Exhibit 99.3







SIERRA METALS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE YEAR ENDED DECEMBER 31, 2017



|Corporate Office                                                    |  | TSX: SMT
        NYSE AMERICAN: SMTS 
|------------------------------------------------------------------- |  | -------------------------------------
|Suite 2100, 79 Wellington St W.
        Toronto, ON, Canada M5K 1H1 |  | BVL: SMT
        www.sierrametals.com











Table
of Contents



|1.  | INTRODUCTION                                                                | 3 
|--- | --------------------------------------------------------------------------- | --
|    |                                                                             |   
|2.  | COMPANY OVERVIEW                                                            | 3 
|    |                                                                             |   
|3.  | 2017 OPERATING AND FINANCIAL highlights                                     | 4 
|    |                                                                             |   
|4.  | OUTLOOK                                                                     | 10
|    |                                                                             |   
|5.  | RESULTS OF OPERATIONS                                                       | 19
|    |                                                                             |   
|6.  | SUMMARIZED FINANCIAL RESULTS                                                | 31
|    |                                                                             |   
|7.  | QUARTERLY FINANCIAL REVIEW                                                  | 37
|    |                                                                             |   
|8.  | LIQUIDITY AND CAPITAL RESOURCES                                             | 40
|    |                                                                             |   
|9.  | safety, health and environment                                              | 41
|    |                                                                             |   
|10. | FINANCIAL INSTRUMENTS AND RELATED RISKS                                     | 41
|    |                                                                             |   
|11. | OTHER RISKS AND UNCERTAINTIES                                               | 45
|    |                                                                             |   
|12. | NON-IFRS PERFORMANCE MEASURES                                               | 50
|    |                                                                             |   
|13. | RELATED PARTY TRANSACTIONS                                                  | 55
|    |                                                                             |   
|14. | CRITICAL ACCOUNTING POLICIES AND ESTIMATES                                  | 56
|    |                                                                             |   
|15. | OFF BALANCE SHEET ARRANGEMENTS                                              | 59
|    |                                                                             |   
|16. | DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”) | 59
|    |                                                                             |   
|17. | CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS                        | 60











|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 1. | INTRODUCTION
| | -- | ------------



This Management’s Discussion and
Analysis (“MD&A”) should be read in conjunction with Sierra Metals Inc.’s (the “Company” or “Sierra”
or “Sierra Metals”) consolidated financial statements for the year ended December 31, 2017 and related notes thereto
(the “Financial Statements”), which have been prepared in accordance with International Financial Reporting Standards
(“IFRS”), as issued by the International Accounting Standards Board (“IASB”). References herein to "$"
are to the United States dollar and “C$” are to the Canadian dollar and all tabular amounts are expressed in thousands
of $ unless otherwise stated. All information contained in this MD&A is current as of March 20, 2018 unless otherwise noted.
The Company’s common shares (the “Common Shares”) are listed and traded on the Toronto Stock Exchange (the “TSX”),
the New York Stock Exchange (the “NYSE MKT”), and the Peruvian Bolsa de Valores de Lima (“BVL” or the “Lima
Stock Exchange”) under the symbol “SMT”, and “SMTS” on the NYSE MKT. Additional information relating
to the Company, including the Company’s Annual Information Form (“AIF”), is available on SEDAR at www.sedar.com
and on the Company’s website at www.sierrametals.com. A cautionary note regarding forward-looking information follows
this MD&A.



QUALIFIED PERSONS



Gordon Babcock B.Sc., P. ENG., Chief Operating
Officer, Sierra Metals, is the qualified person as defined in National Instrument 43-101 (“NI 43-101”) relating to
operational scientific and technical information of Sierra Metals which have been included in this MD&A.



Americo Zuzunaga, MAusIMM CP(Mining Engineer)
and Vice President of Corporate Planning is a Qualified Person and chartered professional qualifying as a Competent Person under
the Joint Ore Reserves Committee (JORC) Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves.



Augusto Chung, FAusIMM CP(Metallurgist)
and Consultant to Sierra Metals is a Qualified Person and chartered professional qualifying as a competent person on metallurgical
processes.



| | 2. | COMPANY OVERVIEW
| | -- | ----------------



Sierra Metals 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 plans to continue growing its production base through brownfield exploration investments within its properties. The Company’s
key priorities are to provide high returns on invested capital, to generate strong cash flows and to maximize shareholder value.
The Company has three producing mining properties and manages its business on the basis of the geographical location of its mining
projects. The Peruvian Operation (“Peru”) is comprised of the Yauricocha mine (“Yauricocha” or the “Yauricocha
Mine”), located in the province of Yauyos, its near-mine concessions, and exploration and early stage properties. The Mexican
Operation (“Mexico”) includes the Bolivar (“Bolivar’ or the “Bolivar Mine”) and Cusi (“Cusi”
or the “Cusi Mine”) mines, both located in Chihuahua State, Mexico, their near-mine concessions, and exploration and
early stage properties. The Company’s strategic focus is currently on its operations, improving efficiencies, as well as
pursuing growth opportunities at, and surrounding, its operating projects. The Company is also considering other opportunities
to add value and expand through external growth. Exploration remains a key aspect of the improvement programs being implemented
at all three of the Company’s mines and there is optimism that these brownfield exploration programs will continue to add
high value tonnage going forward. Examples of this can be seen at Yauricocha with the Esperanza, Cuye-Mascota zones, at Bolivar,
with the Bolivar West and Northwest zones, as well as at Cusi, with the recently announced Santa Rosa de Lima Zone. These results
provide potential to further grow mineral resources and enhance shareholder value.



3







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 3. | 2017 OPERATING AND FINANCIAL highlights
| | -- | ---------------------------------------



|(In thousands of dollars, except per share and cash
    cost amounts,  consolidated |  | Three Months Ended |         |   | Year Ended        |  
|----------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|figures
    unless noted otherwise)                                                 |  | December 31, 2017  |         |   | December 31, 2016 |  
|Operating                                                                           |  |                    |         |   |                   |  
|Ore
    Processed / Tonnes Milled                                                   |  |                    | 509,488 |   |                   |  
|Silver
    Ounces Produced (000's)                                                  |  |                    | 496     |   |                   |  
|Copper
    Pounds Produced (000's)                                                  |  |                    | 7,471   |   |                   |  
|Lead
    Pounds Produced (000's)                                                    |  |                    | 5,736   |   |                   |  
|Zinc
    Pounds Produced (000's)                                                    |  |                    | 19,545  |   |                   |  
|Gold
    Ounces Produced                                                            |  |                    | 1,591   |   |                   |  
|Copper
    Equivalent Pounds Produced (000's)1                                      |  |                    | 21,856  |   |                   |  
|Zinc
    Equivalent Pounds Produced (000's)1                                        |  |                    | 47,287  |   |                   |  
|Silver
    Equivalent Ounces Produced (000's)1                                      |  |                    | 4,078   |   |                   |  
|                                                                                    |  |                    |         |   |                   |  
|Cash
    Cost per Tonne Processed                                                   |  | $                  | 50.57   |   |                   | $
|Cost of sales per AgEqOz                                                            |  | $                  | 7.91    |   |                   | $
|Cash
    Cost per AgEqOz2                                                           |  | $                  | 7.54    |   |                   | $
|AISC
    per AgEqOz2                                                                |  | $                  | 12.42   |   |                   | $
|Cost
    of sales per CuEqLb2                                                       |  | $                  | 1.48    |   |                   | $
|Cash
    Cost per CuEqLb2                                                           |  | $                  | 1.41    |   |                   | $
|AISC
    per CuEqLb2                                                                |  | $                  | 2.32    |   |                   | $
|Cost
    of sales per ZnEqLb2                                                       |  | $                  | 0.68    |   |                   | $
|Cash
    Cost per ZnEqLb2                                                           |  | $                  | 0.65    |   |                   | $
|AISC
    per ZnEqLb2                                                                |  | $                  | 1.07    |   |                   | $
|                                                                                    |  |                    |         |   |                   |  
|Cash
    Cost per ZnEqLb (Yauricocha)2                                              |  | $                  | 0.57    |   |                   | $
|AISC
    per ZnEqLb (Yauricocha)2                                                   |  | $                  | 0.90    |   |                   | $
|Cash
    Cost per CuEqLb (Bolivar)2                                                 |  | $                  | 1.72    |   |                   | $
|AISC
    per CuEqLb (Bolivar)2                                                      |  | $                  | 3.03    |   |                   | $
|Cash
    Cost per AgEqOz (Cusi)2                                                    |  | $                  | 18.67   |   |                   | $
|AISC
    per AgEqOz (Cusi)2                                                         |  | $                  | 36.33   |   |                   | $
|Financial                                                                           |  |                    |         |   |                   |  
|Revenues                                                                            |  | $                  | 51,170  |   |                   | $
|Adjusted
    EBITDA2                                                                |  | $                  | 19,208  |   |                   | $
|Operating
    cash flows before movements in working capital                        |  | $                  | 17,812  |   |                   | $
|Adjusted
    net income attributable to shareholders2                               |  | $                  | 3,241   |   |                   | $
|Net
    income (loss) attributable to shareholders                                  |  | $                  | 2,118   |   |                   | $
|Cash
    and cash equivalents                                                       |  | $                  | 23,878  |   |                   | $
|Working
    capital                                                                 |  | $                  | (6,784  | ) |                   | $



(1) Silver equivalent ounces and copper and zinc equivalent
pounds for Q4 2017 were calculated using the following realized prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz
Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2016 were calculated using the following realized prices:
$16.82/oz Ag, $2.38/lb Cu, $0.95/lb Pb, $1.16/lb Zn, $1,210/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds
for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $1.06/lb Pb, $1.32/lb Zn, $1,265/oz
Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2016 were calculated using the following realized prices:
$17.08/oz Ag, $2.21/lb Cu, $/0.85lb Pb, $0.95/lb Zn, $1,254/oz Au.

(2) This is a non-IFRS performance measure, see
Non-IFRS Performance Measures section of the MD&A.



2017 Operational Highlights and Growth Initiatives



During 2017, silver equivalent production
increased by 26%, copper equivalent production decreased 1%, and zinc equivalent production decreased by 9% compared to 2016. During
Q4 2017, silver equivalent production increased by 15%, copper equivalent production decreased 12%, and zinc equivalent production
decreased by 8% compared to Q4 2016. The decrease in metal production was due to lower production in Mexico, partially offset by
record throughput, which led to an increase in production, in Peru. The temporary decrease in metal production in Q4 2017 compared
to Q4 2016 was primarily due to lower throughput, head grades, and recoveries at the Bolivar Mine, and decreases in throughput
and recoveries at the Cusi Mine.



4







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Similar to the successful program at Yauricocha
in Peru, which began in 2015, the Company has engaged in an operation turnaround program in Mexico to modernize operations, improve
production, and lower costs. The Company has already realized a 2% increase in throughput at Bolivar and a 23% increase at Cusi
in Q4 2017 compared to Q3 2017, and further throughput increases are expected to continue during the first half of 2018. Equivalent
metal production variances are partially the result of differences in realized metal prices used in the equivalent metal calculations
for both periods.



Mexican operations have seen quarterly
improvements over the last two quarters. At Bolivar, there have been increases in tonnages as a result of new equipment purchases,
which have allowed more minable stopes to be incorporated into the mine plan. At Cusi, the Company has changed its focus from mining
the existing narrow vein structures to the recently discovered Santa Rosa de Lima zone, which has significantly larger widths and
higher grades. Cusi reported a significant improvement in metal recoveries, and the 2018 guidance is based on projections which
reflect the potential for record silver production and lower costs, as a result of the restructuring program performed during the
second half of 2017, which focused on the mining of the Santa Rosa de Lima structure. Both mines have also benefitted from successful
improvement efforts in metallurgical recoveries, which have increased during Q4 2017 compared to previous quarters.



Brownfield exploration programs remains
a key aspect at all three of our mines and we are very optimistic that they will continue to add high value tonnage going forward.
Examples of this can be seen at Yauricocha with the Esperanza, Cuye-Mascota zones, at Bolivar with the Bolivar West and Northwest
zones as well as at Cusi with the recently announced Santa Rosa de Lima Zone. When combined with our continued production optimization
program, it should lead to substantial growth, not only in production with lower costs, but most importantly in shareholder value.



2017 Consolidated Production Highlights



| | · | Silver equivalent production of 14.9 million ounces; a 26% increase
from 2016
| | - | -----------------------------------------------------------------------------

| | · | Copper equivalent production of 90.4 million pounds; a 1% decrease
from 2016
| | - | ----------------------------------------------------------------------------

| | · | Zinc equivalent production of 193.2 million pounds; a 9% decrease
from 2016
| | - | ---------------------------------------------------------------------------

| | · | Total of 2.0 million tonnes processed; a 2% decrease from 2016
| | - | --------------------------------------------------------------

| | · | Completion of key aspects of operational improvements and turnaround
plan in Mexico
| | - | -----------------------------------------------------------------------------------



Fourth Quarter 2017 Production Highlights



| | · | Silver equivalent production of 4.1 million ounces; a 15% increase
from Q4 2016
| | - | -------------------------------------------------------------------------------

| | · | Copper equivalent production of 21.9 million pounds; a 12% decrease
from Q4 2016
| | - | --------------------------------------------------------------------------------

| | · | Zinc equivalent production of 47.3 million pounds; an 8% decrease
from Q4 2016
| | - | ------------------------------------------------------------------------------

| | · | Total of 498,199 tonnes processed; a 4% decrease from Q4 2016
| | - | -------------------------------------------------------------

| | · | Tonnage at Bolivar and Cusi increased during Q4 2017 as key components
of the operational improvement and turnaround plan were completed
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



5







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



2017 Consolidated Financial Highlights



| | · | Revenue from metals payable of $205.1
million in 2017 increased by 43% from $143.2 million in 2016. Higher revenues are primarily attributable to the 14% increase in
throughput, the increase in copper, and zinc head grades, and higher recoveries for all metals, except gold, at Yauricocha; and
the increase in the prices of copper (26%), lead (26%), and zinc (35%) in 2017 compared to 2016; this was partially offset by a
7% decrease in throughput and lower head grades and recoveries for all metals, except gold recoveries, at Bolivar; and a 53% decrease
in throughput and lower head grades for all metals, except gold, and lower recoveries of all metals, except zinc, at Cusi;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Yauricocha’s cost of sales per zinc
equivalent payable pound was $0.54 (2016 - $0.44), cash cost per zinc equivalent payable pound was $0.50 (2016 - $0.42), and all-in
sustaining cash cost (“AISC”) per zinc equivalent payable pound was $0.78 (2016 - $0.71) for 2017 compared to 2016.
The increase in the AISC per zinc equivalent payable pound for 2017 compared to 2016 were the result of increased sustaining capital
expenditures, which included a substantial amount of infill drilling, ventilation improvements, equipment purchases, and plant
improvements. The increase was also a result of temporary increases to the mining costs, partially due to timing; as well as slight
increases related to infill drilling and drift development costs that will be utilized within one year, and thus are included in
operating costs. This was partially offset by lower treatment and refining costs incurred during 2017 compared to 2016, resulting
from improved terms on re-negotiated sales contracts with our off-takers, which helped offset higher sustaining capital expenditures;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Bolivar’s cost of sales per copper
equivalent payable pound was $1.54 (2016 - $1.31), cash cost per copper equivalent payable pound was $1.49 (2016 - $1.12), and
AISC per copper equivalent payable pound was $2.68 (2016 - $2.21) for 2017 compared to 2016. The increase in the AISC per copper
equivalent payable pound during 2017 was due to a decrease in copper equivalent payable pounds as a result of 7% lower throughput,
as well as an increase in sustaining capital expenditures related to the various equipment purchases made by the Company during
the year in an effort to improve equipment availability and increase tonnage;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Cusi’s cost of sales per silver
equivalent payable ounce was $12.51 (2016 - $5.47), cash cost per silver equivalent payable ounce was $15.38 (2016 - $9.37), and
AISC per silver equivalent payable ounce was $33.90 (2016 - $18.60) for 2017 compared to 2016. AISC per silver equivalent payable
ounce increased due to the 53% decline in throughput which resulted in fewer silver equivalent payable ounces as the Company continued
its refocused efforts on completing access, development and production from the Santa Rosa de Lima zone which contains wider structures
and higher silver grades;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | · | Adjusted EBITDA
(1) of $81.0 million for 2017 increased compared to $41.9 million in 2016. The increase in adjusted EBITDA in 2017 was primarily
due to the $56.9 million increase in revenues at Yauricocha, discussed previously;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Net income (loss)
attributable to shareholders for 2017 was $(4.6) million (2016: $(12.3 million)) or $(0.03) per share (basic and diluted) (2016:
$0.08). The net loss incurred in 2017 included a $4.4 million non-cash loss on the distribution of Cautivo Mining Inc. assets to
Sierra shareholders;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Adjusted net
income attributable to shareholders (1) of $23.5 million, or $0.14 per share, for 2017 was higher than the adjusted
net income of $7.0 million, or $0.04 per share for 2016;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A large component of the net income (loss)
for every period is the non-cash depletion charge in Peru, which was $31.4 million for 2017 (2016: $24.4 million). The non-cash
depletion charge is based on the aggregate fair value of the Yauricocha mineral property at the date of acquisition of Corona of
$371.0 million amortized over the total proven and probable reserves of the mine. The increase in the non-cash depletion charge
in 2017 was due to the reduction in proven and probable reserves reported in the Company’s NI 43-101 Technical Report issued
on August 11, 2016. Also, the increase in tonnes mined during 2017 compared to 2016 resulted in a higher depletion charge;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Cash flow generated from operations before
movements in working capital of $79.8 million for 2017 increased compared to $44.3 million in 2016. The increase in operating cash
flow is mainly the result of higher revenues generated and higher gross margins realized; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Cash and cash equivalents of $23.9 million
and working capital of $(6.8) million as at December 31, 2017 compared to $42.1 million and $9.6 million, respectively, at the
end of 2016. Cash and cash equivalents have decreased by $18.3 million during 2017 due to $54.5 million of operating cash flows
being offset by capital expenditures incurred in Mexico and Peru of $(51.6) million, repayment of loans, credit facilities and
interest of $(47.5) million, dividends paid to non-controlling interest shareholders of $(3.4) million, and proceeds from issuances
of loans and credit facilities of $29.8 million. Included in the $54.5 million of operating cash flows were negative changes in
non-cash working capital items of $7.9 million due to the increase accounts receivable and decrease in deferred revenue as at December
31, 2017.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1) This is a non-IFRS performance
measure, see non-IFRS Performance Measures section of this MD&A.



Project Development



| | · | The Company provided an updated Mineral
Reserve Estimate at the Company’s Yauricocha Mine (press release dated October 26, 2017). Previously the Company had also
provided an updated Mineral Resource Estimate at the Company’s Yauricocha Mine (press release dated September 28, 2017).
The NI 43-101 Technical Report was filed on SEDAR and was prepared by SRK Consulting (U.S.) Inc.;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Company provided an updated NI 43-101
Technical Report on the Cusi Mine (press release dated February 12, 2018). Previously, the Company had also provided an updated
Mineral Resource Estimate at the Cusi Mine (press release dated December 29, 2017). The NI 43-101 Technical Report was filed on
SEDAR and was prepared by SRK Consulting (U.S.) Inc.;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | · | Mine development at Bolívar during
Q4 2017 totaled 963 meters. Most of these meters (663) were developed to prepare stopes for mine production. The remainder of the
meters (232) were related to the deepening of ramps and developing service ramps to be used for ventilation and pumping, and 68
meters of raises; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | During Q4 2017, at the Cusi property,
mine development totaled 1,172 meters, and 846 meters of infill drilling was carried out inside the Mine.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



Exploration Highlights



Peru:

During Q4 2017, the Company drilled 204
holes totaling 9,424 meters at Yauricocha. The drilling included the following:



Exploration Drilling:

| | · | Cuye (Levels 1320 & 1370): 5 holes
totaling 1,748 meters have intercepted the mineralized structure and economic mineral;
| | - | -------------------------------------------------------------------------------------------------------------------------

| | · | Contacto Sur Medio II (Level 1070 Central
Mine Zone): 3 holes totaling 525 meters to explore the area on levels 1120 & 170, has intercepted mineralized sections with
high grade mineralization;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Huamanrripa (Level 720 Central Mine Zone):
1 hole of 1,149 meters with the objective of exploring and verifying geological anomalies based on the Titan 24 geophysical study;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Escondida West (870 level Cachi Cachi):
1 hole totaling 759 meters with the objective of exploring and verifying geological anomalies based on the Titan 24 geophysical
study;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Definition Drilling:

| | · | Antacaca (Level 970): 15 holes totaling
1,329 meters to define the orebody on the 970 level, floors 16 and 8;
| | - | -------------------------------------------------------------------------------------------------------------

| | · | Esperanza (920 levels): 8 holes totaling
992 meters to define and provide higher certainty on the size and quality of the orebody;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | · | Esperanza North (920 level): 7 holes totaling
685 meters to determine the continuity of the orebody from the 920 level to floor 8 on the 870 level;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Antacaca Sur (970 level): 11 holes totaling
1,002 meters which have intercepted lead and silver oxides, and structures with polymetallic mineral;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Mascota (1120 level, piso 8): 3 holes
totaling 292 meters to further define the orebody;
| | - | ----------------------------------------------------------------------------------------

| | · | Catas (Levels 970 & 1020): 10 holes
totaling 943 meters to further define the orebody;
| | - | --------------------------------------------------------------------------------------

| | · | Karlita (870 Level): 5 holes totaling
535 meters to further define the orebody.
| | - | -------------------------------------------------------------------------------



Positive Drill Results on Wide High-Grade
Structures from the Cuye Zone at the Yauricocha Mine



On December 19, 2017, the Company announced
drilling results demonstrating new limestone replacement mineralization at the Cuye Zone extension located within the Central Mine
at Yauricocha.



8







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The drill results represent the existence
of high-grade polymetallic mineralization at the Northern extension of Cuye, and suggest the possibility of even further mineralization
at depth specifically from the copper sulphide orebodies which contain significant widths. The Central Mine area contains several
high-grade mineralized areas opening the possibility for further discovery of additional orebodies along the Yauricocha fault.



The results from Cuye demonstrate high-grade,
sulphide mineralized sectors containing primarily silver, copper, lead and zinc. The potential still exists for further extensions,
within the Cuye zone which remains open at depth. The exploration completed at depth demonstrates considerable widths and high-grade
nature of these orebodies. The significance of this information is that prior exploration programs at Yauricocha have not typically
assayed the intrusive rocks, as the mineralization was considered to occur in the contact of the intrusive and the volcanics. The
existence of disseminated copper mineralization in the intrusive rock formation opens a new exploration horizon previously unknown
and a new interpretation of the sources of copper mineralization in the Yauricocha district.



11 holes were executed from the 1070 level
of the Yauricocha Mine in the Cuye area. These holes intercepted polymetallic sulphide mineralization containing high-grade silver,
zinc, copper and lead zones over significant widths. These results demonstrate the potential for high grade mineralization within
the reported area, and more importantly indicate the continued existence of extensive mineralization at depth. These results come
as part of an ongoing brownfield drilling program testing priority targets at the Yauricocha Mine.



Drill hole highlights include:



|             |  | From |       |  | To |  |       |       |  | Ag        |  |  | Pb |  |  | Cu |      |  | Zn |  |      | Au  | 
|------------ |  | ---- | ----- |  | -- |  | ----- | ----- |  | --------- |  |  | -- |  |  | -- | ---- |  | -- |  | ---- | --- | 
|Hole No.     |  | m    |       |  | m  |  |       | Width |  | g/t       |  |  | %  |  |  | %  |      |  | %  |  |      | g/t | 
|CUY 17-17-07 |  |      | 251.0 |  |    |  | 268.0 |       |  | over 15 m |  |  | 17 |  |  |    | 0.01 |  |    |  | 1.68 |     | 
|CUY 17-17-09 |  |      | 307.6 |  |    |  | 374.0 |       |  | over 66 m |  |  | 11 |  |  |    | 0.01 |  |    |  | 1.85 |     | 
|CUY 17-17-10 |  |      | 191.8 |  |    |  | 207.4 |       |  | over 15 m |  |  | 91 |  |  |    | 0.59 |  |    |  | 0.41 |     | 
|CUY 17-17-10 |  |      | 234.0 |  |    |  | 249.0 |       |  | over 15 m |  |  | 13 |  |  |    | 0.03 |  |    |  | 0.56 |     | 
|CUY 17-17-10 |  |      | 249.0 |  |    |  | 293.0 |       |  | over 44 m |  |  | 9  |  |  |    | 0.00 |  |    |  | 1.43 |     | 



Confirmation of the Extension of Wide, High-Grade Structures
at the Cuye Zone at the Yauricocha Mine



On February 7, 2018, the Company announced
additional drill results from the Cuye Zone, including an intersection of 99 meters @ 1.48% Cu, 12 g/t Ag, 0.05% Zn, 0.01% Pb and
0.7 g/t Au.



| | · | Copper sulphide mineralized areas have
been defined containing intersections of more than 99 meters which remain open at depth
| | - | ------------------------------------------------------------------------------------------------------------------------------

| | · | Mineralized areas noted in core continue
to identify large dioritic intrusive inclusions which previously were never studied and are the widest intercepts of copper mineralization
in Sierra Metals history. This suggests a new geological interpretation concept in the intrusive rocks with potentially larger
dimensions
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | · | Drill hole 13 intercepted over 120 meters
of continued high grade polymetallic and copper mineralization and included a 21-meter intercept of polymetallic mineralization
followed by a 99-meter copper sulphide intercept
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Drill hole highlights include:



|             |  | From |       |  | To |  |       |       |  | Ag        |  |  | Pb  |  |  | Cu |      |  | Zn |  |      | Au  | 
|------------ |  | ---- | ----- |  | -- |  | ----- | ----- |  | --------- |  |  | --- |  |  | -- | ---- |  | -- |  | ---- | --- | 
|Hole No.     |  | m    |       |  | m  |  |       | Width |  | g/t       |  |  | %   |  |  | %  |      |  | %  |  |      | g/t | 
|CUY 17-17-12 |  |      | 286.2 |  |    |  | 303.0 |       |  | over 17 m |  |  | 13  |  |  |    | 0.01 |  |    |  | 1.58 |     | 
|CUY 17-17-12 |  |      | 303.0 |  |    |  | 334.0 |       |  | over 31 m |  |  | 2.4 |  |  |    | 0.01 |  |    |  | 0.33 |     | 
|CUY 17-17-13 |  |      | 316.3 |  |    |  | 337.3 |       |  | over 21 m |  |  | 91  |  |  |    | 1.18 |  |    |  | 1.58 |     | 
|CUY 17-17-13 |  |      | 337.3 |  |    |  | 436.3 |       |  | over 99 m |  |  | 12  |  |  |    | 0.01 |  |    |  | 1.48 |     | 
|CUY 17-17-14 |  |      | 209.3 |  |    |  | 253.7 |       |  | over 44 m |  |  | 14  |  |  |    | 0.13 |  |    |  | 1.04 |     | 



To date, 14 holes have been executed from
the 1070 level of the Yauricocha Mine in the Cuye area. These holes have intercepted polymetallic sulphide mineralization containing
high-grade silver, zinc, copper and lead zones over significant widths. These results demonstrate the potential for high-grade
mineralization within the reported area and more importantly indicate the continued existence of extensive mineralization at depth.



Mexico:



Bolivar

| | · | At Bolívar during Q4 2017, 10,402
meters were drilled from surface as well as diamond drilling within the mine. 1,766 meters were drilled within the mine, 328 meters
within Bolivar Northwest and 1,438 meters from Chimney 2. Diamond drilling from surface totaled 8,636 in the Bolivar Northwest
area, exploring the extension of the orebody to the North and West, exploring the skarn orebody with semi-massive magnetite, and
disseminated nodules of chalcopyrite. This area will continue to be explored during 2018.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cusi:



| | · | The Company drilled 846 meters inside
the mines to verify the continuity of the orebodies and support development work on the various veins and 153 meters on surface.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | OUTLOOK
| | -- | -------



The Company is focused on improving operating
performance through the production of higher value ore, strengthening its asset base, continuing to increase its mineral reserves
and resources at each of its mines, and exploring organic and external growth opportunities to enhance and deliver shareholder
value. Significant increases to the resources at the Cusi Mine, as well reserves and resources at the Yauricocha Mine resulted
from updated 43-101 Technical Reports released during 2017. This will be followed by an updated 43-101 Technical Report on the
reserves and resources for the Bolivar Mine in Mexico during Q2 2018.



10







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The Company’s focus this year is
to initiate preliminary scoping / PEA studies for all three mines, with the intent of production optimization at all sites. These
PEA’s will be followed by Prefeasibility and Feasibility studies to finalize future operational production increases and
or maintain operations at a status quo. In addition to these work programs, the Company will also focus on including reviews of
plant optimization strategies, mine shaft and infrastructure improvements, and review of processing plant efficiencies.



During 2018 at the Yauricocha Mine, the
final infrastructure for the Yauricocha tunnel will be completed. This will enable the mine to have a direct run to the mill, which
will result in a faster turn-around in the cycle time of the trolley locomotives. In the long run, this will allow for more capacity
to handle larger volumes of waste and ore. This tunnel also provides another ventilation inlet to the mine, which benefits the
current ventilation system. The tunnel has been driven in a limestone host area of the mine which is in more favorable ground conditions
as compared to the Klepetko tunnel. The tunnel should be fully operational by the beginning of Q3 2018.



The 2018 work program for the Yauricocha
shaft is to sink the shaft to the 1270 level, and to cut a loading pocket below the 1170 working level. This pocket will handle
waste and ore from two streams in a multi feed raise configuration. Three loading points will be excavated on the 1170 level, with
each having a grizzly cover, and independent discharge points for locomotive track haulage, and trackless haulage equipment. A
mobile rock-breaker will handle any oversize muck encountered on the grizzly platforms. The company estimates this facility will
be operational in 2020.



The Company’s emphasis at Yauricocha
will continue to be on the production of higher value ore, including an estimated 450,000 tonnes of ore feed from the Esperanza
Zone during 2018. This effort is expected to continue to improve the Company’s operating margins and cash flow generation
within a recently improved, but historically softer metals price environment.



The updated Reserve and Resource Estimates
more than doubled the previous mine life at current throughput levels and when compared to the previous estimate from August 2016,
as the Company has realized a 134% increase to the mineral reserves for Yauricocha. The mineral reserves now consist of 8,917,000
tonnes averaging 48.3 g/t silver, 1.2% copper, 0.8% lead, 2.4% zinc and 0.5 g/t gold representing a 134% increase to the previous
Reserve Estimate. These increases represent a significant amount of additional drilling and mine exploration development work completed
at the Yauricocha Mine. This will allow the Company to look at potential production increases going forward, as well as continuing
our brownfield exploration programs over the next year with the aim of further mineral resource expansions.



Brownfield exploration remains a key component
of the Company’s growth program. The Company has budgeted drilling campaigns of 70,000 meters to be performed during 2018.
Promising drill results from the Cachi-Cachi Mine confirm the existence of important high grade mineralized areas and unlocks the
possibility of discovering additional orebodies along the Yauricocha fault between the Esperanza and Cachi-Cachi ore bodies. The
Company is planning to mine the Escondida zone in 2018 on the level 920 at Cachi-Cachi. The successful drill results from the Cuye
Zone demonstrating new limestone replacement mineralization at the Cuye Zone extension located within the Central Mine at Yauricocha,
provides the Company with additional opportunities to add to the previously increased reserves and resources at the mine.



11







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The Company is currently focused on the
operational improvement program taking place at its Bolivar and Cusi Mines in Mexico, focusing on modernizing operations, improving
production, and reducing unit costs. The program to date has focused on strengthening the corporate team, adding technical expertise
at the projects, improvements to production capacity through mine design, planning and sequencing, and improving metals production
through improvements to the metallurgical recovery process and ore throughput. At both the Bolivar and Cusi Mines, the long-term
intent is to implement sub-level long-hole stope drilling to improve productivity in the current operations.



The Company continues to define higher
grade ore sources at Bolivar West and Bolivar Northwest which are expected to come into the mine plan by the second half of 2019.
However, as a short-term planning strategy, the Bolivar Mine continues to focus on developing and mining the El Gallo Inferior
zone to centralize operations, optimize equipment usage and to improve productivity. Two re-furbished ball mills were purchased
during Q4 2017 and are being installed at the Mal Paso and Piedras Verdes Mills. The additional ball mill being installed at the
Piedras Verdes Plant will provide flexibility for the Company’s milling operations. Bolivar production for 2018 is expected
to reach 3,000 tonnes per day in Q1 2018, and to reach 3,500 tpd during Q3 or Q4 2018. Metallurgical recoveries are expected to
remain at current levels for 2018. The Company has been successful increasing tonnage at Bolivar through the commissioning of 13
new pieces of equipment. The new equipment along with the best use of existing mine infrastructure and equipment will help to maximize
ore delivery to the processing plant.



The Company is currently finalizing an
updated 43-101 Technical Report for the Bolivar Mine which is expected to be released during Q2 2018.



At the Cusi Mine, the Company is focused
on completing access, development and production of the Santa Rosa de Lima zone, which has wider structures and higher silver grades
than the narrow veins currently being mined. The Company has reached the Santa Rosa de Lima structure and is currently developing
drifts to mine this area. The Company is currently mining selected higher-grade structures at the old mine, in addition to campaigning
development ore from the Santa Rosa de Lima structure containing improved head grades to the mill at Cusi. The Company expects
to gradually increase tonnage from the Santa Rosa de Lima zone as well as other zones in the areas previously developed with a
different mandate to produce from disseminated mineralized zones until the mill is operating at its capacity of 650 tonnes per
day. It is expected that the main supply of ore in-terms of tonnage and grade will come from Santa Rosa de Lima, in conjunction
with other zones such as Promontorio, and Azucarera, starting in Q2 2018. Additionally, structural development at the Santa Rosa
de Lima zone will be completed using long hole mining versus the existing cut and fill methodology which should result in lower
costs going forward.



A scoping/ PEA study are underway to review
economic options which will define parameters for increased production and the implementation of a potential new plant at the Cusi
Mine operation. This will be followed up with a prefeasibility study and capex estimate study to follow through with a future potential
new Cusi plant and underground infrastructure to support an increased production rate at Cusi. This is targeted for the second
half of 2018. At year end 2017, the Company purchased a second ball mill (8x14) from Canada slated for installation in the Mal
Paso plant by year end 2018. The successful implementation of this newly purchased re-furbished ball mill at the Mal Paso Plant
will allow the Company to ramp production up to 1,200 tpd by January 2019.



12







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The Company has also been focused on improving
metallurgical recoveries at both mills in Mexico and has successfully achieved consistently higher metallurgical recovery levels
to an average level of 82% at the Piedras Verdes Mill located at the Bolivar Mine and to an average level of 83% at the Malpaso
Mill located near the Cusi Mine. This has been accomplished through a reduction in the grind size of the ore processed to a particle
size distribution level of P80 allowing for the optimal release of mineralization, and milling throughput. Additionally, at the
Cusi Mine recoveries have been increased through the identification, classification and individual treatment of separated ore types.
The separated ore types are then processed through individual campaigns, and through the addition of lime, recoveries are increased.
Furthermore, at Cusi the Company has also implemented a comprehensive cost analysis for each campaign sent to the mill to ensure
that only economic ore is processed which also helps to control mill expenses and improve operating margins. Studies are underway
to define capital requirements to expand the Yauricocha, Cusi, and Bolivar mines in the following areas: New tailings facilities,
mine development and plant expansions during the second half of 2018.



The Company has a history of strong operating
cash flow generation, as evidenced by $79.8 million of operating cash flows before movements in working capital generated during
2017, and had cash and cash equivalents of $23.9 million as at December 31, 2017. The Company has been successful in maintaining
positive cash flow generation from its existing operations in order to reduce debt levels, fund required capital expenditures,
and maintain liquidity. The Company’s objective of reducing debt levels equal to or less than 1 times EBITDA was reached
during 2017 as 2017 Adjusted EBITDA of $81 million was greater than the $65 million of debt on the books at year end. The Company
continues to believe that its treasury, future cash flows, and potential ATM financing will be adequate to finance the capital
expenditures budgeted at each of the three mines.



Filing of Preliminary Base Shelf Prospectus
and Registration Statement



On May 18, 2017, the Company announced
that it filed a preliminary short form base shelf prospectus (the “Shelf Prospectus”) with the securities regulatory
authorities in each of the provinces of British Columbia, Alberta and Ontario, and a corresponding registration statement on Form
F-10 (the “Registration Statement”) with the U.S. Securities and Exchange Commission (“SEC”)
in accordance with the Multijurisdictional Disclosure System established between Canada and the United States.



The Shelf Prospectus and Registration Statement,
when made final and effective, will enable the Company to make offerings of up to C$75 million of common shares, warrants, units
and subscription receipts or a combination thereof of the Company from time to time, separately or together, in amounts, at prices
and on terms to be determined based on market conditions at the time of the offering and as set out in an accompanying prospectus
supplement, during the 25-month period that the Shelf Prospectus and Registration Statement, when made final, remain effective.
Unless otherwise specified in the prospectus supplement relating to a particular offering of securities, the net proceeds from
any sale of any securities will be used for general working capital purposes, and for one or more other general corporate purposes
including to complete corporate acquisitions, to, directly or indirectly, finance future growth opportunities and to repay existing
or future indebtedness. The specific terms of any future offering will be established in a prospectus supplement to the Shelf Prospectus,
which supplement will be filed with the applicable Canadian securities regulatory authorities and the SEC.



13







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Announcement of “At-The-Market”
Issuance Program and Filing of Prospectus Supplement



On October 10, 2017, the Company announced
that it entered into an Open Market Sale AgreementSM(the “Sales Agreement”) with Jefferies LLC, H.C. Wainwright
& Co., LLC, Scotia Capital (USA) Inc. and Noble Capital Markets, Inc. (collectively, the "Agents"), pursuant to which
the Company may, at its discretion and from time to time during the term of the Sales Agreement, sell, through the Agents, acting
as agent and/or principal, such number of common shares of the Company (“Common Shares”) as would result in aggregate
gross proceeds to the Company of up to US$55 million. Sales of Common Shares through the Agents, acting as agent, will be made
through “at the market” issuances on the NYSE American at the market price prevailing at the time of each sale, and,
as a result, sale prices may vary. No Common Shares will be offered or sold in Canada.



The Company has filed a prospectus supplement,
dated October 10, 2017, to the base prospectus included in its U.S. registration statement on Form F-10 (Registration No. 333-218076)
declared effective on July 7, 2017, pursuant to which the Company may issue up to US$55.0 million of Common Shares (but not more
than 22,500,000 Common Shares) in an at-the-market distribution.



The Company intends to use the net proceeds
of the offering for general corporate purposes, including debt repayment and/or capital requirements. In accordance with our amended
acquisition credit facility with Banco de Credito del Peru (“BCP”), at least 50% of the proceeds which we receive from
the offering must be allocated to the mandatory prepayment of the amounts owing to BCP under such facility.



2018 Production and Cost Guidance



This section of the MD&A provides
management’s production, cost, and capex estimates for 2018. These are “forward-looking statements” and subject
to the cautionary note regarding the risks associated with forward-looking statements contained at the end of this document



2018 Production and Cost Guidance



The Company anticipates that 2018 silver
equivalent production will range between 13.9 and 16.2 million ounces, copper equivalent production will range between 89.2 and
104.0 million pounds, and zinc equivalent production will range between 183.8 and 214.5 million pounds. The forecasted range is
a result of increased throughput, production, and higher recoveries at Bolivar and Cusi. Yauricocha will see consistently strong,
albeit flat levels of throughput in 2018 due to a rehabilitation of the lower part of the Mascota shaft in Q2 2018, which will
slightly lower throughput rates during that time period.



14







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



A table summarizing 2018 production guidance
has been provided below:



|                                    |  | 2018 Guidance |         |  | 2017 | 
|----------------------------------- |  | ------------- | ------- |  | ---- | 
|                                    |  | Low           |         |  | High | 
|Silver ounces (000's)               |  |               | 2,474   |  |      | 
|Copper pounds (000's)               |  |               | 32,700  |  |      | 
|Lead pounds (000's)                 |  |               | 19,100  |  |      | 
|Zinc pounds (000's)                 |  |               | 62,900  |  |      | 
|Gold ounces                         |  |               | 6,700   |  |      | 
|Silver equivalent ounces (000's)(1) |  |               | 13,900  |  |      | 
|Copper equivalent pounds (000's)(1) |  |               | 89,184  |  |      | 
|Zinc equivalent pounds (000's)(1)   |  |               | 183,830 |  |      | 



(1) Silver equivalent ounces, copper and zinc equivalent pounds
for 2018 were calculated using the following metal prices: $18.25/oz Ag, $3.00/lb Cu, $1.38/lb Pb, $1.05/lb Zn, $1,291/oz Au. Silver
equivalent ounces, copper and zinc equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz
Ag, $2.82/lb Cu, $1.06/lb Pb, $1.32/lb Zn, $1,265/oz Au.



A mine by mine breakdown of 2018 production
guidance, cash costs and all-in sustaining costs (“AISC”) are included in the table below. Cash costs and AISC guidance
is shown per payable zinc equivalent pound at Yauricocha, copper equivalent pound at Bolivar, and silver equivalent ounce at Cusi.



|Mine       |  |                       |  | Equivalent
    Production Range |  | Cash Costs per
ZnEqLb or CuEqLb or AgEqOz Sold |       |     | AISC ($)* per ZnEqLb or CuEqLb or AgEqOz Sold |  
|---------- |  | --------------------- |  | ------------------------------- |  | ---------------------------------------------- | ----- | --- | --------------------------------------------- | -
|Yauricocha |  | Zinc Eq Lbs (000's)   |  | 123,897 - 144,546               |  | $                                              | 0.62  | /lb |                                               | $
|Bolivar    |  | Copper Eq Lbs (000's) |  | 21,986 - 25,651                 |  | $                                              | 1.60  | /lb |                                               | $
|Cusi       |  | Silver Eq Ozs (000's) |  | 1,205 - 1,406                   |  | $                                              | 11.12 | /oz |                                               | $



*AISC includes Treatment and Refining Charges, Selling Costs,
G&A Costs and Sustaining Capex

(1) 2018 Silver equivalent ounces, copper and zinc equivalent
pounds were calculated using the following metal prices: $18.25/oz Ag, $3.00/lb Cu, $1.05/lb Pb, $1.38/lb Zn, $1,291/oz Au



2018 Capital Expenditures



In 2018, the Company plans to invest a
total of $49 million on capital expenditures, including $13.1 million for sustaining capital requirements and $35.7 million for
expansion, growth projects and exploration expenses. These capital expenditures will allow Sierra Metals to continue to significantly
grow mineral resources and increase production, which will provide increased cash flow and lower cash costs. This program will
be funded by operating cash flow.



15







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The 2018 budget includes several capital
investments for property, plant and equipment; underground development; exploration; and corporate projects including tunnel completion,
shaft deepening and rehabilitation at the Yauricocha Mine, and improvements to existing tailings deposition facilities at the Bolivar
and Cusi Mines. Management will continue to review metal prices and retains the option to adjust the 2018 budget should metal prices
experience any dramatic changes within the year.



A breakdown by mine of the throughput and
planned capital investments is shown below:



The Yauricocha Mine in Peru plans to process
up to 1.0 million tonnes (3,000 tpd) in 2018. Sustaining capex will be approximately $8.4 million and growth capex will be approximately
$19.3 million.



2018 major capital investments include:



| | · | $6.0 million for deepening of the Yauricocha
Shaft
| | - | --------------------------------------------------

| | · | $1.8 million for rehabilitation of
the lower portion of Mascota Shaft
| | - | ---------------------------------------------------------------------

| | · | $2.7 million for the completion of
the Yauricocha Tunnel
| | - | --------------------------------------------------------

| | · | $3.2 million ventilation
| | - | ------------------------

| | · | $6.0 million for brownfield exploration
and existing definition drilling and development
| | - | ----------------------------------------------------------------------------------------

| | · | $1.1 million for concentrator plant
| | - | -----------------------------------

| | · | $1.0 million for mine camp
| | - | --------------------------

| | · | $3.3 million for equipment
| | - | --------------------------



The Bolivar Mine in Mexico plans to process
up to 1.2 million tonnes, with initial production at 3,000 tpd with an objective to reach 3,500 tpd by year end in 2018. Sustaining
capex will be approximately $2.8 million and growth capex will be approximately $9.0 million.



2018 major capital investments include:



| | · | $1.0 million for tailings deposition
facility expansion
| | - | -------------------------------------------------------

| | · | $5.1 million for brownfield exploration
and existing definition drilling and development
| | - | ----------------------------------------------------------------------------------------

| | · | $3.0 million for concentrator plant
| | - | -----------------------------------

| | · | $2.7 million for equipment
| | - | --------------------------



The Cusi Mine in Mexico plans to process
up to 201,540 tonnes, ramping up from 300 tpd with an objective to reach 650 tpd in Q2 2018. Sustaining capex will be approximately
$1.9 million and growth capex will be $7.4 million.

2018 major capital investments include:



| | · | $1.5 million for tailings deposition
facility
| | - | ---------------------------------------------

| | · | $4.3 million for brownfield exploration
and existing definition drilling and development
| | - | ----------------------------------------------------------------------------------------

| | · | $1.4 million for equipment
| | - | --------------------------

| | · | $1.9 million for concentrator plant
| | - | -----------------------------------



16







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Market Review and Trends



Metal Prices



One of the primary drivers of Sierra’s
earnings and ability to generate operating cash flows are the market prices of silver, copper, zinc, lead and gold, which were
approximately 26% higher for copper, 26% higher for lead, 35% higher for zinc, and consistent for silver and gold, during 2017
compared to the average realized prices for 2016. A shortage of non-ferrous raw materials combined with an improved view of the
Chinese economy have, in recent months, had a positive impact on the prices.



|LME Average Prices |  | Three months ended December 31, |       |  | Year ended December 31, |  
|------------------ |  | ------------------------------- | ----- |  | ----------------------- | -
|(In US dollars)    |  | 2017                            |       |  | 2016                    |  
|                   |  |                                 |       |  |                         |  
|Silver (oz)        |  | $                               | 16.70 |  |                         | $
|Copper (lb)        |  | $                               | 3.09  |  |                         | $
|Lead (lb)          |  | $                               | 1.13  |  |                         | $
|Zinc (lb)          |  | $                               | 1.47  |  |                         | $
|Gold (oz)          |  | $                               | 1,277 |  |                         | $



Since February 2016, supply concerns, prevailing
low to negative interest rates and political uncertainty led to renewed investment demand in precious metals in comparison to the
last nine months of 2015. However, nearing the end of 2016, the U.S. election results revived the sentiment towards the U.S. economy
and U.S. dollar, resulting in both silver and gold prices depreciating against the U.S. currency. The price of gold began the quarter
at $1,245 per ounce and closed, essentially unchanged, at $1,243 per ounce. The main economic feature of the quarter was a further
interest rate hike by the US Federal Reserve on June 14, 2017, and it was this, and the threat of further rate hikes during the
remainder of the year, that may have kept the price capped. In 2017, investor uncertainty surrounding the effectiveness of the
U.S. administration and its policies, particularly escalating signals of implementing tariffs has renewed interest in precious
metals.



During 2017, the prices of silver and gold
were consistent compared to 2016, with the price ranging from $15.18 to $18.55 per ounce for silver and $1,150 to $1,350 per ounce
for gold. Sierra’s average realized silver price for 2017 was $17.14 per ounce compared to $17.16 per ounce in 2016. Sierra’s
average realized gold price for 2017 was $1,265 per ounce compared to $1,267 per ounce in 2016.



London Metal Exchange (LME) copper prices traded in a range
of $2.48 to $3.27 per pound with an average price of $2.80 per pound compared with $2.21 per pound in 2016. Global demand for copper
metal grew by 2.0% in 2017, in comparison to 2.7% in 2016, to reach an estimated 23.0 million tonnes. In 2017, global copper mine
production decreased 0.7% in 2017, with total production estimated at 19.9 million tonnes. The industry faced several disruptions
to production in the first half of 2017, mostly attributable to labour disputes. Fundamentals remain positive over the medium to
long term, with supply constrained by lower grades and a lack of investment in new projects over the past six years due to the
downtrend in copper prices. Sierra’s average realized copper price for 2017 was $2.28 per pound compared to $2.23 per pound
in 2016.



17







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



During 2017, zinc prices traded in a range
of $1.10 to $1.53 per pound with an average price of $1.31 compared with $0.95 per pound in 2016. Sierra’s realized zinc
price for 2017 was $1.32 per pound compared to $0.98 per pound in 2016. Year to date LME zinc prices averaged US$1.31 per pound,
up US$0.36 per pound or 40% over the same period last year. Zinc reached a 10-year high in October at just under US $1.53 per pound,
a price last seen in August 2007. LME stocks fell by 245,800 tonnes in 2017, a 58% decline from 2016 levels, finishing the year
at 182,050 tonnes. We estimate that total reported global stocks — which include producer, consumer, merchant and terminal
stocks — fell by approximately 345,200 tonnes in 2017 and, at year-end, were 0.75 million tonnes, representing an estimated
20 days of global demand, compared to the 25-year average of 41 days.



Lead prices traded in a range of $0.93
to $1.18 per pound in 2017. Sierra’s realized lead price during 2017 was $1.06 per pound compared to $0.84 per pound in 2016.



Currency Exchange Rates



The results of Sierra’s operations
are affected by US dollar exchange rates. Sierra’s largest exposures are to the US dollar/Peruvian Nuevo Sol exchange rate
and the US dollar/Mexican Peso exchange rate which impacts operating and administration costs in Peru and Mexico incurred in Nuevo
Soles and Pesos while revenues are earned in US dollars. As at December 31, 2017 the US dollar/Peruvian Nuevo Sol exchange rate
was 3.26 (December 31, 2016: 3.35) and the US dollar/Mexican Peso exchange rate was 19.74 (December 31, 2016: 20.74). A 10% change
in the value of the Nuevo Sol and Peso against the US dollar would result in a change of $4.2 million and $1.4 million in the Company’s
net profit, respectively, assuming that our operational performance during 2017 was consistent with 2016.



The Company also has a minor exposure to
the Canadian dollar through corporate administrative costs.



18







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 5. | RESULTS OF OPERATIONS
| | -- | ---------------------



Selected Production Results on a Mine-by-Mine
Basis for the Past Eight Quarters



|                               |  | 2017 |         |  | 2016 | 
|------------------------------ |  | ---- | ------- |  | ---- | 
|Production Highlights          |  | Q4   |         |  | Q3   | 
|Ore Processed/tonnes milled    |  |      |         |  |      | 
|Yauricocha                     |  |      | 266,222 |  |      | 
|Bolivar                        |  |      | 226,986 |  |      | 
|Cusi                           |  |      | 16,280  |  |      | 
|Consolidated                   |  |      | 509,488 |  |      | 
|Silver ounces produced (000's) |  |      |         |  |      | 
|Yauricocha                     |  |      | 330     |  |      | 
|Bolivar                        |  |      | 84      |  |      | 
|Cusi                           |  |      | 82      |  |      | 
|Consolidated                   |  |      | 496     |  |      | 
|Copper pounds produced (000's) |  |      |         |  |      | 
|Yauricocha                     |  |      | 3,567   |  |      | 
|Bolivar                        |  |      | 3,904   |  |      | 
|Cusi                           |  |      | -       |  |      | 
|Consolidated                   |  |      | 7,471   |  |      | 
|Lead pounds produced (000's)   |  |      |         |  |      | 
|Yauricocha                     |  |      | 5,431   |  |      | 
|Bolivar                        |  |      | -       |  |      | 
|Cusi                           |  |      | 305     |  |      | 
|Consolidated                   |  |      | 5,736   |  |      | 
|Zinc pounds produced (000's)   |  |      |         |  |      | 
|Yauricocha                     |  |      | 19,393  |  |      | 
|Bolivar                        |  |      | -       |  |      | 
|Cusi                           |  |      | 152     |  |      | 
|Consolidated                   |  |      | 19,545  |  |      | 
|Gold ounces produced           |  |      |         |  |      | 
|Yauricocha                     |  |      | 723     |  |      | 
|Bolivar                        |  |      | 791     |  |      | 
|Cusi                           |  |      | 77      |  |      | 
|Consolidated                   |  |      | 1,591   |  |      | 



19







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



|                                           |  | 2017 |        |  | 2016 |  
|------------------------------------------ |  | ---- | ------ |  | ---- | -
|Production Highlights                      |  | Q4   |        |  | Q3   |  
|Silver equivalent ounces produced (000's)1 |  |      |        |  |      |  
|Yauricocha                                 |  |      | 3,084  |  |      |  
|Bolivar                                    |  |      | 873    |  |      |  
|Cusi                                       |  |      | 121    |  |      |  
|Consolidated                               |  |      | 4,078  |  |      |  
|Copper equivalent pounds produced (000's)1 |  |      |        |  |      |  
|Yauricocha                                 |  |      | 16,527 |  |      |  
|Bolivar                                    |  |      | 4,677  |  |      |  
|Cusi                                       |  |      | 652    |  |      |  
|Consolidated                               |  |      | 21,856 |  |      |  
|Cash cost per tonne processed              |  |      |        |  |      |  
|Yauricocha                                 |  | $    | 64.90  |  |      | $
|Bolivar                                    |  | $    | 28.84  |  |      | $
|Cusi                                       |  | $    | 119.06 |  |      | $
|Consolidated                               |  | $    | 50.57  |  |      | $



|                                         |  | Three Months Ended |         |  | Year Ended        | 
|---------------------------------------- |  | ------------------ | ------- |  | ----------------- | 
|Consolidated Production                  |  | December 31, 2017  |         |  | December 31, 2016 | 
|Tonnes
    processed                     |  |                    | 509,488 |  |                   | 
|Daily
    throughput                     |  |                    | 5,694   |  |                   | 
|                                         |  |                    |         |  |                   | 
|Silver ounces (000's)                    |  |                    | 496     |  |                   | 
|Copper pounds (000's)                    |  |                    | 7,471   |  |                   | 
|Lead pounds (000's)                      |  |                    | 5,736   |  |                   | 
|Zinc pounds (000's)                      |  |                    | 19,545  |  |                   | 
|Gold ounces                              |  |                    | 1,591   |  |                   | 
|Silver
    equivalent ounces (000's) (1) |  |                    | 4,078   |  |                   | 
|Copper
    equivalent pounds (000's) (1) |  |                    | 21,856  |  |                   | 
|Zinc
    equivalent pounds (000's) (1)   |  |                    | 47,287  |  |                   | 
|Metals
    payable in concentrates       |  |                    |         |  |                   | 
|Silver ounces (000's)                    |  |                    | 400     |  |                   | 
|Copper pounds (000's)                    |  |                    | 7,078   |  |                   | 
|Lead pounds (000's)                      |  |                    | 5,193   |  |                   | 
|Zinc pounds (000's)                      |  |                    | 15,047  |  |                   | 
|Gold ounces                              |  |                    | 815     |  |                   | 
|Silver
    equivalent ounces (000's) (1) |  |                    | 3,428   |  |                   | 
|Copper
    equivalent pounds (000's) (1) |  |                    | 18,367  |  |                   | 
|Zinc
    equivalent pounds (000's) (1)   |  |                    | 39,648  |  |                   | 



(1) Silver equivalent ounces and copper
and zinc equivalent pounds for Q4 2017 were calculated using the following realized prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb
Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for Q4 2016 were calculated using
the following realized prices: $16.82/oz Ag, $2.38/lb Cu, $0.95/lb Pb, $1.16/lb Zn, $1,210/oz Au. Silver equivalent ounces and
copper and zinc equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu,
$1.06/lb Pb, $1.32/lb Zn, $1,265/oz Au. Silver equivalent ounces and copper and zinc equivalent pounds for 12M 2016 were calculated
using the following realized prices: $17.08/oz Ag, $2.21/lb Cu, $/0.85lb Pb, $0.95/lb Zn, $1,254/oz Au.



The Peruvian Operation



Yauricocha Mine, Yauyos, Peru



Corona’s main asset, Yauricocha,
is an underground mine located in western central Peru in the Yauyos province, approximately 12 km west of the Continental Divide.
The Yauricocha property covers 18,778 hectares that straddle a 20 km strike length of the prolific Yauricocha fault, a major ore
controlling structure in this part of western central Peru. The mine is at an average altitude of 4,600 meters and has been producing
for more than 68 years. Ore is processed at the on-site Chumpe plant using a combination of crushing, grinding and flotation and
is soon to be permitted to produce at a rate of 3,000 tpd. The ore is treated in two separate circuits and is extracted from three
different types of deposits which include the following:



| | - | A polymetallic deposit, containing silver, lead, zinc,
copper, and gold
| | - | -----------------------------------------------------------------------

| | - | A lead oxide deposit, containing lead, silver and gold
| | - | ------------------------------------------------------

| | - | A copper oxide deposit, containing copper, silver,
lead and gold
| | - | ----------------------------------------------------------------



20







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Yauricocha Mineral Reserve Estimate



The Reserves Estimate at Yauricocha is
the result of the recent significant increase to Mineral Resource stated in the September 28, 2017 press release. A Technical Report
was prepared by SRK Consulting (U.S.) Inc. in accordance with NI 43-101 and was filed on SEDAR.



| | · | Mineral Reserves for Yauricocha are 8,917,000 tonnes averaging 48.3
g/t silver, 1.2% copper, 0.8% lead, 2.4% zinc and 0.5 g/t gold representing a 134% increase to the previous Reserve Estimate.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total Proven and Probable Contained Metal has significantly increased
by 86% silver, 237% copper, 58% lead, 96% zinc, and 97% gold as compared to the previous August 2016 reserve estimate.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Increases to copper contained metal reflect the discovery and delineation
of new Cu-rich zones in Cuye, Mascota, and Esperanza and a 14% increase in Copper Price.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The updated Reserve Estimate has incorporated the recent significant
increase to Yauricocha’s Mineral Resource (press released on September 28th, 2017). This Reserve Estimate does
not include the latest drill intercepts reported from Cuye-Mascota (press released on October 2, 2017) as they were completed after
the cut-off date of the current report.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In addition, metal pricing, metallurgical recoveries, costs, and other
factors have been updated to reflect July 31, 2017 actuals and assumptions
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Yauricocha Reserve Estimate
– July 31, 2017



|                               |  |                       |  |  |       |  |  |    |      |  |    |  |     |    |  |  |     |  |  | Contained Metal |    
|------------------------------ |  | --------------------- |  |  | ----- |  |  | -- | ---- |  | -- |  | --- | -- |  |  | --- |  |  | --------------- | ---
|                               |  | Tonnes                |  |  | Ag    |  |  | Cu |      |  | Pb |  |     | Zn |  |  | Au  |  |  | Ag              |    
|Reserves - Proven and Probable |  | (000's)               |  |  | g/t   |  |  | %  |      |  | %  |  |     | %  |  |  | g/t |  |  | M oz            |    
|Yauricocha                     |  |                       |  |  |       |  |  |    |      |  |    |  |     |    |  |  |     |  |  |                 |    
|                               |  | Proven                |  |  | 1,836 |  |  |    | 46.6 |  |    |  | 1.1 |    |  |  | 0.8 |  |  |                 | 2.6
|                               |  | Probable              |  |  | 7,081 |  |  |    | 48.8 |  |    |  | 1.2 |    |  |  | 0.8 |  |  |                 | 2.4
|                               |  | Proven
    & Probable |  |  | 8,917 |  |  |    | 48.3 |  |    |  | 1.2 |    |  |  | 0.8 |  |  |                 | 2.4



| | (1) | All figures rounded to reflect the relative accuracy of the estimates. Total may not
sum due to rounding.
| | --- | ---------------------------------------------------------------------------------------------------------



| | (2) | The consolidated Yauricocha Reserve Estimate is comprised of the proven and probable material in
the Mina Central, Esperanza, Cach-Cachi, Mascota, Cuye, and Cuerpos Pequenos mining areas.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Mineral reserves are reported at unit value cut-offs (COG) based on metal price assumptions*, variable
metallurgical recovery assumptions (variable metallurgical recoveries** as a function of grade and relative metal distribution
in individual concentrates), and variable grade adjustments*** made to the resource model.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | * | Metal price assumptions considered for the calculation
of unit values are: Gold (US$/oz 1,255.00), Silver (US$/oz 17.80), Copper (US$/lb 2.60), Lead (US$/lb 1.01), and Zinc (US$/lb
1.25)
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | Metallurgical recovery assumptions for the Yauricocha
Mine are variable by mineralization style and degree of oxidation. Recovery is a function of grade and relative metal distribution
in individual concentrates. The assumptions are built in to the unit values for each area, as a function of the metallurgical
recovery multiplied by the metal price.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | *** | Grade adjustment factors are based on historical mine
to mill reconciliation and are variable by mining area.
| | --- | -------------------------------------------------------------------------------------------------------------



| | (4) | The mining costs are variable by mining method.
| | --- | -----------------------------------------------



| | (5) | Mining recovery and dilution have been applied and are variable by mining area and proposed mining
method.
| | --- | ----------------------------------------------------------------------------------------------------------



| | (6) | The unit value cut-off grades (COG) are variable by mining area and proposed mining method. The
economic COG ranges from US$56-63.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------



21







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Mineral Reserve Estimate



Mineral Reserve Estimations have been conducted
or reviewed by the following Qualified Persons:



Shannon L. Rhéaume of SRK Consulting
(Canada) Inc.; Datamine Studio 5DPTM and Enhanced Production Scheduler (EPS)TM Software



Yauricocha Mineral Resource Estimate



The Resource Estimate at Yauricocha is
the result of a successful exploration drill program completed at several zones within the mine including Mina Central, Esperanza,
Cachi-Cachi, Escondida and Cuye-Mascota which have been previously press released and now represent a material proportion of the
mine’s overall resources. A Technical Report is currently being prepared by SRK Consulting (U.S.) Inc. in accordance with
NI 43-101 and will be filed on SEDAR and with the Securities Exchange Commission within 45 days of the news release dated September
28, 2017.



| | · | Total Measured and Indicated Contained Metal has significantly increased
by 72% silver, 128% copper, 74% zinc, 64% lead and 61% gold
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| | · | Total Inferred Contained Metal has significantly increased by 55%
silver, 59% copper, 105% zinc, 42% lead and 83% gold
| | - | ----------------------------------------------------------------------------------------------------------------------

| | · | Mineral Resources for Yauricocha are 13,206,000 tonnes averaging 62.3
g/t silver, 1.5% copper, 0.9% lead, 2.8% zinc and 0.6 g/t gold representing a 68% increase from the previous resource tonnage estimate
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total Inferred Mineral Resources for Yauricocha are 6,632,000 tonnes
averaging 43.0 g/t silver, 1.2% copper, 0.5% lead, 2.2% zinc and 0.5 g/t gold representing a 77% increase from the previous resource
tonnage estimate
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Increases
to copper grade reflect the discovery and delineation of new Cu-rich zones in Cuye, Mascota, and Esperanza and a 14% increase
in Copper Price assumptions
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Yauricocha Resource Estimate – July 31,
2017



|                                   |  |           |  |        |        |  |    |   |      |    |   |  |     |   |  |    |     |  |    |      |     | Contained Metal |     
|---------------------------------- |  | --------- |  | ------ | ------ |  | -- | - | ---- | -- | - |  | --- | - |  | -- | --- |  | -- | ---- | --- | --------------- | ----
|                                   |  |           |  | Tonnes |        |  | Ag |   |      | Cu |   |  | Pb  |   |  | Zn |     |  | Au |      |     | Ag              |     
|Resources - Measured and Indicated |  | (000's)   |  |        | g/t    |  |    | % |      |    | % |  |     | % |  |    | g/t |  |    | M oz |     |                 | M lb
|Yauricocha                         |  |           |  |        |        |  |    |   |      |    |   |  |     |   |  |    |     |  |    |      |     |                 |     
|                                   |  | Measured  |  |        | 3,094  |  |    |   | 70.0 |    |   |  | 1.7 |   |  |    | 1.2 |  |    |      | 3.2 |                 |     
|                                   |  | Indicated |  |        | 10,112 |  |    |   | 59.9 |    |   |  | 1.5 |   |  |    | 0.8 |  |    |      | 2.7 |                 |     
|                                   |  | M
    + I |  |        | 13,206 |  |    |   | 62.3 |    |   |  | 1.5 |   |  |    | 0.9 |  |    |      | 2.8 |                 |     
|                                   |  | Inferred  |  |        | 6,632  |  |    |   | 43.0 |    |   |  | 1.2 |   |  |    | 0.5 |  |    |      | 2.2 |                 |     



| | (1) | Mineral resources are reported inclusive of ore reserves. Mineral resources are not ore reserves
and do not have demonstrated economic viability. All figures rounded to reflect the relative accuracy of the estimates.
Gold, silver, copper lead and zinc assays were capped where appropriate.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Mineral resources are reported at unit value cut-offs grades (COG) based on metal price assumptions*,
variable metallurgical recovery assumptions (variable metallurgical recoveries** as a function of grade and relative metal distribution
in individual concentrates), generalized mining/processing costs).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | * | Metal price assumptions considered for the calculation
of unit values are: Gold (US$/oz 1,255.00), Silver (US$/oz 17.80), Copper (US$/lb 2.60), Lead (US$/lb 1.01) and Zinc (US$/lb 1.25)
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | Metallurgical recovery assumptions for the Yauricocha
Mine are variable by mineralization style and degree of oxidation. The assumptions are built in to the unit values for each area,
as a function of the metallurgical recovery multiplied by the metal price.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | The unit value COG are variable, by mining area and proposed mining method. The COG ranges from
US$41-48.
| | --- | ---------------------------------------------------------------------------------------------------------



22







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The updated Resource Estimate has incorporated
significant new exploration information into the geologic interpretation and grade estimations, providing more refined resource
models in previously known areas as well as expanding the resource base with new discoveries.



The Updated Resource Estimate varies significantly from the
2016 Technical Report due to a combination of material factors including but not limited to:



| | · | Significant additional drilling (80,000m) and mine exploration development
(10,000m).
| | - | -------------------------------------------------------------------------------------

| | · | The previous drilling and sampling information was based on end-of-year
2015 totals, and is now effective as of July 31, 2017.
| | - | ------------------------------------------------------------------------------------------------------------------------------

| | · | Refinements to the geologic models and additions of previously un-modeled
areas.
| | - | --------------------------------------------------------------------------------

| | · | Discovery and delineation of new Cu-rich zones in Cuye, Mascota, and
Esperanza.
| | - | -------------------------------------------------------------------------------

| | · | Expansion of Mina Central, Cachi Cachi, and Esperanza mineralization
along strike and at depth.
| | - | -----------------------------------------------------------------------------------------------

| | · | Increases in metal pricing compared to previous estimates, most notably
a 33% increase in Zn and a 14% increase in Cu metal price assumptions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | · | Zn is a major commodity produced at Yauricocha, and this increase
in pricing has a material effect on the value of material that may have previously been marginal or not reported in the previous
resource statement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Update to the Yauricocha Capex included in the recently
published NI 43-101 Technical Report



The technical report filed on SEDAR on
November 10, 2017 noted the inclusion in reserves of 9M tonnes. As indicated in the report, during the years 2018, 2019 and 2020,
capital expenditures would have amounted to approximately $70 million, and this estimate had the shaft sinking down to the 1400
level.



Management has revised some of the estimated
capex, and the related activity program for the expenditures was reduced to 2 years from the 3-year timeline set out in the November
2017 technical report.



The capital expenditures included in the technical report has
been reduced by $18M, to $52M (capex expected to be spent in 2018 is $28M). This reduction resulted in the elimination of 130 meters
of shaft sinking, the elimination of the proposed 1370 level station, and the elimination of the 1400 level loading and spill pocket.
This program does not compromise the ability to access the 9M tonnes of reserves delineated in the technical report. This revised
capex estimate reflects the necessary capital required to mine the existing 9M tonnes of reserves included in the technical report.



Mineral Resource Estimate



Mineral Resource Estimations have been conducted or reviewed
by the following Qualified Person:



Matthew
Hastings of SRK Consulting (U.S.) Inc.; Maptek VulcanTM Software



23







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Yauricocha Production



A summary of contained metal production
from the Yauricocha Mine for the three months and year ended December 31, 2017 has been provided below:



|                                  |  | 3 Months Ended |         |   | 12 Months Ended | 
|--------------------------------- |  | -------------- | ------- | - | --------------- | 
|Yauricocha Production             |  | Q4 2017        |         |   | Q4 2016         | 
|                                  |  |                |         |   |                 | 
|Tonnes processed (mt)             |  |                | 266,222 |   |                 | 
|Daily throughput                  |  |                | 3,043   |   |                 | 
|                                  |  |                |         |   |                 | 
|Silver grade (g/t)                |  |                | 53.57   |   |                 | 
|Copper grade                      |  |                | 0.80    | % |                 | 
|Lead grade                        |  |                | 1.19    | % |                 | 
|Zinc grade                        |  |                | 3.91    | % |                 | 
|Gold Grade (g/t)                  |  |                | 0.55    |   |                 | 
|Silver recovery                   |  |                | 75.13   | % |                 | 
|Copper recovery                   |  |                | 78.86   | % |                 | 
|Lead recovery                     |  |                | 81.32   | % |                 | 
|Zinc recovery                     |  |                | 88.25   | % |                 | 
|Gold Recovery                     |  |                | 16.02   | % |                 | 
|                                  |  |                |         |   |                 | 
|Silver ounces (000's)             |  |                | 330     |   |                 | 
|Copper pounds (000's)             |  |                | 3,567   |   |                 | 
|Lead pounds (000's)               |  |                | 5,431   |   |                 | 
|Zinc pounds (000's)               |  |                | 19,393  |   |                 | 
|Gold ounces                       |  |                | 723     |   |                 | 
|                                  |  |                |         |   |                 | 
|Zinc equivalent pounds (000's)(1) |  |                | 35,758  |   |                 | 



(1) Zinc equivalent pounds for Q4 2017 were calculated using
the following realized prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Zinc equivalent pounds for Q4
2016 were calculated using the following realized prices: $16.82/oz Ag, $2.38/lb Cu, $0.95/lb Pb, $1.16/lb Zn, $1,210/oz Au. Zinc
equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $1.06/lb Pb, $1.32/lb
Zn, $1,265/oz Au. Zinc equivalent pounds for 12M 2016 were calculated using the following realized prices: $17.08/oz Ag, $2.21/lb
Cu, $/0.85lb Pb, $0.95/lb Zn, $1,254/oz Au.



The Yauricocha Mine processed a total of
1,023,491 tonnes during 2017, representing a 14% increase from 2016. The mine processed a total of 266,222 tonnes in Q4 2017, representing
a 12% increase compared to Q4 2016. Higher metal production was driven by increased throughput, higher copper and zinc head grades,
and higher recoveries of all metals, except gold, which were a consequence of higher head grades in the ore sources available to
be mined, as the Esperanza Zone and Cuerpos Chicos continued to contribute to the metal production.



24







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Year over year zinc equivalent production
was 4% higher in 2017 compared to the prior year. Copper Production was 87% higher and zinc production 37% higher. This was offset
by a 10% decrease in silver production, a 23% decrease in lead production and a 38% decrease in gold production from 2016. The
Company continued to see positive improvements from the restructuring at Yauricocha with increased throughput; however, slightly
lower grades were noted with increased contribution from the Esperanza zone into the production schedule in Q4 2017, as evidenced
a 3% decrease in zinc equivalent production over Q4 2016. During Q4 2017, the Company saw a significant 107% increase in the production
of copper and a 16% increase in the production of zinc, offset by decreases in production of silver (40%), lead (42%) and gold
(20%) compared to Q4 2016.



The Mexican Operations



Bolivar Mine, Chihuahua State



The Bolivar Mine is a contiguous portion
of the 15,217 hectare Bolívar Property land package within the municipality of Urique, in the Piedras Verdes mining district
of Chihuahua State, Mexico. During 2012, the Company achieved its first full year of commercial production at the new Piedras Verdes
plant, which is located 6 kilometres from the Bolivar Mine that had an initial capacity of 1,000 tpd. In September 2013, the Piedras
Verdes plant further increased its daily throughput capacity to 2,000 tpd by installing a new circuit. The Company is currently
producing at a rate of approximately 2,700 tpd and expects to increase this throughput rate to 3,000 tpd and higher during Q4 2017
and beyond.



At Bolívar during Q4 2017, 10,402
meters were drilled from surface as well as diamond drilling within the mine. 1,766 meters were drilled within the mine, 328 meters
within Bolivar Northwest and 1,438 meters from Chimney 2. Diamond drilling from surface totaled 8,636 in the Bolivar Northwest
area, exploring the extension of the orebody to the North and West, exploring the skarn orebody with semi-massive magnetite, and
disseminated nodules of chalcopyrite. This area will continue to be explored during 2018.



Positive Drill Results from the High-Grade Bolivar West Zone
at the Bolivar Mine



On September 5, 2017, the Company announced assay results from
a recently completed definition drilling program at the Bolivar West zone, which is adjacent to the current operations at the Bolivar
Mine. The highlight of this program is that at completion the drill information will be included in a future resource update for
the Bolivar Mine. Our exploration programs have identified skarn ore deposits in the form of mantos in the area extending for eight
kilometers. The brownfield drilling program completed had been designed with a target of increasing the grades being mined at the
Bolivar Mine and defining further mineral resources.



Recently completed drill program of 28
holes (12,300 meters), has provided the Company with good Copper, Zinc and Silver Grades. This detailed drill data will provide
the Company with new data to update the current resources at the Bolivar mine. This resource update will be completed by Q4 2017.
Average grade of 2.55% copper equivalent with an average true width of 9.1 meters, which is significantly above Bolivar’s
current resource grade and current head grades. The in-fill drilling in this manto formation covered an area 300 meters long and
180 meters wide. Bolivar West still has further potential resource growth prospects and remains open to the northeast.



25







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Discovery of Several Wide, High-Grade Copper Structures at
the Bolivar Mine



On October 4, 2017, the Company announced
the initial results of the drilling program designed to test the anomalies of the Titan 24 Geophysical Survey recently completed
on the Bolivar Property. The Titan 24 survey was completed to follow up on geophysical, geological and geochemical anomalies identified.
The Titan 24 Geophysical survey was carried out to assist in mapping the extent of the Mantos and structures containing copper
and copper/zinc skarn mineralization for drill targeting in the immediate vicinity of the mine. The Bolivar survey grid consisted
of a total of 12 lines which were 26.5 kilometers in length. Titan 24 lines had 100-meter dipole spacing and 200-meter line spacing.
The survey covers an area of approximately 2.4 kilometers by 2.2 kilometers.

The Titan 24 survey highlighted over 40
specific areas of interest requiring further investigation and follow up. The 3D inversion modelling of the data provided an excellent
tool for further exploration and highlights the overall structure below the deposit, in addition to similar structures and mineralization
to the north of the deposit. The Company began the first phase of a drilling program to test the most promising anomalies and drilled
the first four holes. The results were very positive, as indicated in Table 1 and 2 below, and therefore the potential exists for
further exploration in these areas and the other multiple geophysical anomaly targets.



Bolivar Production



A summary of contained metal production
from the Bolivar Mine for the three months and year ended December 31, 2017 has been provided below:



|                                    |  | 3 Months Ended |         |   | 12 Months Ended | 
|----------------------------------- |  | -------------- | ------- | - | --------------- | 
|Bolivar Production                  |  | Q4 2017        |         |   | Q4 2016         | 
|                                    |  |                |         |   |                 | 
|Tonnes processed (mt)               |  |                | 226,986 |   |                 | 
|Daily throughput                    |  |                | 2,594   |   |                 | 
|                                    |  |                |         |   |                 | 
|Copper grade                        |  |                | 0.94    | % |                 | 
|Silver grade (g/t)                  |  |                | 14.67   |   |                 | 
|Gold grade (g/t)                    |  |                | 0.16    |   |                 | 
|Copper recovery                     |  |                | 83.03   | % |                 | 
|Silver recovery                     |  |                | 78.35   | % |                 | 
|Gold recovery                       |  |                | 68.42   | % |                 | 
|                                    |  |                |         |   |                 | 
|Copper pounds (000's)               |  |                | 3,904   |   |                 | 
|Silver ounces (000's)               |  |                | 84      |   |                 | 
|Gold ounces                         |  |                | 791     |   |                 | 
|                                    |  |                |         |   |                 | 
|Copper equivalent pounds (000's)(1) |  |                | 4,677   |   |                 | 



(1) Copper equivalent pounds for Q4 2017
were calculated using the following realized prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Copper
equivalent pounds for Q4 2016 were calculated using the following realized prices: $16.82/oz Ag, $2.38/lb Cu, $0.95/lb Pb, $1.16/lb
Zn, $1,210/oz Au. Copper equivalent pounds for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb
Cu, $1.06/lb Pb, $1.32/lb Zn, $1,265/oz Au. Copper equivalent pounds for 12M 2016 were calculated using the following realized
prices: $17.08/oz Ag, $2.21/lb Cu, $/0.85lb Pb, $0.95/lb Zn, $1,254/oz Au.



26







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The Bolivar Mine processed 887,237 tonnes
in 2017, representing a 7% decrease over 2016. Q4 2017 throughput was 226,986 tonnes, which was 7% lower when compared to Q4 2016.
The lower throughput and recoveries, along with lower head grades encountered, resulted in a 16% decrease in copper equivalent
production in Q4 2017 compared to Q4 2016. The decrease in throughput was due to the lack of availability of equipment required
to mine current production stopes and minable ore zones, as well as a lack of development within the mine. The focus remains on
increasing tonnage at Bolivar through the commissioning of the newly acquired equipment, all of which has arrived was commissioned
during Q4 2017. We continue to define higher grade ore sources through further development, which are expected to come into the
mine plan in the future.



Metal production at the Bolivar Mine decreased
in 2017 compared to 2016 with copper production 12% lower, silver production 18% lower and gold production 4% lower. In Q4 2017,
copper production decreased by 12% to 3,904,000 pounds, silver production decreased 15% to 84,000 ounces, and gold production decreased
1% to 791 ounces compared to Q4 2016. The 16% decrease in metal production was driven by lower throughput, lower head grades and
lower recoveries for all metals, with the exception of gold recoveries.



The Cusi Mine, Chihuahua



The Company’s Cusi Mine encompasses
73 concessions covering 11,977 hectares that include 12 historical mines, each located on a mineralized structure, which lie within
40 kilometers of the Malpaso Plant located in Chihuahua State, Mexico. On January 1, 2013 the Company announced that the Cusi Mine
achieved commercial production.



During Q4 2017, at the Cusi property, mine
development totaled 1,172 meters, and 846 meters of infill drilling was carried out inside the Mine. The Company drilled 846 meters
inside the mines to verify the continuity of the orebodies and support development work on the various veins and 153 meters on
surface.



Cusi Mineral Resource Estimate



On December 29, 2017 the Company provided
its updated Mineral Resource Estimate at the Company’s Cusi Mine, located in Chihuahua State, Mexico.



The updated Mineral Resource Estimate is
the result of drilling programs completed between January 2014 and August 2017. Subsequent to the cut-off date of August 31, 2017
the updated Resource statement includes additional 48,684 metre drilling program that was focused on the high-grade Santa Rosa
de Lima zone and Promontorio.



The Company believes that the Santa Rosa
de Lima zone demonstrates strong potential for further structural extensions of high-grade zones at the Company’s Cusi Mine.
Conversion of some of the higher grade to measured and indicated resources has been the priority for the Cusi exploration efforts.



A Technical Report prepared by SRK Consulting
(U.S.) Inc. in accordance with NI 43-101 standards of disclosure was completed and filed on SEDAR.



27







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | · | Total Measured and Indicated Resources
increased 129% to 4,557,000 tonnes from 1,990,000 tonnes previously reported; and Total Inferred Resources increased 36% to 1,633,000
tonnes from 1,200,000 tonnes previously reported
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total Measured Mineral Resources for Cusi
are 362,000 tonnes averaging 225g/t silver, 0.55% lead, 0.68% zinc, 0.13 g/t gold for a total 268 g/t Ag Eq
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total Indicated Mineral Resources for
Cusi are 4,195,000 tonnes averaging 217 g/t silver, 0.64% lead, 0.66% zinc, 0.21 g/t gold and 267 g/t AgEq
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total Inferred Mineral Resources for Cusi
are 1,633,000 tonnes averaging 158 g/t silver, 0.54% lead, 0.84% zinc, 0.16 g/t gold and 207 g/t AgEq
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| | · | The updated Resource Estimate varies from
the previous 2017 Technical Report due to a variety of factors, including the use of silver equivalent cut-off grade and depletion
by production since the previous Report was completed
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The updated Resource Estimate has incorporated
new exploration drilling, sampling, and underground mapping information into the geologic interpretation and grade estimations
providing more refined resource models in the areas of San Nicolas and Promontorio
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The update of the Mineral Resource Estimations
have been conducted by Giovanny Ortiz of SRK Consulting (U.S.) Inc., a Qualified Person under National Instrument 43-101 –
Standards of Disclosure for Mineral Projects, using Maptek VulcanTM and Leapfrog GeoTM software.



This sunmmary features mineral resources
reported from models reviewed and estimated by SRK using criteria determined by the Company and SRK to be reasonable for reporting
of these resources.



SRK has worked with the Company’s
personnel to review the geology models, and independently estimated and reported the mineral resources for Cusi. Geology models
were developed internally by the Company’s geologists and were reviewed by SRK. In all, there are thirty-eight individual
mineralized bodies identified through drilling and mine development. These were used as hard boundaries for the purposes of the
estimation. The resource is supported by a database featuring over 233,750m of drilling and over 23,800m of channel sampling in
mine development. The block models were created by SRK, and have been estimated using inverse distance squared methods. SRK has
validated the estimation for each model using a variety of methods considered to be industry standard. These include a visual comparison
of the blocks versus the composites, an assessment of the quality of the estimate, and comparative statistics of block estimates
vs. composites. The models have been depleted for previous production and reported within the boundaries of Sierra Metal’s
mineral titles. The mineral resources have been estimated and reported in conformity with generally accepted CIM “Estimation
of Mineral Resource and Mineral Reserves Best Practices” guidelines.



The August 31, 2017, consolidated mineral
resource statement for the Cusi Mine area is presented in Table 1.



Table 1:
Consolidated Cusi Mineral Resource Estimate as at August 31, 2017 – SRK Consulting (U.S.), Inc.



|Category |  | Tonnes (000's) |     |  | Ag (g/t) |  |     | Au (g/t) |  |  | Pb (%) |  |  | Zn (%) |      |  | AgEq (g/t) |  |      | Ag Moz |  |  | Au Koz |  |  | Pb Mlb |     |  | Zn Mlb |  |     | AgEq Moz | 
|-------- |  | -------------- | --- |  | -------- |  | --- | -------- |  |  | ------ |  |  | ------ | ---- |  | ---------- |  | ---- | ------ |  |  | ------ |  |  | ------ | --- |  | ------ |  | --- | -------- | 
|Measured |  |                | 362 |  |          |  | 225 |          |  |  | 0.13   |  |  |        | 0.55 |  |            |  | 0.68 |        |  |  | 268    |  |  |        | 2.6 |  |        |  | 1.5 |          | 



28







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



|Category  |  | Tonnes (000's) |       |  | Ag (g/t) |  |     | Au (g/t) |  |  | Pb (%) |  |  | Zn (%) |      |  | AgEq (g/t) |  |      | Ag Moz |  |  | Au Koz |  |  | Pb Mlb |      |  | Zn Mlb |  |      | AgEq Moz | 
|--------- |  | -------------- | ----- |  | -------- |  | --- | -------- |  |  | ------ |  |  | ------ | ---- |  | ---------- |  | ---- | ------ |  |  | ------ |  |  | ------ | ---- |  | ------ |  | ---- | -------- | 
|Indicated |  |                | 4,195 |  |          |  | 217 |          |  |  | 0.21   |  |  |        | 0.64 |  |            |  | 0.66 |        |  |  | 267    |  |  |        | 29.2 |  |        |  | 28.7 |          | 



|Category |  | Tonnes  (000's) |       |  | Ag (g/t) |  |     | Au (g/t) |  |  | Pb (%) |  |  | Zn (%) |      |  | AgEq (g/t) |  |      | Ag Moz |  |  | Au Koz |  |  | Pb Mlb |     |  | Zn Mlb |  |     | AgEq Moz | 
|-------- |  | --------------- | ----- |  | -------- |  | --- | -------- |  |  | ------ |  |  | ------ | ---- |  | ---------- |  | ---- | ------ |  |  | ------ |  |  | ------ | --- |  | ------ |  | --- | -------- | 
|Inferred |  |                 | 1,633 |  |          |  | 158 |          |  |  | 0.16   |  |  |        | 0.54 |  |            |  | 0.84 |        |  |  | 207    |  |  |        | 8.3 |  |        |  | 8.3 |          | 



| | (1) | Mineral resources are reported inclusive of ore reserves.
Mineral resources are not ore reserves and do not have demonstrated economic viability. All figures rounded to reflect
the relative accuracy of the estimates. Gold, silver, lead and zinc assays were capped where appropriate.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Mineral resources are reported at a single cut-off grade
of 105 g/t AgEq based on metal price assumptions*, metallurgical recovery assumptions, mining costs (US$29.41/t), processing costs
(US$18.3/t), and general and administrative costs (US$3.74/t).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Metal price assumptions considered for the calculation
of the cut-off grade and equivalency are: Silver (Ag): US$/oz 18.30, Lead (US$/LB 0.93), Zinc (US$/lb 1.15) and Gold (US$/oz 1,283.00).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The resources were estimated
by SRK. Giovanny Ortiz, B.Sc., PGeo, FAusIMM #304612 of SRK, a Qualified Person, performed the resource calculations for the Cusi
Mine.

| | ** | Based on the historical production information of Cusi,
the metallurgical recovery assumptions are: 84% Ag, 57% Au, 86% Pb, 51% Zn.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------



Cusi Production



A summary of contained metal production
from the Cusi Mine for the three months and year ended December 31, 2017 has been provided below:



|                                    |  | 3 Months Ended |        |   | 12 Months Ended | 
|----------------------------------- |  | -------------- | ------ | - | --------------- | 
|Cusi Production                     |  | Q4 2017        |        |   | Q4 2016         | 
|                                    |  |                |        |   |                 | 
|Tonnes processed (mt)               |  |                | 16,280 |   |                 | 
|Daily throughput                    |  |                | 186    |   |                 | 
|                                    |  |                |        |   |                 | 
|Silver grade (g/t)                  |  |                | 178.60 |   |                 | 
|Gold grade (g/t)                    |  |                | 0.25   |   |                 | 
|Lead grade                          |  |                | 0.97   | % |                 | 
|Zinc grade                          |  |                | 1.00   | % |                 | 
|Silver recovery                     |  |                | 88.15  | % |                 | 
|Gold recovery                       |  |                | 58.09  | % |                 | 
|Lead recovery                       |  |                | 87.65  | % |                 | 
|Zinc recovery                       |  |                | 42.50  | % |                 | 
|                                    |  |                |        |   |                 | 
|Silver ounces (000's)               |  |                | 82     |   |                 | 
|Gold ounces                         |  |                | 77     |   |                 | 
|Lead pounds (000's)                 |  |                | 305    |   |                 | 
|Zinc pounds (000's)                 |  |                | 152    |   |                 | 
|                                    |  |                |        |   |                 | 
|Silver equivalent ounces (000's)(1) |  |                | 122    |   |                 | 



(1) Silver equivalent ounces for Q4 2017 were calculated using
the following realized prices: $16.77/oz Ag, $3.13/lb Cu, $1.11/lb Pb, $1.45/lb Zn, $1,282/oz Au. Silver equivalent ounces for
Q4 2016 were calculated using the following realized prices: $16.82/oz Ag, $2.38/lb Cu, $0.95/lb Pb, $1.16/lb Zn, $1,210/oz Au.
Silver equivalent ounces for 12M 2017 were calculated using the following realized prices: $17.14/oz Ag, $2.82/lb Cu, $1.06/lb
Pb, $1.32/lb Zn, $1,265/oz Au. Silver equivalent ounces for 12M 2016 were calculated using the following realized prices: $17.08/oz
Ag, $2.21/lb Cu, $/0.85lb Pb, $0.95/lb Zn, $1,254/oz Au.



29







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Annual production at the Cusi Mine was
88,011 tonnes in 2017, which was 53% lower than 2016. Total ore processed decreased 55% to 16,280 tonnes during Q4 2017 compared
to Q4 2016. The lower throughput was partially offset by increased head grades for gold and silver and increased recoveries of
all metals except gold, and resulted in a 42% decrease in silver equivalent production in Q4 2017 compared to Q4 2016. Recovery
improvements at Cusi also helped, with metallurgical recoveries increasing in Q4 2017 compared to previous quarters.



Metal production decreased in 2017 compared
to 2016 for all metals including silver (54%), gold (56%), lead (57%) and zinc (48%). Silver production decreased 41% to 82,000
ounces, gold production decreased 51% to 77 ounces, lead production decreased 56% to 305,000 pounds and zinc production decreased
42% to 152,000 pounds during Q4 2017 compared to Q4 2016.



The lower throughput was the result of the Company refocusing
its efforts away from the existing structures to the recently discovered Santa Rosa de Lima structure, which is wider and has higher
silver grades compared to the narrow veins currently being mined. The Company remains focused on the development of the Santa Rosa
de Lima zone, developing drifts to mine this area and with production ramping up from this area, which is expected to continually
increase into Q2 2018 when full mill feed capacity will come from this new zone.



Consolidated Mineral Resources



|Reserves - Proven and Probable |  | Contained Metal       | 
|------------------------------ |  | --------------------- | 
|                               |  |                       | 
|                               |  |                       | 
|Yauricocha                     |  | Proven                | 
|                               |  | Probable              | 
|                               |  | Proven
    & Probable | 
|Bolivar                        |  | Proven                | 
|                               |  | Probable              | 
|                               |  | Proven & Probable     | 
|Total                          |  | Proven & Probable     | 



|Resources - Measured
    and Indicated |  | Contained
    Metal      | 
|-------------------------------------- |  | ------------------------ | 
|                                       |  |                          | 
|                                       |  |                          | 
|Yauricocha                             |  | Measured                 | 
|                                       |  | Indicated                | 
|                                       |  | Measured
    & Indicated | 
|Bolivar                                |  | Measured                 | 
|                                       |  | Indicated                | 
|                                       |  | Measured
    & Indicated | 
|Cusi                                   |  | Measured                 | 
|                                       |  | Indicated                | 
|                                       |  | Measured
    & Indicated | 
|Total                                  |  | Measured & Indicated     | 



|Resources - Inferred |  | Contained Metal | 
|-------------------- |  | --------------- | 
|                     |  |                 | 
|                     |  |                 | 
|Yauricocha           |  |                 | 
|Bolivar              |  |                 | 
|Cusi                 |  |                 | 
|Total                |  | Inferred        | 



Notes:

| | 1. | The effective date of the mineral reserve and resource
statement for the Yauricocha Mine is July 31, 2017. Details of the estimate are provided in a NI 43-101 tecnical report filed
on SEDAR on November 10, 2017. Silver/copper equivalent is based on the following metal price assumptions: US$17.31/oz Ag, US$2.70/lb
Cu, US$1.03/lb Pb and US$1.28 Zn and US$1,253/oz Au. Metallurgical recovery assumptions are based on Yauricocha actual plant data
for 2017 and are 67% Ag, 65% Cu, 85% Pb, 89% Zn, 16% Au. The equivalency expression is designed to present an in-situ silver equivalent,
considering the recovered value of the other metals expressed in the value of silver g/t.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The equation is: AgEq = ((Ag*Ag$*Agrec)+(Cu*Cu$*Curec)+(Pb*Pb$*Pbrec)+(Zn*Zn$*Znrec)+(Au*Au$*Aurec))
/ (Ag$*Agrec).

| | 2. | The effective date of the Bolivar mineral reserve and resource estimate is Sep 31, 2016. Details
of the estimate are provided in the Company’s Apr 11, 2017 press releases and a NI 43-101 compliant technical report filed
on SEDAR on Apr 19, 2017. Measured, Indicated and Inferred Resources include Proven and Probable Reserves. Copper equivalent is
based on the following metal prices: US$18.30/oz Ag, US2.43/lb Cu and US$1,283 Au. Totals for proven and probable are diluted for
internal waste.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The effective date of the Cusi mineral resource estimate is Aug 31, 2017. Details of the estimate
are provided in an NI 43-101 compliant technical report filed on SEDAR on February 12, 2018. Silver equivalent is based on the
following metal price assumptions. US$18.30/oz Ag, US$0.93/lb Pb, US$1.15 Zn, and US$1,283/oz Au. Based on the historical production
information for Cusi, the metallurgical recovery assumptions are 84% Ag, 86% Pb, 51% Zn, 57% Au. Mineral resources that are not
mineral reserves do not have demonstrated economic viability.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 6. | SUMMARIZED FINANCIAL RESULTS
| | -- | ----------------------------



Year ended December 31, 2017 (compared
to the year ended December 31, 2016)



|                                                              |  | Year ended   |        
|------------------------------------------------------------- |  | ------------ | -------
|(In thousands of United States dollars, except cash costs)    |  | Dec 31, 2017 |        
|                                                              |  |              |        
|Revenue                                                       |  | $            | 205,118
|Adjusted EBITDA 1                                             |  |              | 81,034 
|Cash flow from operations before movements in working capital |  |              | 79,785 
|Adjusted net income attributable to shareholders              |  |              | 23,482 
|Non-cash charge on the acquisition of Corona                  |  |              | 31,448 
|Gross profit (loss)                                           |  |              | 45,964 
|Income tax recovery (expense)                                 |  |              | (10,348
|Net income (loss) attributable to shareholders                |  |              | (4,645 



|(In thousands of United States dollars) |  | Dec 31, 2017 |         |  | Dec 31, 2016 |   |         | Dec 31, 2015 | 
|--------------------------------------- |  | ------------ | ------- |  | ------------ | - | ------- | ------------ | 
|                                        |  |              |         |  |              |   |         |              | 
|Cash and cash equivalents               |  | $            | 23,878  |  |              | $ | 42,145  |              | 
|Assets                                  |  |              | 340,601 |  |              |   | 364,812 |              | 
|Liabilities                             |  |              | 159,923 |  |              |   | 178,850 |              | 
|Net Debt 2                              |  |              | 40,982  |  |              |   | 36,537  |              | 
|Equity                                  |  |              | 180,678 |  |              |   | 185,962 |              | 



1 This is a non-IFRS performance
measure, see Non-IFRS Performance Measures section

2 Loans payable minus cash and cash equivalents.



Net income (loss) attributable to shareholders
for 2017 was $(4.6) million (2016: $(12.3) million) or $(0.03) per share (basic and diluted) (2016: $(0.08)). Included in the net
loss of $(4.6) million for 2017 was a $(4.4) million loss on the distribution of assets to Sierra shareholders as part of the spin
out of Cautivo Mining Inc. The other major differences between these periods are explained below.



31







|Sierra Metals Inc.                                                  
|--------------------------------------------------------------------
|Management’s Discussion and Analysis                                
|For the year ended December 31, 2017                                
|(In
    thousands of United States dollars, unless otherwise stated)



Revenues



Revenue from metals payable at the Yauricocha
Mine in Peru of $154.2 million for the year ended December 31, 2017 compared to $97.3 million for the same period in 2016. The
increase in revenue was primarily due to the increases in the prices of copper (26%), lead (26%), and zinc (35%), the 14% increase
in throughput, the increase in copper, and zinc head grades, and higher recoveries for all metals, except gold, during 2017 compared
to 2016, The Company continued to achieve exceptional production during 2017 as the operational improvement program, and the focus
on extracting higher value ore, in addition to ore sourced from the Esperanza Zone, has positively impacted the revenues during
the last year and a half.



Revenue from metals payable in Mexico were
$51.0 million for the year ended December 31, 2017 compared to $45.9 million for the same period in 2016. Revenue in Mexico increased
as a result of the increase in copper (26%) lead (26%), and zinc (35%) prices during 2017 compared to 2016; and higher recoveries
of gold at the Bolivar Mine. This was partially offset by the decrease in throughput, head grades of all metals at Bolivar, and
lower throughput, head grades, and recoveries of all metals, except gold head grades and zinc recoveries, at the Cusi Mine. Another
reason for the increase in revenues in Mexico was because the Company received a payment of $4.9 million in December 2016 for Bolivar
copper concentrate stockpiled at the Piedras Verdes Plant which was awaiting a new filter in order to further process and dry the
concentrate. The $4.9 million payment has been recognized as revenue during January – April 2017 as it was shipped.



Revenue from metals payable at the Bolivar
Mine were $45.0 million for the year ended December 31, 2017 compared to $33.3 million for the same period in 2016. The increase
in revenue from the Bolivar Mine was due to the 26% increase in the price of copper realized in 2017 compared to 2016, as well
as the higher gold recoveries realized due to plant enhancements completed at Bolivar which included the installation of a new
vibrating screen, filters, and cyclones.



Revenue from metals payable at the Cusi
Mine for the year ended December 31, 2017 were $6.0 million compared to $12.6 million for the same period in 2016. The decrease
in revenues was due to the 53% decrease in throughput, and lower head grades and recoveries for all metals, except zinc and silver
recoveries, realized during 2017. Despite the decreases in tonnage and metal production at Cusi it is important to note that Cusi
only represents approximately 4% of Sierra Metals current total production. The Company is currently mining selected higher-grade
structures at the old mine in addition to campaigning development ore from the Santa Rosa de Lima structure containing improved
head grades to the mill at Cusi. The Company expects to gradually increase tonnage from the Santa Rosa de Lima zone until the mill
is operating at its capacity of 650 tonnes per day using only ore from the Santa Rosa de Lima zone. It is expected that the main
supply of ore in-terms of tonnage and grade will come from Santa Rosa de Lima starting in Q2 2018.



32







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The following table shows the Company’s
realized selling prices for each quarter in 2017 and 2016:



|Realized Metal Prices |  | 2017 |       |  | 2016 |  
|--------------------- |  | ---- | ----- |  | ---- | -
|(In US dollars)       |  | Q4   |       |  | Q3   |  
|                      |  |      |       |  |      |  
|Silver (oz)           |  | $    | 16.77 |  |      | $
|Copper (lb)           |  | $    | 3.13  |  |      | $
|Lead (lb)             |  | $    | 1.11  |  |      | $
|Zinc (lb)             |  | $    | 1.45  |  |      | $
|Gold (oz)             |  | $    | 1,282 |  |      | $



Yauricocha’s cost of sales per zinc
equivalent payable pound was $0.54 (2016 - $0.44), cash cost per zinc equivalent payable pound was $0.50 (2016 - $0.42), and AISC
per zinc equivalent payable pound was $0.78 (2016 - $0.71) for 2017 compared to 2016. The increase in the AISC per zinc equivalent
payable pound for 2017 compared to 2016 were the result of increased sustaining capital expenditures, which included a substantial
amount of infill drilling, ventilation improvements, equipment purchases, and plant improvements. The increase was also a result
of temporary increases to the mining costs, partially due to timing; as well as slight increases related to infill drilling and
drift development costs that will be utilized within one year, and thus are included in operating costs. This was partially offset
by lower treatment and refining costs incurred during 2017 compared to 2016, resulting from improved terms with re-negotiated sales
contracts with our off-takers, which helped offset higher sustaining capital expenditures.



Bolivar’s cost of sales per copper
equivalent payable pound was $1.54 (2016 - $1.31), cash cost per copper equivalent payable pound was $1.49 (2016 - $1.12), and
AISC per copper equivalent payable pound was $2.68 (2016 - $2.21) for 2017 compared to 2016. The increase in the AISC per copper
equivalent payable pound during 2017 was due to a decrease in copper equivalent payable pounds as a result of 7% lower throughput,
as well as an increase in sustaining capital expenditures related to the various equipment purchases made by the Company during
the year in an effort to improve equipment availability and increase tonnage. The effect of the new equipment purchased will improve
availability and has helped improve production and will continue to do so.



Cusi’s cost of sales per silver equivalent
payable ounce was $12.51 (2016 - $5.47), cash cost per silver equivalent payable ounce was $15.38 (2016 - $9.37), and AISC per
silver equivalent payable ounce was $33.90 (2016 - $18.60) for 2017 compared to 2016. AISC per silver equivalent payable ounce
increased due to the decline in throughput which resulted in fewer silver equivalent payable ounces as the Company continued its
refocused efforts on completing access, development and production from the Santa Rosa de Lima zone which contains wider structures
and higher silver grades.



Non-cash depletion, depreciation and
amortization



The Company recorded total non-cash depletion,
depreciation and amortization expense for the year ended December 31, 2017 of $58.2 million compared to $45.7 million for the same
period in 2016.



A large component of the net income (loss)
for every period is the non-cash depletion charge in Peru, which was $31.4 million for 2017 (2016: $24.4 million). The non-cash
depletion charge is based on the aggregate fair value of the Yauricocha mineral property at the date of acquisition of Corona of
$371.0 million amortized over the total proven and probable reserves of the mine. The increase in the non-cash depletion charge
in 2017 was due to the reduction in proven and probable reserves reported in the Company’s NI 43-101 Technical Report issued
on August 11, 2016. Also, the increase in tonnes mined during 2017 compared to 2016 resulted in a higher depletion charge. The
depletion charge will be reduced significantly during 2018, and beyond, as a result of the significant increase in proven and probable
reserves reported in the Company’s NI 43-101 Technical Report issued on October 26, 2017.



33







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



General and Administrative Expenses



The Company incurred general and administrative
expenses of $20.3 million for the year ended December 31, 2017 compared to $14.9 million for the same period in 2016. The increase
in general and administrative costs in 2017 compared to the same period in 2016 was due to an increase in consultant fees, professional
fees, and legal fees incurred in Canada with regards to the work being performed towards listing Sierra Metals Inc on the NYSE
MKT stock exchange, as well as the proposed spin-out of the Northern Peruvian Properties within the Company’s Plexmar Resources
subsidiary.



Adjusted EBITDA (1)



The Company recorded adjusted EBITDA of
$81.0 million during the year ended December 31, 2017 (2016: $41.9 million) which was comprised of $74.8 million (2016: $34.3 million)
from the Peruvian operations and $10.5 million (2016: $11.6 million) from the operations in Mexico. The increase in adjusted EBITDA
is due to the increase in revenues discussed previously. Adjusted EBITDA is a non-IFRS measure that represents an indication of
the Company’s continuing capacity to generate earnings from operations before taking into account management’s financing
decisions and costs of consuming capital assets, which vary according to their vintage, technological currency, and management’s
estimate of their useful life. Adjusted EBITDA comprises revenue less operating expenses before interest expense (income), property,
plant and equipment amortization and depletion, foreign exchange variations, non-recurring provisions, share-based payments expense,
and income taxes. The Company considers cash flow before movements in working capital to be the IFRS performance measure that is
most closely comparable to adjusted EBITDA.



Income taxes



The Company recorded current tax expense
of $23.4 million for the year ended December 31, 2017 compared to $9.6 million for the same period in 2016. The increase was the
result of the higher taxable income generated in Peru during 2017 compared to 2016.



During the year ended December 31, 2017,
the Company recorded a deferred tax recovery of $13.1 million compared to $3.9 million in the same period in 2016. The main driver
for the Company’s consolidated deferred tax recovery is the non-cash recovery associated with the acquisition of Corona which
has increased year over year in line with the non-cash depletion charge mentioned previously.



34







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Adjusted net income attributable to
shareholders (1)



The Company recorded an adjusted net income
of $23.5 million for the year ended December 31, 2017 compared to an adjusted net income of $7.0 million for the same period in
2016. The increase resulted from the increase in revenues at the Yauricocha and Bolivar Mines. Adjusted net income is defined by
management as the net income attributable to shareholders shown in the condensed interim consolidated statements of income excluding
the non-cash depletion charge due to the acquisition of Corona, the corresponding deferred income tax recovery, and certain non-recurring
or non-cash items. Accordingly, management considers this metric to be more meaningful to measure the Company’s profitability
than net income as it adjusts for specific non-cash items.



Other Comprehensive Income (Loss)



Other comprehensive loss (“OCL”)
for the year ended December 31, 2017 was $(0.4) million compared to OCL of $(11.9) million for the same period in 2016. OCL includes
a foreign currency gain of $0.5 million for the year ended December 31, 2017 (2016: $0.8 million gain). The unrealized foreign
currency translation gain was caused by the strengthening of the Canadian dollar relative to the US dollar during the period which
resulted in a foreign exchange gain on the translation of the Canadian dollar net assets into the Company’s US dollar presentation
currency.



(1) This is a non-IFRS performance measure, see
non-IFRS Performance Measures section of this MD&A.



The following tables display selected annual financial results
detailed by operating segment:



|                                                               |  | Peru            |          |   | Mexico       |  |         |           |  |  | Canada    |   |  |       |        
|-------------------------------------------------------------- |  | --------------- | -------- | - | ------------ |  | ------- | --------- |  |  | --------- | - |  | ----- | -------
|                                                               |  | Yauricocha Mine |          |   | Bolivar Mine |  |         | Mexico    |  |  | Corporate |   |  | Total |        
|Year ended December 31, 2017                                   |  | $               |          |   | $            |  |         | Cusi Mine |  |  | $         |   |  | $     |        
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Revenue                                                        |  |                 | 154,153  |   |              |  | 44,949  |           |  |  | 6,016     |   |  |       | -      
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Production cost of sales                                       |  |                 | (67,542  | ) |              |  | (27,418 | )         |  |  | (6,019    | ) |  |       | -      
|Depletion of mineral property                                  |  |                 | (31,448  | ) |              |  | (3,163  | )         |  |  | (690      | ) |  |       | -      
|Depreciation and amortization of property, plant and equipment |  |                 | (12,783  | ) |              |  | (8,275  | )         |  |  | (1,816    | ) |  |       | -      
|Cost of sales                                                  |  |                 | (111,773 | ) |              |  | (38,856 | )         |  |  | (8,525    | ) |  |       | -      
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Gross profit (loss) from mining operations                     |  |                 | 42,380   |   |              |  | 6,093   |           |  |  | (2,509    | ) |  |       | -      
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Net income (loss) from operations                              |  |                 | 17,958   |   |              |  | (3,230  | )         |  |  | (4,593    | ) |  |       | (10,995
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Adjusted EBITDA                                                |  |                 | 74,815   |   |              |  | 11,900  |           |  |  | (1,404    | ) |  |       | (4,277 



35







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



|                                                               |  | Peru            |         |   | Mexico       |  |         |           |  |  | Canada    |   |  |       |       
|-------------------------------------------------------------- |  | --------------- | ------- | - | ------------ |  | ------- | --------- |  |  | --------- | - |  | ----- | ------
|                                                               |  | Yauricocha Mine |         |   | Bolivar Mine |  |         | Mexico    |  |  | Corporate |   |  | Total |       
|Year ended December 31, 2016                                   |  | $               |         |   | $            |  |         | Cusi Mine |  |  | $         |   |  | $     |       
|                                                               |  |                 |         |   |              |  |         |           |  |  |           |   |  |       |       
|Revenue                                                        |  |                 | 97,290  |   |              |  | 33,267  |           |  |  | 12,623    |   |  |       | -     
|                                                               |  |                 |         |   |              |  |         |           |  |  |           |   |  |       |       
|Production cost of sales                                       |  |                 | (53,705 | ) |              |  | (23,064 | )         |  |  | (5,063    | ) |  |       | -     
|Depletion of mineral property                                  |  |                 | (24,384 | ) |              |  | (3,426  | )         |  |  | (752      | ) |  |       | -     
|Depreciation and amortization of property, plant and equipment |  |                 | (7,812  | ) |              |  | (6,719  | )         |  |  | (1,475    | ) |  |       | -     
|Cost of sales                                                  |  |                 | (85,901 | ) |              |  | (33,209 | )         |  |  | (7,290    | ) |  |       | -     
|                                                               |  |                 |         |   |              |  |         |           |  |  |           |   |  |       |       
|Gross profit from mining operations                            |  |                 | 11,389  |   |              |  | 58      |           |  |  | 5,333     |   |  |       | -     
|                                                               |  |                 |         |   |              |  |         |           |  |  |           |   |  |       |       
|Net income (loss) from operations                              |  |                 | (5,250  | ) |              |  | (6,853  | )         |  |  | 3,306     |   |  |       | (3,924
|                                                               |  |                 |         |   |              |  |         |           |  |  |           |   |  |       |       
|Adjusted EBITDA                                                |  |                 | 34,264  |   |              |  | 5,120   |           |  |  | 6,445     |   |  |       | (3,942



Cash Flows



Cash flow from operating activities before
movements in working capital of $79.8 million for the year ended December 31, 2017 increased from $44.3 million in the same period
of 2016. The increase was due to the increase in revenues and operating margins previously discussed.



Net cash flow of $(51.6) million (2016:
$(25.4) million) used in investing activities for the year ended December 31, 2017 consists of purchases of property, plant and
equipment, capital expenditures related to the Yauricocha shaft and tunnel development, and exploration and evaluation assets in
Peru and Mexico.



A breakdown of the Company’s capital
expenditures of $51.6 million during the year ended December 31, 2017 is presented below:



|2017 Capital Expenditures by Mine        
|-----------------------------------------
|($ Millions)                             
|Expenditure                              
|Esperanza development and infill drilling
|Mine Development                         
|Shafts                                   
|Tunnel                                   
|Equipment                                
|Tailings Dam                             
|Increase Mill Capacity/maintenance       
|Mine Exploration                         
|Mining Concession Fees                   
|                                         



36







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Net cash flow of $(21.1) million (2016:
$1.0 million) from (used in) financing activities for the year ended December 31, 2017 consists of $(44.5) million (2016: $(20.5)
million) in repayments of loans and credit facilities, $(3.0) million (2016: $(3.7) million) in interest paid on loans and credit
facilities, and $(3.4) million (2016: $(0.5) million) of dividends paid to non-controlling interest shareholders. This was partially
offset by proceeds received from the issuance of credit facilities of $29.8 million during the year ended December 31, 2017 (2016:
23.8 million).



| | 7. | QUARTERLY FINANCIAL REVIEW
| | -- | --------------------------



The following table displays selected results
from the eight most recent quarters:





|                                                                      |  | 2017   |        |  | 2016   | 
|--------------------------------------------------------------------- |  | ------ | ------ |  | ------ | 
|(In thousands of United States dollars,
    except per share amounts) |  | Dec-31 |        |  | Sep-30 | 
|Revenues                                                              |  |        | 51,170 |  |        | 
|Adjusted EBITDA                                                       |  |        | 19,208 |  |        | 
|Adjusted net income (loss) attributable to shareholders               |  |        | 3,241  |  |        | 
|Net income (loss) attributable to shareholders                        |  |        | 2,118  |  |        | 
|                                                                      |  |        |        |  |        | 
|Basic and diluted earnings (loss) per share ($)                       |  |        | 0.01   |  |        | 





Three months ended December 31, 2017 (compared to the three
months ended December 31, 2016)



Net income (loss) attributable to shareholders
for Q4 2017 was $2.1 million, or $0.01 per share (basic and diluted), compared to net income (loss) of $(5.1) million, or $(0.04)
per share (basic and diluted) for the same period in 2016. The major differences between these periods are explained below.



Revenues



Revenue from metals payable from the Yauricocha
Mine in Peru were $38.2 million for Q4 2017 compared to $31.8 million for the same period in 2016. Higher revenues are primarily
attributable to the 12% increase in throughput, the increase in copper, and zinc head grades, higher recoveries for silver and
copper, and the increase in the prices of copper (32%), lead (17%), zinc (25%), and gold (6%) in Q4 2017 compared to Q4 2016.



Revenue from metals payable in Mexico were
$12.9 million for Q4 2017, compared to $9.9 million for the same period in 2016. Revenues in Mexico increased as a result the 32%
increase in copper prices in Q4 2017 compared to Q4 2016, as well as the copper concentrate stockpiled at the Piedras Verdes Plant
during Q4 2016 for which the Company received a payment of $4.9 million which was recognized in revenue during 2017. This offset
the declines in throughput at Bolivar and Cusi, as well as the lower head grades for all metals at Bolivar, and lower lead and
zinc grades at Cusi.



Revenues generated at the Bolivar Mine
for Q4 2017 were $12.0 million, compared to $7.2 million for the same period in 2016. At Bolivar, lower throughput was due to reduced
equipment availability as the Company was awaiting the final deliveries of equipment purchases made during the year. The mine also
encountered lower head grades and recoveries which have been slightly lower due to higher antimony levels which have required some
blending with lower grade ore stopes. However, the Company benefitted from the 32% increase in copper prices during Q4 2017 compared
to Q4 2016, as well as improved gold recoveries.



37







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Revenues generated at the Cusi Mine for
Q4 2017 were $1.0 million compared to $2.7 million for Q4 2016. The decrease in revenue was due to only 16,280 tonnes of ore being
processed during Q4 2017 which decreased 55% compared to Q4 2016. Cusi’s contribution to the Company’s overall production
is expected to increase in the future as the Company continues with the development of the Santa Rosa de Lima structure, which
is wider and has higher silver grades compared to the narrow veins currently being mined. The Company is currently developing drifts
to mine this area and with production ramping up from this area, which is expected to continually increase into Q2 2018 when full
mill feed capacity will come from this zone.



Yauricocha’s cost of sales per zinc
equivalent payable pound was $0.63 (Q4 2016 - $0.46), cash cost per zinc equivalent payable pound was $0.57 (Q4 2016 - $0.43),
and AISC per zinc equivalent payable pound was $0.90 (Q4 2016 - $0.74) for Q4 2017 compared to the same period in 2016. The increase
in the Q4 2017 AISC per zinc equivalent payable pound relative to Q4 2016 is a result of increased Capex, including a substantial
amount of infill drilling, infrastructure improvements including ramp and shaft development, ventilation improvements, equipment,
as well as plant improvements that were completed. The increase was also a result of Opex including infill drilling and drift development
that will be utilized within one year.



Bolivar’s cost of sales per copper
equivalent payable pound was $1.66 (Q4 2016 - $1.45), cash cost per copper equivalent payable pound was $1.72 (Q4 2016 - $1.00),
and AISC per copper equivalent payable pound was $3.03 (Q4 2016 - $2.59) for Q4 2017 compared to the same period in 2016. The increase
in the AISC per copper equivalent payable pound during Q4 2017 was due to a decrease in copper equivalent payable pounds as a result
of 11% lower throughput, as well as an increase in sustaining capital expenditures related to the various equipment purchases made
by the Company during the quarter in an effort to improve equipment availability and increase tonnage.



Cusi’s cost of sales per silver equivalent
payable ounce was $17.18 (Q4 2016 - $5.58), cash cost per silver equivalent payable ounce was $18.67 (Q4 2016 - $12.88), and AISC
per silver equivalent payable ounce was $36.33 (Q4 2016 - $24.42) for Q4 2017 compared to the same period in 2016. AISC per silver
equivalent payable ounce increased due to the decline in throughput which resulted in fewer silver equivalent payable ounces as
the Company continued its refocused efforts on completing access, development and production from the Santa Rosa de Lima zone which
contains wider structures and higher silver grades.



Non-cash depletion, depreciation and
amortization



The Company recorded total non-cash depletion,
depreciation and amortization expense for Q4 2017 of $7.9 million compared to $15.3 million for the same period in 2016.



A large component of the non-cash depletion,
depreciation and amortization expense is the depletion charge on the acquisition of Corona of $2.7 million for Q4 2017 compared
to $8.4 million for the same period in 2016. The non-cash depletion charge is based on the aggregate fair value of the Yauricocha
mineral property at the date of acquisition of Corona of $371.0 million amortized over the total proven and probable reserves of
the mine. The decrease in the non-cash depletion charge in Q4 2017 was due to the significant increase in proven and probable reserves
reported in the Company’s NI 43-101 Technical Report issued on October 26, 2017.



38







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



General and Administrative Expenses



The Company incurred general and administrative
expenses of $8.6 million for Q4 2017 compared to $4.7 million for Q4 2016. The increase in general and administrative costs in
Q4 2017 compared to the same period in 2016 was due to an increase in consultant fees, professional fees, and legal fees incurred
in Canada and Mexico.



Adjusted EBITDA



Adjusted EBITDA of $19.2 million for Q4 2017 increased compared
to $16.0 million in Q4 2016. The increase in adjusted EBITDA in Q4 2017 was primarily due to the increase in revenues at Yauricocha,
discussed previously.



Income taxes



The Company recorded current tax expense
of $5.6 million for Q4 2017 compared to $4.6 million in Q4 2016 and the increase was the result of the higher taxable income generated
in Peru during Q4 2017 compared to Q4 2016.



During Q4 2017, the Company recorded a
deferred tax recovery of $0.6 million compared to $1.8 million in Q4 2016. The main driver for the Company’s consolidated
deferred tax recovery is the non-cash recovery associated with the acquisition of Corona which has decreased quarter over quarter
in line with the non-cash depletion charge mentioned previously.



Adjusted net income attributable to
shareholders



The Company recorded an adjusted net income
of $3.2 million for Q4 2017 compared to $3.5 million for Q4 2016. Adjusted net income is defined by management as the net income
attributable to shareholders shown in the condensed interim consolidated statements of income excluding the non-cash depletion
charge due to the acquisition of Corona, the corresponding deferred income tax recovery, and certain non-recurring or non-cash
items. Accordingly, management considers this metric to be more meaningful to measure the Company’s profitability than net
income as it adjusts for specific non-cash items.





Other Comprehensive Income (Loss)



OCI for Q4 2017 was $3.6 million compared
to OCL of $(5.6) million for the same period in 2016. OCL includes a foreign currency loss of $0.1 million in Q4 2017 (Q4 2016:
$(0.4) million).



39







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 8. | LIQUIDITY AND CAPITAL RESOURCES
| | -- | -------------------------------



Financial Condition Review



The following table provides a comparison
of key elements of Sierra’s balance sheet as at December 31, 2017 and December 31, 2016:



|(000's)                                      |  | December 31, 2017 |         |   | December 31, 2016 |  
|-------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Cash and cash equivalents                    |  | $                 | 23,878  |   |                   | $
|Working capital                              |  | $                 | (6,784  | ) |                   | $
|Total assets                                 |  | $                 | 340,601 |   |                   | $
|                                             |  |                   |         |   |                   |  
|Debt (net of financing fees)                 |  | $                 | 64,860  |   |                   | $
|Total liabilities                            |  | $                 | 159,923 |   |                   | $
|                                             |  |                   |         |   |                   |  
|Equity attributable to owners of the Company |  | $                 | 154,571 |   |                   | $



Cash and cash equivalents of $23.9 million
and working capital of $(6.8) million as at December 31, 2017 compared to $42.1 million and $9.6 million, respectively, at the
end of 2016. Cash and cash equivalents have decreased by $18.3 million during 2017 due to $54.5 million of operating cash flows
being offset by capital expenditures incurred in Mexico and Peru of $(51.6) million, repayment of loans, credit facilities and
interest of $(47.5) million, dividends paid to non-controlling interest shareholders of $(3.4) million, and proceeds from issuances
of loans and credit facilities of $29.8 million. Included in the $54.5 million of operating cash flows were negative changes in
non-cash working capital items of $7.9 million due to the increase accounts receivable and decrease in deferred revenue as at December
31, 2017.



Trade and other receivables includes $5.7
million (December 31, 2016 - $3.8 million) of Mexican value-added tax (“VAT”) receivables. During 2014, the Company
commenced the process to request the refund of the VAT receivable relating to 2012 and 2013 and has successfully received refunds
of $14.0 million for some of the monthly claims submitted over the past three years. The Company expects to collect or offset the
VAT balance against 2018 VAT payables. Amounts included in trade and other receivables are current and the Company has no allowance
for doubtful accounts as at December 31, 2017.



40







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Sierra’s outstanding loan and credit
facilities are shown below:



|                                                         |  | Balance Outstanding |       
|-------------------------------------------------------- |  | ------------------- | ------
|(000's)                                                  |  | Limit               |       
|Dia Bras Peru loan with BCP (Corona Acquisition)(1)      |  | $                   | -     
|Corona loan with BCP (Corona Operating)(2)               |  | $                   | -     
|DBP revolving credit facility with BCP(3)                |  | $                   | 15,000
|Corona Notes payable to Scotiabank and Interbank Peru(4) |  | $                   | 15,000
|Pre-export finance facility with Metagri S.A. de C.V.(5) |  | $                   | -     
|FIFOMI working capital facility                          |  | $                   | 7,543 
|Total Debt                                               |  |                     |       
|                                                         |  |                     |       
|Less cash balances                                       |  |                     |       
|Net Debt                                                 |  |                     |       



(1 – 5) See consolidated
financial statements as at December 31, 2017 for details of each loan and credit facility.



Outstanding shares



The authorized share capital at December
31, 2017 was an unlimited number of common shares without par value. As at March 20, 2018, the Company had 162.8 million shares
issued and outstanding (December 31, 2016 – 162.4 million shares issued and outstanding).



As at December 31, 2017, there were 1,316,314
RSUs outstanding at a weighted average fair value of C$2.45.



As at March 20, 2018 there are 1,103,330
RSU’s outstanding at a weighted average fair value of C$2.45.



| | 9. | safety, health and environment
| | -- | ------------------------------



Sierra Metals is fully committed to disciplined
and responsible growth and has Safety and Health and Environmental Policies in place to support this commitment. The Company’s
corporate responsibility objectives are to prevent pollution, minimize the impact operations may cause to the environment and practice
progressive rehabilitation of areas impacted by its activities. The Company aims to operate in a socially responsible and sustainable
manner, and to follow international guidelines in Mexico and Peru. The Company focuses on social programs with the local communities
in Mexico and Peru on an ongoing basis.



| | 10. | FINANCIAL INSTRUMENTS AND RELATED RISKS
| | --- | ---------------------------------------



Financial risk management



The Company is exposed to financial risks,
including credit risk, liquidity risk, currency risk, interest rate risk and price risk. The aim of the Company’s overall
risk management strategy is to reduce the potential adverse effect that these risks may have on the Company’s financial position
and results.



The Company’s Board of Directors
has overall responsibility and oversight of management’s risk management practices. Risk management is carried out under
policies approved by the Board of Directors. The Company may from time to time, use foreign exchange contracts, future and forward
contracts to manage its exposure to fluctuations in foreign currency and metals prices. The Company does not ordinarily enter into
hedging arrangements to cover long term commodity price risk unless it has the obligation to do so under a credit facility, which
would be approved by the Board of Directors.



41







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | i) | Market Risk
| | -- | -----------



| | (1) | Currency risk
| | --- | -------------



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



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



|                                       |  | December 31, 2017 |       
|-------------------------------------- |  | ----------------- | ------
|                                       |  | CAN dollar        |       
|                                       |  |                   |       
|Cash and cash equivalents              |  |                   | 132   
|Income tax and other receivables       |  |                   | 158   
|                                       |  |                   | 290   
|                                       |  |                   |       
|Accounts payable and other liabilities |  |                   | (1,461
|                                       |  |                   |       
|Total                                  |  |                   | (1,171



|                                       |  | December 31, 2016 |       
|-------------------------------------- |  | ----------------- | ------
|                                       |  | CAN dollar        |       
|                                       |  |                   |       
|Cash and cash equivalents              |  |                   | 244   
|Income tax and other receivables       |  |                   | 411   
|                                       |  |                   | 655   
|                                       |  |                   |       
|Accounts payable and other liabilities |  |                   | (1,086
|                                       |  |                   |       
|Total                                  |  |                   | (431  



42







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The Company manages and monitors
this risk with the objective of mitigating the potential adverse effect that fluctuations in currencies against the Canadian dollar
and US dollar could have on the Company’s Consolidated Statement of Financial Position and Consolidated Statement of income
(loss). As at December 31, 2017, the Company has not entered into any derivative contracts to mitigate this risk.



A 10% appreciation in the US
dollar exchange rate against the Peruvian Nuevo Soles and the Mexican Peso based on the financial assets and liabilities held at
December 31, 2017, with all the other variables held constant, would have resulted in an increase to the Company’s net loss
of $4,118 (increase in loss in 2016 of $2,500).



A 10% appreciation in the Canadian
dollar exchange rate against the US dollar based on the financial assets and liabilities held at December 31, 2017 and 2016, with
all the other variables held constant, would have resulted in a negligible impact to the Company’s net income (loss).



| | (2) | Interest rate risk
| | --- | ------------------



Interest rate risk is the risk
that the fair values or future cash flows of the Company will fluctuate because of changes in market interest rates. The Company
is exposed to interest rate risk on its loans payable. The Company monitors its exposure to interest rates closely and has not
entered into any derivative contracts to manage its risk. The weighted average interest rate paid by the Company during the year
ended December 31, 2017 on its loans and notes payable in Peru was 4.31% (2016 – 4.47%). With all other variables unchanged
a 1% increase in the interest rate would have increased the Company’s net loss by $541 (2016 - $635). The interest rate paid
by the Company during the year ended December 31, 2017 on its loans payable in Mexico was 5.74% (2016 – 5.83%). With all
other variables unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $60 (2016 - $65).



| | (3) | Commodity price risk
| | --- | --------------------



Commodity price risk is the
risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other
than those arising from interest risk or currency risk), whether those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting all similar financial instruments in the market.



As at December 31, 2017 and
2016, the Company had certain amounts related to the sales of concentrates that have only been provisionally priced. Commodity
price risk exists solely in Mexico as the Company fixes metal prices with the purchaser of its concentrates for specific sales
for which concentrates have been delivered. The Company’s exposure to commodity price risk is as follows:



|                              |  | 2017 |      |   | 2016 | 
|----------------------------- |  | ---- | ---- | - | ---- | 
|Commodity                     |  | $    |      |   | $    | 
|                              |  |      |      |   |      | 
|10% decrease in silver prices |  |      | (27  | ) |      | 
|10% decrease in copper prices |  |      | (456 | ) |      | 
|10% decrease in lead prices   |  |      | (1   | ) |      | 
|10% decrease in gold prices   |  |      | (87  | ) |      | 



43







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



As at December 31, 2017 and
2016, the Company did not have any forward contracts outstanding.



| | ii) | Liquidity risk
| | --- | --------------



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



In the normal course of business,
the Company enters into contracts that give rise to commitments for future minimum payments. The following table summarizes the
remaining contractual maturities and undiscounted cash flows as at December 31, 2017 of the Company’s financial liabilities
and operating and capital commitments:



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



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



| | iii) | Credit risk
| | ---- | -----------



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



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



44







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 11. | OTHER RISKS AND UNCERTAINTIES
| | --- | -----------------------------



Foreign operations



The Company currently conducts foreign
operations and has exploration properties in Peru and Mexico, and as such is exposed to various levels of economic, political and
other risks and uncertainties. These risks and uncertainties vary from country to country and include, but are not limited to,
royalties and tax increases or claims by governmental bodies, expropriation or nationalization, foreign exchange controls, import
and export regulations, cancellation or renegotiation of contracts and environmental permitting regulations. The occurrence of
these various factors and uncertainties cannot be accurately predicted and could have a material adverse effect on operations or
profitability.



The Company currently has no political
risk insurance coverage against these risks. The Company is unable to determine the impact of these risks on its future financial
position or results of operations. Changes, if any, in mining or investment policies or shifts in political attitude in foreign
countries may substantively affect Company’s exploration, development and production activities.



Environmental regulation



The Company’s activities are subject
to extensive laws and regulations governing environmental protection which are complex and have tended to become more stringent
over time. The Company is required to obtain governmental permits and in some instances provide bonding requirements under federal,
state, or provincial air, water quality, and mine reclamation rules and permits. Although the Company makes provisions for reclamation
costs, it cannot be assured that these provisions will be adequate to discharge its future obligations for these costs. Failure
to comply with applicable environmental laws may result in injunctions, damages, suspension or revocation of permits and imposition
of penalties. While responsible environmental stewardship is one of the Company’s top priorities, there can be no assurance
that the Company has been or will be at all times in complete compliance with such laws, regulations and permits, or that the costs
of complying with current and future environmental laws and permits will not materially and adversely affect the Company’s
business, results of operations or financial condition.



Exploration, development and mining risk



Sierra’s operations will be subject
to all the hazards and risks normally encountered in the exploration, development and production of base or precious metals, including,
without limitation, unusual and unexpected geologic formations, seismic activity, rock bursts, pit-wall failures, cave-ins, flooding,
mudrushes and other conditions involved in the drilling, mining and removal of material, any of which could result in damage to,
or destruction of, mines and other producing facilities, damage to life or property, environmental damage and legal liability.
Milling operations are also subject to various hazards, including, without limitation, equipment failure and failure of retaining
dams around tailings disposal areas, which may result in environmental pollution and legal liability.



45







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Loan repayment risk



The Company’s ability to repay its
loans depends on its future cash flows, profitability, results of operations and financial condition. The Company has prepared
budgets based on estimates of commodity prices, future production, operating costs and capital costs however the Company cannot
assure you that such revenues, production plans, costs or other estimates will be achieved. Actual revenues and production costs
may vary from the estimates depending on a variety of factors, many of which are not within the Company’s control. These
factors include, but are not limited to: commodity price fluctuations; actual ore mined varying from estimates of grade, tonnage,
dilution, and metallurgical and other characteristics; mine failures, slope failures or equipment failures; industrial accidents;
natural phenomena such as inclement weather conditions, floods, droughts, rock slides and earthquakes; encountering unusual or
unexpected geological conditions; changes in power costs and potential power shortages; exchange rate and commodity price fluctuations;
shortages of principal supplies needed shortages of principal supplies needed for operations, including explosives, fuels, chemical
reagents, water, equipment parts and lubricants; labor shortages or strikes; high rates of inflation; civil disobedience and protests;
and restrictions (including change to the taxation regime) or regulations imposed by governmental or regulatory authorities or
other changes in the regulatory environments. Failure to achieve revenue, production or cost estimates or material increases in
costs or material decreases in commodity prices could have a material adverse impact on the Company’s future cash flows,
profitability, results of operations and financial condition.



Title risk



Although the Company believes that it has
exercised commercially reasonable due diligence with respect to determining title to properties that it owns or controls, there
is no guarantee that title to such properties will not be challenged or impugned. The Company’s properties may be subject
to prior unrecorded agreements or transfers or native land claims and title may be affected by undetected defects. There may be
valid challenges to the title of the Company’s properties which could impair development and/or operations of the Company.



Permit risk



In the ordinary course of business, the
Company will be required to obtain and renew governmental permits and licenses for the operation and expansion of existing operations
or for the commencement of new operations. Obtaining or renewing the necessary governmental permits is a complex and time-consuming
process. The duration and success of the Company’s efforts to obtain and renew permits and licenses are contingent upon many
variables not within its control including the interpretation of applicable requirements implemented by the permitting or licensing
authority. The Company may not be able to obtain or renew permits and licenses that are necessary to continue its operations or
the cost to obtain or renew permits and licenses may exceed what the Company expects. Any unexpected delays or costs associated
with the permitting and licensing process could delay the development or impede operations, which may adversely affect the Company’s
revenues and future growth.



46







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Estimates of mineralized materials are subject to geologic
uncertainty and inherent sample variability



Although the estimated resources have been
delineated with appropriately spaced drilling and sampling, both underground and surface, there is inherent variability between
duplicate samples taken adjacent to each other and between sampling points that cannot be reasonably eliminated. There also may
be unknown geologic details that have not been identified or correctly appreciated at the current level of delineation. This results
in uncertainties that cannot be reasonably eliminated from the estimation process. Some of the resulting variances can have a positive
effect and others can have a negative effect on mining and processing operations. Acceptance of these uncertainties is part of
any mining operation.



Estimates of mineralized material constitute
forward-looking information, which is inherently subject to variability. Although resource estimates require a high degree of assurance
in the underlying data when the estimates are made, unforeseen events and uncontrollable factors can have significant adverse or
positive impacts on the estimates. Actual results will inherently differ from estimates. The unforeseen events and uncontrollable
factors include: geologic uncertainties including inherent sample variability, metal price fluctuations, variations in mining and
processing parameters, and adverse changes in environmental or mining laws and regulations. The timing and effects of variances
from estimated values cannot be accurately predicted.



Mineral resources



Although the Company’s reported mineral
resources have been carefully prepared by qualified persons, these amounts are estimates only by independent geologists, and the
Company cannot be certain that any specified level of recovery of mineral will in fact be realized or that any identified mineral
deposit will ever qualify as a commercially mineable (or viable) ore body that can be economically exploited. Mineralized materials,
which are not mineral reserves, do not have demonstrated economic viability. Any material change in the quantity of mineralization,
grade or stripping ratio, or the metal price may affect the economic viability of the Company’s properties. In addition,
the Company cannot be certain that metal recoveries in small-scale laboratory tests will be duplicated in larger scale tests under
on-site conditions or during production.



Until an un-mined deposit is actually mined
and processed, the quantity of mineral resources and reserves and grades must be considered as estimates only. In addition, the
economic value of mineral reserves and mineral resources may vary depending on, among other things, metal prices.



Insurance risk



The Company’s insurance will not
cover all the potential risks associated with a mining company’s operations. The Company may also be unable to maintain insurance
to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate
to cover any resulting liability. Moreover, the Company expects that insurance against risks such as environmental pollution or
other hazards as a result of exploration and production may be prohibitively expensive to obtain for a company of Sierra’s
size and financial means. The Company might also become subject to liability for pollution or other hazards which may not be insured
against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events
may cause the Company to incur significant costs that could have a material adverse effect upon the Company’s financial condition
and results of operations.



47







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Competitive risk



The mining industry is competitive in all
of its phases. The Company faces strong competition from other mining companies in connection with the acquisition of properties
producing, or capable of producing, base and precious metals. Many of these companies have greater financial resources, operational
experience and technical capabilities than the Company does. As a result of this competition, the Company may be unable to maintain
or acquire attractive mining properties on terms acceptable to the Company or at all. Consequently, the Company’s revenues,
operations and financial condition could be materially adversely affected.



Sierra’s common shares may experience price volatility



Securities of mineral resource and mining
companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or
prospects of the companies involved. These factors include macroeconomic developments in North America and globally, as well as
market perceptions of the attractiveness of particular industries. The price of the Company’s common shares is also likely
to be significantly affected by short-term changes in commodity prices and currency exchange fluctuation. As a result of any of
these factors, the market price of the Company’s common shares at any given point in time may not accurately reflect the
long-term value of the Company. Securities class-action litigation often has been brought against companies following periods of
volatility in the market price of their securities. The Company may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and damages and divert management’s attention and resources.



Global financial risk



Financial markets globally have been subject
to increased volatility. Access to financing has been negatively impacted by liquidity crises throughout the world. These factors
may impact the Company’s ability to obtain loans and other credit facilities in the future and, if obtained, on terms favorable
to Sierra. The levels of volatility and market turmoil are on the rise, and the Company may not be able to secure appropriate debt
or equity financing, any of which could affect the trading price of the Company’s securities in an adverse manner.



Claims and Legal Proceedings



The Company is subject to various claims
and legal proceedings covering a wide range of matters that arise in the normal course of business. Each of these matters is subject
to various uncertainties and it is possible that some of these matters may be resolved unfavorably to the Company. The Company
carries liability insurance coverage and will establish accruals and provisions for matters that are probable and can be reasonably
estimated. In addition, the Company may be involved in disputes with other parties in the future which may result in a significant
impact on our financial condition, cash flow and results of operations.



48







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The claims associated with the Company’s
Mexican operations are discussed in detail below:



| | 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. (“DBM”). P&R claimed damages for the cancellation of an
option agreement (the “Option Agreement”) regarding the San Jose properties in Chihuahua, Mexico (the “San Jose
Properties”). The San Jose Properties are not located in any areas where DBM currently operates, nor are these properties
included in any resource estimates of the Company. 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 are located; and (ii) pay $423 to P&R; the Company was not appropriately notified
of this resolution. 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. In July 2014, a Federal Court in the State of Chihuahua ordered
that the Company was entitled to receive proper notice of the adverse resolution previously issued by the State Court of Chihuahua.
This allows the Company to proceed with its appeal (writ of “amparo”) of the State Court’s previous resolution.
The adverse resolution has been temporarily suspended since March 2013, which suspension will remain in place pending the writ
of amparo. The amparo is being heard in Federal Court and will challenge the State Court’s ruling. The Federal Court’s
verdict in the amparo will be final and non-appealable. The Company continues to vigorously defend its position by applying the
proper legal resources necessary to defend its position.  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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | 12. | NON-IFRS PERFORMANCE MEASURES
| | --- | -----------------------------



The non-IFRS performance measures presented
do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be directly comparable to similar measures
presented by other issuers.



Non-IFRS reconciliation of adjusted
EBITDA



EBITDA is a non-IFRS measure that represents
an indication of the Company’s continuing capacity to generate earnings from operations before taking into account management’s
financing decisions and costs of consuming capital assets, which vary according to their vintage, technological currency, and management’s
estimate of their useful life. EBITDA comprises revenue less operating expenses before interest expense (income), property, plant
and equipment amortization and depletion, and income taxes. Adjusted EBITDA has been included in this document. Under IFRS, entities
must reflect in compensation expense the cost of share-based payments. In the Company’s circumstances, share-based payments
involve a significant accrual of amounts that will not be settled in cash but are settled by the issuance of shares in exchange
for cash. As such, the Company has made an entity specific adjustment to EBITDA for these expenses. The Company has also made an
entity-specific adjustment to the foreign currency exchange (gain)/loss. The Company considers cash flow before movements in working
capital to be the IFRS performance measure that is most closely comparable to adjusted EBITDA.



The following table provides a reconciliation
of adjusted EBITDA to the consolidated financial statements for the three months and year ended December 31, 2017 and 2016:



|                                               |  | Three Months Ended |        |   | Year Ended        |  
|---------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|(In thousands of United States dollars)        |  | December 31, 2017  |        |   | December 31, 2016 |  
|                                               |  |                    |        |   |                   |  
|Net income (loss)                              |  | $                  | 3,719  |   |                   | $
|                                               |  |                    |        |   |                   |  
|Adjusted for:                                  |  |                    |        |   |                   |  
|Depletion and depreciation                     |  |                    | 7,906  |   |                   |  
|Interest expense and other finance costs       |  |                    | 860    |   |                   |  
|Loss on spin out of Cautivo Mining Inc.        |  |                    | -      |   |                   |  
|Interest income                                |  |                    | (253   | ) |                   |  
|Share-based payments                           |  |                    | 554    |   |                   |  
|Foreign currency exchange and other provisions |  |                    | 1,463  |   |                   |  
|Income taxes                                   |  |                    | 4,959  |   |                   |  
|Adjusted EBITDA                                |  | $                  | 19,208 |   |                   | $



Non-IFRS reconciliation of adjusted
net income



The Company has included the non-IFRS financial
performance measure of adjusted net income, defined by management as the net income attributable to shareholders shown in the statement
of earnings plus the non-cash depletion charge due to the acquisition of Corona and the corresponding deferred tax recovery and
certain non-recurring or non-cash items such as share-based compensation and foreign currency exchange (gains) losses. The Company
believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors may want to use this information
to evaluate the Company’s performance and ability to generate cash flows. Accordingly, it is intended to provide additional
information and should not be considered in isolation or as a substitute for measures of performance in accordance with IFRS.



50







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The following table provides a reconciliation
of adjusted net income to the consolidated financial statements for the three months and year ended December 31, 2017 and 2016:



|                                                               |  | Three Months Ended |        |   | Year Ended        |  
|-------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|(In thousands of United States dollars)                        |  | December 31, 2017  |        |   | December 31, 2016 |  
|                                                               |  |                    |        |   |                   |  
|Net loss attributable to shareholders                          |  | $                  | 2,118  |   |                   | $
|Non-cash depletion charge on Corona's acquisition              |  |                    | 2,721  |   |                   |  
|Deferred tax recovery on Corona's acquisition depletion charge |  |                    | (915   | ) |                   |  
|Share-based compensation                                       |  |                    | 554    |   |                   |  
|Foreign currency exchange gain                                 |  |                    | (1,237 | ) |                   |  
|Loss on spin out of Cautivo Mining Inc.                        |  |                    | -      |   |                   |  
|Adjusted net income attributable to shareholders               |  | $                  | 3,241  |   |                   | $



Cash cost per silver equivalent payable
ounce, copper equivalent payable pound, and zinc equivalent payable pound



The Company uses the non-IFRS measure of
cash cost per silver equivalent ounce, copper equivalent payable pound, and zinc equivalent payable pound to manage and evaluate
operating performance. The Company believes that, in addition to conventional measures prepared in accordance with IFRS, certain
investors use this information to evaluate the Company’s performance and ability to generate cash flows. Accordingly, it
is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance
prepared in accordance with IFRS. The Company considers cost of sales per silver equivalent payable ounce, copper equivalent payable
pound, and zinc equivalent payable pound to be the most comparable IFRS measure to cash cost per silver equivalent payable ounce,
copper equivalent payable pound, and zinc equivalent payable pound, and has included calculations of this metric in the reconciliations
within the applicable tables to follow.



All-in sustaining cost per silver equivalent
payable ounce, copper equivalent payable pound, and zinc equivalent payable pound



All-In Sustaining Cost (“AISC”)
is a non-IFRS measure and was calculated based on guidance provided by the World Gold Council (“WGC”) in June 2013.
WGC is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements.
Other mining companies may calculate AISC differently as a result of differences in underlying accounting principles and policies
applied, as well as differences in definitions of sustaining versus development capital expenditures.



AISC is a more comprehensive measure than
cash cost per ounce/pound for the Company’s consolidated operating performance by providing greater visibility, comparability
and representation of the total costs associated with producing silver and copper from its current operations.



The Company defines sustaining capital
expenditures as, “costs incurred to sustain and maintain existing assets at current productive capacity and constant planned
levels of productive output without resulting in an increase in the life of assets, future earnings, or improvements in recovery
or grade. Sustaining capital includes costs required to improve/enhance assets to minimum standards for reliability, environmental
or safety requirements. Sustaining capital expenditures excludes all expenditures at the Company’s new projects and certain
expenditures at current operations which are deemed expansionary in nature.”



51







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Consolidated AISC includes total production
cash costs incurred at the Company’s mining operations, including treatment and refining charges and selling costs, which
forms the basis of the Company’s total cash costs. Additionally, the Company includes sustaining capital expenditures and
corporate general and administrative expenses. AISC by mine does not include certain corporate and non-cash items such as general
and administrative expense and share-based payments. The Company believes that this measure represents the total sustainable costs
of producing silver and copper from current operations, and provides the Company and other stakeholders of the Company with additional
information of the Company’s operational performance and ability to generate cash flows. As the measure seeks to reflect
the full cost of silver and copper production from current operations, new project capital and expansionary capital at current
operations are not included. Certain other cash expenditures, including tax payments, dividends and financing costs are also not
included.



The following table provides a reconciliation
of cash costs to cost of sales, as reported in the Company’s consolidated statement of income (loss) for the three months
and year ended December 31, 2017 and 2016:



|                                           |  | Year ended        |           |   | Year ended        | 
|------------------------------------------ |  | ----------------- | --------- | - | ----------------- | 
|(In thousand of US dollars, unless stated) |  | December 31, 2017 |           |   | December 31, 2016 | 
|                                           |  | Yauricocha        |           |   | Bolivar           | 
|                                           |  |                   |           |   |                   | 
|Cash Cost per Tonne of Processed Ore       |  |                   |           |   |                   | 
|Cost of Sales                              |  |                   | 111,733   |   |                   | 
|Reverse: Workers Profit Sharing            |  |                   | (4,446    | ) |                   | 
|Reverse: D&A/Other adjustments             |  |                   | (44,619   | ) |                   | 
|Reverse: Variation in Finished Inventory   |  |                   | 1,222     |   |                   | 
|Total Cash Cost                            |  |                   | 63,890    |   |                   | 
|Tonnes Processed                           |  |                   | 1,023,492 |   |                   | 
|Cash Cost per Tonne Processed              |  | US$               | 62.42     |   |                   | 



|                                           |  | Three months ended |         |   | Three months ended | 
|------------------------------------------ |  | ------------------ | ------- | - | ------------------ | 
|(In thousand of US dollars, unless stated) |  | December 31, 2017  |         |   | December 31, 2016  | 
|                                           |  | Yauricocha         |         |   | Bolivar            | 
|                                           |  |                    |         |   |                    | 
|Cash Cost per Tonne of Processed Ore       |  |                    |         |   |                    | 
|Cost of Sales                              |  |                    | 22,551  |   |                    | 
|Reverse: Workers Profit Sharing            |  |                    | (1,268  | ) |                    | 
|Reverse: D&A/Other adjustments             |  |                    | (4,536  | ) |                    | 
|Reverse: Variation in Finished Inventory   |  |                    | 531     |   |                    | 
|Total Cash Cost                            |  |                    | 17,278  |   |                    | 
|Tonnes Processed                           |  |                    | 266,222 |   |                    | 
|Cash Cost per Tonne Processed              |  | US$                | 64.90   |   |                    | 



52







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The following table provides detailed information
on Yauricocha’s cost of sales, cash cost, and all-in sustaining cost per silver equivalent payable ounce, copper equivalent
payable pound, and zinc equivalent payable pound for the three months and year ended December 31, 2017 and 2016:



Yauricocha:



|YAURICOCHA                                                      |  | Three months ended |        |   | Year ended        | 
|--------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | 
|(In thousand of US dollars, unless stated)                      |  | December 31, 2017  |        |   | December 31, 2016 | 
|                                                                |  |                    |        |   |                   | 
|Cash Cost per silver equivalent payable ounce                   |  |                    |        |   |                   | 
|Total Cash Cost                                                 |  |                    | 17,278 |   |                   | 
|Variation in Finished inventory                                 |  |                    | (531   | ) |                   | 
|Total Cash Cost of Sales                                        |  |                    | 16,747 |   |                   | 
|Treatment and Refining Charges                                  |  |                    | 4,461  |   |                   | 
|Selling Costs                                                   |  |                    | 1,057  |   |                   | 
|G&A Costs                                                       |  |                    | 1,844  |   |                   | 
|Sustaining Capital Expenditures                                 |  |                    | 2,156  |   |                   | 
|All-In Sustaining Cash Costs                                    |  |                    | 26,265 |   |                   | 
|Silver Equivalent Payable Ounces (000's)                        |  |                    | 2,534  |   |                   | 
|Cost of Sales                                                   |  |                    | 18,443 |   |                   | 
|Cost of Sales per Silver Equivalent Payable Ounce               |  | (US$)              | 7.28   |   |                   | 
|Cash Cost per Silver Equivalent Payable Ounce                   |  | (US$)              | 6.61   |   |                   | 
|All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce |  | (US$)              | 10.37  |   |                   | 
|Copper Equivalent Payable Pounds                                |  |                    | 13,575 |   |                   | 
|Cost of Sales per Copper Equivalent Payable Pound               |  | (US$)              | 1.36   |   |                   | 
|Cash Cost per Copper Equivalent Payable Pound                   |  | (US$)              | 1.23   |   |                   | 
|All-In Sustaining Cash Cost per Copper Equivalent Payable Pound |  | (US$)              | 1.93   |   |                   | 
|Zinc Equivalent Payable Pounds                                  |  |                    | 29,303 |   |                   | 
|Cost of Sales per Zinc Equivalent Payable Pound                 |  | (US$)              | 0.63   |   |                   | 
|Cash Cost per Zinc Equivalent Payable Pound                     |  | (US$)              | 0.57   |   |                   | 
|All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound   |  | (US$)              | 0.90   |   |                   | 



The following table provides detailed information
on Bolivar’s cost of sales, cash cost, and all-in sustaining cost per copper equivalent payable pound, zinc equivalent payable
pound, and silver equivalent payable ounce for the three months and year ended December 31, 2017 and 2016:



Bolivar:



|BOLIVAR                                                         |  |  | Three months ended |        |  | Year ended        | 
|--------------------------------------------------------------- |  |  | ------------------ | ------ |  | ----------------- | 
|(In thousand of US dollars, unless stated)                      |  |  | December 31, 2017  |        |  | December 31, 2016 | 
|                                                                |  |  |                    |        |  |                   | 
|Cash Cost per copper equivalent payable pound                   |  |  |                    |        |  |                   | 
|Total Cash Cost                                                 |  |  |                    | 6,546  |  |                   | 
|Variation in Finished inventory                                 |  |  |                    | 867    |  |                   | 
|Total Cash Cost of Sales                                        |  |  |                    | 7,412  |  |                   | 
|Treatment and Refining Charges                                  |  |  |                    | 1,152  |  |                   | 
|Selling Costs                                                   |  |  |                    | 726    |  |                   | 
|G&A Costs                                                       |  |  |                    | 834    |  |                   | 
|Sustaining Capital Expenditures                                 |  |  |                    | 2,891  |  |                   | 
|All-In Sustaining Cash Costs                                    |  |  |                    | 13,016 |  |                   | 
|Silver Equivalent Payable Ounces (000's)                        |  |  |                    | 803    |  |                   | 
|Cost of Sales                                                   |  |  |                    | 7,121  |  |                   | 
|Cost of Sales per Silver Equivalent Payable Ounce               |  |  | (US$)              | 8.87   |  |                   | 
|Cash Cost per Silver Equivalent Payable Ounce                   |  |  | (US$)              | 9.23   |  |                   | 
|All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce |  |  | (US$)              | 16.21  |  |                   | 
|Copper Equivalent Payable Pounds                                |  |  |                    | 4,302  |  |                   | 
|Cost of Sales per Copper Equivalent Payable Pound               |  |  | (US$)              | 1.66   |  |                   | 
|Cash Cost per Copper Equivalent Payable Pound                   |  |  | (US$)              | 1.72   |  |                   | 
|All-In Sustaining Cash Cost per Copper Equivalent Payable Pound |  |  | (US$)              | 3.03   |  |                   | 
|Zinc Equivalent Payable Pounds                                  |  |  |                    | 9,286  |  |                   | 
|Cost of Sales per Zinc Equivalent Payable Pound                 |  |  | (US$)              | 0.77   |  |                   | 
|Cash Cost per Zinc Equivalent Payable Pound                     |  |  | (US$)              | 0.80   |  |                   | 
|All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound   |  |  | (US$)              | 1.40   |  |                   | 



53







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The following table provides detailed information
on Cusi’s cost of sales, cash cost, and all-in sustaining cost per silver equivalent payable ounce, copper equivalent payable
pound, and zinc equivalent payable pound for the three months and year ended December 31, 2017 and 2016:



Cusi:



|CUSI                                                            |  | Three months ended |       |   | Year ended        | 
|--------------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | 
|(In thousand of US dollars, unless stated)                      |  | December 31, 2017  |       |   | December 31, 2016 | 
|                                                                |  |                    |       |   |                   | 
|Cash Cost per silver equivalent payable ounce                   |  |                    |       |   |                   | 
|Total Cash Cost                                                 |  |                    | 1,938 |   |                   | 
|Variation in Finished inventory                                 |  |                    | (240  | ) |                   | 
|Total Cash Cost of Sales                                        |  |                    | 1,699 |   |                   | 
|Treatment and Refining Charges                                  |  |                    | 181   |   |                   | 
|Selling Costs                                                   |  |                    | 160   |   |                   | 
|G&A Costs                                                       |  |                    | 183   |   |                   | 
|Sustaining Capital Expenditures                                 |  |                    | 1,084 |   |                   | 
|All-In Sustaining Cash Costs                                    |  |                    | 3,306 |   |                   | 
|Silver Equivalent Payable Ounces (000's)                        |  |                    | 91    |   |                   | 
|Cost of Sales                                                   |  |                    | 1,563 |   |                   | 
|Cost of Sales per Silver Equivalent Payable Ounce               |  | (US$)              | 17.18 |   |                   | 
|Cash Cost per Silver Equivalent Payable Ounce                   |  | (US$)              | 18.67 |   |                   | 
|All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce |  | (US$)              | 36.33 |   |                   | 
|Copper Equivalent Payable Pounds                                |  |                    | 490   |   |                   | 
|Cost of Sales per Copper Equivalent Payable Pound               |  | (US$)              | 3.19  |   |                   | 
|Cash Cost per Copper Equivalent Payable Pound                   |  | (US$)              | 3.47  |   |                   | 
|All-In Sustaining Cash Cost per Copper Equivalent Payable Pound |  | (US$)              | 6.75  |   |                   | 
|Zinc Equivalent Payable Pounds                                  |  |                    | 1,059 |   |                   | 
|Cost of Sales per Zinc Equivalent Payable Pound                 |  | (US$)              | 1.48  |   |                   | 
|Cash Cost per Zinc Equivalent Payable Pound                     |  | (US$)              | 1.60  |   |                   | 
|All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound   |  | (US$)              | 3.12  |   |                   | 



Consolidated:



|CONSOLIDATED                                                    |  |  | Three months ended |        |  | Year ended        | 
|--------------------------------------------------------------- |  |  | ------------------ | ------ |  | ----------------- | 
|(In thousand of US dollars, unless stated)                      |  |  | December 31, 2017  |        |  | December 31, 2016 | 
|Total Cash Cost of Sales                                        |  |  |                    | 25,858 |  |                   | 
|All-In Sustaining Cash Costs                                    |  |  |                    | 42,587 |  |                   | 
|Silver Equivalent Payable Ounces (000's)                        |  |  |                    | 3,428  |  |                   | 
|Cost of Sales                                                   |  |  |                    | 27,127 |  |                   | 
|Cost of Sales per Silver Equivalent Payable Ounce               |  |  | (US$)              | 7.91   |  |                   | 
|Cash Cost per Silver Equivalent Payable Ounce                   |  |  | (US$)              | 7.54   |  |                   | 
|All-In Sustaining Cash Cost per Silver Equivalent Payable Ounce |  |  | (US$)              | 12.42  |  |                   | 
|Copper Equivalent Payable Pounds                                |  |  |                    | 18,367 |  |                   | 
|Cost of Sales per Copper Equivalent Payable Pound               |  |  | (US$)              | 1.48   |  |                   | 
|Cash Cost per Copper Equivalent Payable Pound                   |  |  | (US$)              | 1.41   |  |                   | 
|All-In Sustaining Cash Cost per Copper Equivalent Payable Pound |  |  | (US$)              | 2.32   |  |                   | 
|Zinc Equivalent Payable Pounds                                  |  |  |                    | 39,648 |  |                   | 
|Cost of Sales per Zinc Equivalent Payable Pound                 |  |  | (US$)              | 0.68   |  |                   | 
|Cash Cost per Zinc Equivalent Payable Pound                     |  |  | (US$)              | 0.65   |  |                   | 
|All-In Sustaining Cash Cost per Zinc Equivalent Payable Pound   |  |  | (US$)              | 1.07   |  |                   | 



Additional non-IFRS measures



The Company uses other financial measures,
the presentation of which is not meant to be a substitute for other subtotals or totals presented in accordance with IFRS, but
rather should be evaluated in conjunction with such IFRS measures. The following other financial measures are used:



| | · | Operating cash flows before movements
in working capital - excludes the movement from period-to-period in working capital items including trade and other receivables,
prepaid expenses, deposits, inventories, trade and other payables and the effects of foreign exchange rates on these items.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



54







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The terms described above do not have a
standardized meaning prescribed by IFRS, and therefore the Company’s definitions are unlikely to be comparable to similar
measures presented by other companies. The Company’s management believes that their presentation provides useful information
to investors because cash flows generated from operations before changes in working capital excludes the movement in working capital
items. This, in management’s view, provides useful information of the Company’s cash flows from operations and are
considered to be meaningful in evaluating the Company’s past financial performance or its future prospects. The most comparable
IFRS measure is cash flows from operating activities.



| | 13. | related party transactions
| | --- | --------------------------



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



| | (a) | Compensation of directors and key management personnel
| | --- | ------------------------------------------------------



The remuneration of the Company’s
directors, officers and other key management personnel during the years ended December 31, 2017 and 2016 are as follows:



|                                                  |  | 2017 |       |  | 2016 | 
|------------------------------------------------- |  | ---- | ----- |  | ---- | 
|                                                  |  | $    |       |  | $    | 
|Salaries and other short term employment benefits |  |      | 2,968 |  |      | 
|Share-based payments                              |  |      | 2,753 |  |      | 
|Total compensation                                |  |      | 5,720 |  |      | 



| | (b) | Principal Subsidiaries
| | --- | ----------------------



The consolidated financial statements
include the accounts of the Company and its subsidiaries, which are entities controlled by the Company. Control exists when the
Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those
returns through its power over the entity. Subsidiaries are consolidated from the date that control commences until the date that
control ceases.



Non-controlling interests represent
equity interests in subsidiaries owned by outside parties. Changes in the parent company’s ownership interest in subsidiaries
that do not result in a loss of control are accounted for as equity transactions.



55







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



The principal subsidiaries of
the Company and their geographical locations as at December 31, 2017 are as follows:



|Name of the subsidiary                                  |  | Ownership interest |       |   | Location
|------------------------------------------------------- |  | ------------------ | ----- | - | --------
|                                                        |  |                    |       |   |         
|Dia Bras EXMIN Resources Inc.                           |  |                    | 100   | % |         
|Sociedad Minera Corona, S. A. (“Corona”) 1              |  |                    | 81.84 | % |         
|Dia Bras Peru, S. A. C. (“Dia Bras Peru”) 1             |  |                    | 100   | % |         
|Dia Bras Mexicana, S. A. de C. V. (“Dia Bras Mexicana”) |  |                    | 100   | % |         
|Servicios de Minería de la Sierra, S. A. de C. V.       |  |                    | 100   | % |         
|Bolívar Administradores, S. A. de C. V.                 |  |                    | 100   | % |         
|Exploraciones Mineras Dia Bras, S. A. de C. V.          |  |                    | 100   | % |         
|EXMIN, S. A. de C. V.                                   |  |                    | 100   | % |         



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



| | 14. | CRITICAL ACCOUNTING POLICIES AND ESTIMATES
| | --- | ------------------------------------------



Significant accounting judgments
and estimates



In the application of the Company’s
accounting policies, which are described in note 2 of the Company’s December 31, 2016 consolidated financial statements,
management is required to make judgments, 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 recognized in the period in which the estimate
is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects
both current and future periods.



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



| | I. | Impairment review of asset carrying values
| | -- | ------------------------------------------



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



56







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



| | II. | 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 which include
commodity prices, production costs, recovery rates and exchange rates may change significantly when new information becomes available.
Changes in assumptions could result in mineral reserves being revised, which in turn would impact our depletion expense, asset
carrying values and the provision for decommissioning costs.



| | III. | Deferred tax assets and liabilities
| | ---- | -----------------------------------



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



| | IV. | 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.



57







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



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.



| | V. | Functional currency
| | -- | -------------------



The determination of a subsidiary’s
functional currency often requires significant judgment where the primary economic environment in which the subsidiary operates
may not be clear. This can have a significant impact on our consolidated results based on the foreign currency translation methods
described in the audited consolidated financial statements.



Future accounting changes



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



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



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



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



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



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



IFRS 16, Leases (“IFRS
16”)



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



58







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



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



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



| | 15. | OFF BALANCE SHEET ARRANGEMENTS
| | --- | ------------------------------



The Company has no
off-balance sheet arrangements as at December 31, 2017.



| | 16. | DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING (“ICFR”)
| | --- | ---------------------------------------------------------------------------



Disclosure controls and procedures



The Company's management is responsible
for designing and maintaining adequate internal controls over financial reporting and disclosure controls and procedures, under
the supervision of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance
with IFRS.



Management, including the CEO and CFO,
has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as at December 31, 2017,
as defined in the rules of the Canadian Securities Administration. Based on this evaluation, they concluded that our disclosure
controls and procedures are effective in providing reasonable assurance that the information required to be disclosed in reports
we filed or submitted under Canadian securities legislation was recorded, processed, summarized and reported within the time periods
specified in those rules.



Internal controls over financial reporting



Management, including the CEO and CFO,
is responsible for establishing and maintaining adequate internal control over financial reporting, and used the framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of our controls in
2017. Based on this evaluation, management concluded that our internal control over financial reporting was effective as at December
31, 2017 and provided a reasonable assurance of the reliability of our financial reporting and preparation of the financial statements.



No matter how well designed any system
of internal control has inherent limitations. Even systems determined to be effective can provide only reasonable assurance of
the reliability of financial statement preparation and presentation.



59







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Changes in internal controls over financial
reporting



There have been no changes in ICFR during
the three months ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, ICFR.



| | 17. | CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
| | --- | ----------------------------------------------------



This discussion includes certain statements
that may be deemed “forward-looking”. All statements in this discussion, other than statements of historical fact,
addressing future exploration drilling, exploration and development activities, production activities and events or developments
that the Company expects, are forward looking statements. Although the Company believes the expectations expressed in such forward-looking
statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or
developments may differ materially from those expressed in forward-looking statements. Factors that could cause actual results
to differ materially from those in forward-looking statements include market prices, exploitation and exploration successes, continued
availability of capital and financing, general economic, market or business conditions, and other factors which are discussed under
“Risk Factors” in the Company’s Annual Information Form dated March 30, 2016 available at www.sedar.com under
the Company’s name.



The MD&A contains “forward-looking
statements” within the meaning of the United States Private Securities Litigation Reform Actof 1995 and “forward
looking information” within Canadian securities laws (collectively “forward-looking statements”) related to the
Company and its operations, and in particular, the anticipated developments in the Company’s operations in future periods,
the Company’s planned exploration activities, the adequacy of the Company’s financial resources and other events or
conditions that may occur in the future. Statements concerning mineral reserve and resource estimates may also be deemed to constitute
forward-looking statements to the extent that they involve estimates of the mineralization that will be encountered if and when
the properties are developed or further developed. These statements relate to analyses and other information that are based on
forecasts of future results, estimates of amounts not yet determinable and assumptions of management.



These forward-looking statements include,
but are not limited to, relate to, among other things: future production of silver, lead, copper and zinc (the “metals”);
future cash costs per ounce or pound of the metals; the price of the metals; the effects of domestic and foreign laws, regulations
and government policies and actions affecting the Company’s operations or potential future operations; future successful
development of the Yauricocha, Bolivar and Cusi near-mine exploration projects and other exploration and development projects;
the sufficiency of the Company’s current working capital, anticipated operating cash flow or the Company’s ability
to raise necessary funds; estimated production rates for the metals produced by the Company; timing of production; the estimated
cost of sustaining capital; ongoing or future development plans and capital replacement, improvement or remediation programs; the
estimates of expected or anticipated economic returns from the Company’s mining projects; future sales of the metals, concentrates
or other future products produced by the Company; and the Company’s plans and expectations for its properties and operations.



60







|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



Risks and uncertainties relating to foreign
currency fluctuations; risks inherent in the mining industry including environmental hazards, industrial accidents, unusual or
unexpected geological formations, ground control problems, flooding and mud rushes; risks associated with the estimation of mineral
resources and the geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining
results will not be consistent with the Company’s expectations; the potential for and effects of labour disputes or other
unanticipated difficulties or shortages of labour or interruptions in production; actual material mined varying from estimates
of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of pilot-mining activities and
cost estimates, including the potential for unexpected costs/expenses and commodity price fluctuations; uncertain political and
economic environments; changes in laws or policies, foreign taxation, delays or the inability to obtain necessary governmental
permits.



Any statements that express or involve
discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or
performance (often, but not always, using words or phrases such as “expects”, “anticipates”, “plans”,
“projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”,
“objectives”, “potential” or variations thereof, or stating that certain actions, events or results “may”,
“could”, “would”, “might” or “will” be taken, occur or be achieved, or the negative
of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking information. Forward-looking
information is subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events
or results to differ from those expressed or implied by the forward-looking information, including, without limitation: uncertainty
of production and cost estimates for the Yauricocha Mine (as hereinafter defined), the Bolivar Mine (as hereinafter defined) and
the Cusi Mine (as hereinafter defined); uncertainty of production at the Company’s exploration and development properties;
risks and uncertainties associated with developing and exploring new mines including start-up delays; risks and hazards associated
with the business of mineral exploration, development and mining (including operating in foreign jurisdictions, environmental hazards,
industrial accidents, unusual or unexpected geological or structure formations, pressures, cave-ins and flooding); risks and uncertainties
relating to the interpretation of drill results and the geology, grade and continuity of the Company’s mineral deposits;
risks related to the Company’s ability to obtain adequate financing for the Company’s planned development activities
and to complete further exploration programs; fluctuations in spot and forward markets for the metals and certain other commodities;
risks related to obtaining long-term sales contracts or completing spot sales for the Company’s products; the Company’s
history of losses and the potential for future losses; risks related to general economic conditions, including recent market and
world events and conditions; inadequate insurance, or inability to obtain insurance, to cover these risks and hazards; relationships
with and claims by local communities and indigenous populations; diminishing quantities or grades of mineral reserves as properties
are mined; challenges to, or difficulty maintaining, the Company’s title to properties and continued ownership thereof; risks
related to the Company’s covenants with respect to the BCP Facility (as hereinafter defined); changes in national and local
legislation, taxation, controls or regulations and political or economic developments or changes in Canada, Mexico, Peru or other
countries where they may carry on business; risks related to the delay in obtaining or failure to obtain required permits, or non-compliance
with permits the Company has obtained; increased costs and restrictions on operations due to compliance with environmental laws
and regulations; regulations and pending legislation governing issues involving climate change, as well as the physical impacts
of climate change; risks related to reclamation activities on the Company’s properties; uncertainties related to title to
the Company’s mineral properties and the surface rights thereon, including the Company’s ability to acquire, or economically
acquire, the surface rights to certain of the Company’s exploration and development projects; the Company’s ability
to successfully acquire additional commercially mineable mineral rights; risks related to currency fluctuations (such as the Canadian
dollar, the United States dollar, the Peruvian sol and the Mexican peso); increased costs affecting the mining industry, including
occasional high rates of inflation; increased competition in the mining industry for properties, qualified personnel and management;
risks related to some of the Company’s directors’ and officers’ involvement with other natural resource companies;
the Company’s ability to attract and retain qualified personnel and management to grow the Company’s business; risks
related to estimates of deferred tax assets and liabilities; risks related to claims and legal proceedings and the Company’s
ability to maintain adequate internal control over financial reporting.





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|Sierra Metals Inc.                                              
|----------------------------------------------------------------
|Management’s Discussion and Analysis                            
|For the year ended December 31, 2017                            
|(In thousands of United States dollars, unless otherwise stated)



This list is not exhaustive of the factors
that may affect any of the Company’s forward-looking statements. Forward looking statements are statements about the future
and are inherently uncertain, and the Company’s actual achievements or other future events or conditions may differ materially
from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without
limitation, those referred to in this MD&A under the heading ‘‘Other Risks and Uncertainties”. The Company’s
forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made,
and the Company does not assume any obligation to update forward-looking statements if circumstances or management’s beliefs,
expectations or opinions should change, other than as required by applicable law. For the reasons set forth above, one should not
place undue reliance on forward-looking statements.



Cautionary Note to U.S. Investors Concerning
Estimates of Inferred Resources



This document uses the term “Inferred
Mineral Resources”. U.S. investors are advised that while this term is recognized and required by Canadian regulations, the
Securities and Exchange Commission (“SEC”) does not recognize it. Inferred Mineral Resources have a great amount of
uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that
all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of
Inferred Mineral Resources may not form the basis of economic studies other than a Preliminary Economic Assessment (PEA).



This document also uses the terms “Measured
and Indicated Mineral Resources”. The Company advises U.S. investors that while these terms are recognized by Canadian regulations,
the SEC does not recognize them. U.S. investors are cautioned not to assume that any part or all of mineral deposits included in
these categories will ever be converted into mineral reserves. Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Disclosure of “contained ounces” is permitted under Canadian regulations; however, the SEC normally
only permits the reporting of non-reserve mineralization as in-place tonnage and grade.



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