 	(1,523	) 	  	 	10,417	 
		  	  
	  
	 	  	  
	  
	 


  
  

42  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	25	 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 reliably 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 cancelation 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. 



 

	26	 Subsequent Events 



Sierra Metals Inc. shareholders have voted at a special meeting of shareholders on February 16, 2017, to spin-out (the
“Spin-out”) to existing shareholders its 100% owned Las Lomas Project, into a new public entity called Cautivo Mining Inc. (“Cautivo”) by approving a reduction in the capital of the common shares of Sierra Metals for the capital
assigned to Cautivo Mining. The final voting results were 99.94% voting in favour of the capital reduction. On the completion of the Spin-out, Cautivo who are the developer of the properties’ main asset will be its indirect interest in the Las
Lomas Project (the “Las Lomas Project”). An estimate of the financial effect of the Spin-out cannot be made at this time. 

  
  

43  |  Page 









 Sierra Metals Inc. 

Notes to the Consolidated Financial Statements 

For the years ended December 31, 2016 and 2015 

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

 
  


	26	 Subsequent Events (continued) 



On March 29, 2017 the Company announced that Mark Brennan has tendered his resignation as President, Chief Executive
Officer. Mr. Brennan will continue in his current role for a period of 30 days to facilitate the implementation of an orderly succession plan. 

  
  

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