Exhibit 99.2



SIERRA METALS INC.



Consolidated Financial Statements



Years
ended December 31, 2017 and 2016



1 | Page







March 20, 2018



Management’s Responsibility for
Financial Reporting



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



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



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



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



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



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



2 | Page







March 20, 2018



Independent Auditor’s Report





To the Shareholders of Sierra Metals
Inc.



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



Management’s responsibility for
the consolidated financial statements



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



Auditor’s responsibility



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



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



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



Opinion



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



signed “PricewaterhouseCoopers
LLP”



Chartered Professional Accountants,
Licensed Public Accountants



Toronto, Canada



3 | Page







Sierra Metals Inc.

Consolidated Statements of
Financial Position

December 31, 2017 and 2016

(In thousands of United
States dollars)



|                                             |  |      |  | December 31, 2017 |         |   | December 31, 2016 | 
|-------------------------------------------- |  | ---- |  | ----------------- | ------- | - | ----------------- | 
|                                             |  | Note |  | $                 |         |   | $                 | 
|ASSETS                                       |  |      |  |                   |         |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|Current assets:                              |  |      |  |                   |         |   |                   | 
|Cash and cash equivalents                    |  |      |  |                   | 23,878  |   |                   | 
|Trade and other receivables                  |  | 5    |  |                   | 27,876  |   |                   | 
|Income tax receivable                        |  |      |  |                   | 220     |   |                   | 
|Prepaid expenses                             |  |      |  |                   | 1,130   |   |                   | 
|Inventories                                  |  | 6    |  |                   | 20,799  |   |                   | 
|                                             |  |      |  |                   | 73,903  |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|Non-current assets:                          |  |      |  |                   |         |   |                   | 
|Property, plant and equipment                |  | 7    |  |                   | 266,240 |   |                   | 
|Other assets                                 |  |      |  |                   | -       |   |                   | 
|Deferred income tax                          |  | 9    |  |                   | 458     |   |                   | 
|Total assets                                 |  |      |  |                   | 340,601 |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|LIABILITIES                                  |  |      |  |                   |         |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|Current liabilities:                         |  |      |  |                   |         |   |                   | 
|Accounts payable and accrued liabilities     |  | 8    |  |                   | 32,319  |   |                   | 
|Income taxes payable                         |  |      |  |                   | 9,440   |   |                   | 
|Deferred revenue                             |  | 11   |  |                   | -       |   |                   | 
|Loans payable                                |  | 10   |  |                   | 28,977  |   |                   | 
|Decommissioning liability                    |  | 12   |  |                   | 1,372   |   |                   | 
|Other liabilities                            |  |      |  |                   | 8,579   |   |                   | 
|                                             |  |      |  |                   | 80,687  |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|Non-current liabilities:                     |  |      |  |                   |         |   |                   | 
|Loans payable                                |  | 10   |  |                   | 35,883  |   |                   | 
|Deferred income tax                          |  | 9    |  |                   | 30,341  |   |                   | 
|Decommissioning liability                    |  | 12   |  |                   | 11,899  |   |                   | 
|Other liabilities                            |  | 13   |  |                   | 1,113   |   |                   | 
|Total liabilities                            |  |      |  |                   | 159,923 |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|EQUITY                                       |  |      |  |                   |         |   |                   | 
|Share capital                                |  | 14   |  |                   | 230,283 |   |                   | 
|Accumulated deficit                          |  |      |  |                   | (88,121 | ) |                   | 
|Other reserves                               |  |      |  |                   | 12,409  |   |                   | 
|Equity attributable to owners of the Company |  |      |  |                   | 154,571 |   |                   | 
|Non-controlling interest                     |  | 15   |  |                   | 26,107  |   |                   | 
|Total equity                                 |  |      |  |                   | 180,678 |   |                   | 
|                                             |  |      |  |                   |         |   |                   | 
|Total liabilities and equity                 |  |      |  |                   | 340,601 |   |                   | 



Contingencies (note 24)



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



|“Alberto Arias”       |  | “Doug Cater”            
|--------------------- |  | ------------------------
|Alberto
    Arias     |  | Doug Cater              
|Chairman of the Board |  | Chairman Audit Committee



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

4 | Page







Sierra Metals Inc. Consolidated Statements of Income (Loss) For the years ended December 31, 2017 and 2016 (In thousands of United States dollars, except per share
amounts)




|                                           |  |      |  | 2017 |          |   | 2016 | 
|------------------------------------------ |  | ---- |  | ---- | -------- | - | ---- | 
|                                           |  | Note |  | $    |          |   | $    | 
|                                           |  |      |  |      |          |   |      | 
|Revenue                                    |  |      |  |      | 205,118  |   |      | 
|                                           |  |      |  |      |          |   |      | 
|Cost of sales                              |  |      |  |      |          |   |      | 
|Mining costs                               |  | 16   |  |      | (100,979 | ) |      | 
|Depletion, depreciation and amortization   |  | 16   |  |      | (58,175  | ) |      | 
|                                           |  |      |  |      | (159,154 | ) |      | 
|                                           |  |      |  |      |          |   |      | 
|Gross profit from mining operations        |  |      |  |      | 45,964   |   |      | 
|                                           |  |      |  |      |          |   |      | 
|General and administrative expenses        |  | 16   |  |      | (20,339  | ) |      | 
|Selling expenses                           |  |      |  |      | (7,543   | ) |      | 
|Exploration and evaluation expenditures    |  |      |  |      | -        |   |      | 
|Income (loss) from operations              |  |      |  |      | 18,082   |   |      | 
|                                           |  |      |  |      |          |   |      | 
|Other income                               |  | 17   |  |      | 818      |   |      | 
|Foreign currency exchange gain (loss)      |  |      |  |      | (1,737   | ) |      | 
|Interest expense and other finance costs   |  | 18   |  |      | (3,263   | ) |      | 
|Loss on spin out of Plexmar net assets     |  | 25   |  |      | (4,412   | ) |      | 
|Income (loss) before income taxes          |  |      |  |      | 9,488    |   |      | 
|                                           |  |      |  |      |          |   |      | 
|Income tax (expense) recovery:             |  |      |  |      |          |   |      | 
|Current tax expense                        |  | 9    |  |      | (23,416  | ) |      | 
|Deferred tax recovery                      |  | 9    |  |      | 13,068   |   |      | 
|                                           |  |      |  |      | (10,348  | ) |      | 
|                                           |  |      |  |      |          |   |      | 
|Net income (loss)                          |  |      |  |      | (860     | ) |      | 
|                                           |  |      |  |      |          |   |      | 
|Net income (loss) attributable to:         |  |      |  |      |          |   |      | 
|Shareholders of the Company                |  |      |  |      | (4,645   | ) |      | 
|Non-controlling interests                  |  |      |  |      | 3,785    |   |      | 
|                                           |  |      |  |      | (860     | ) |      | 
|                                           |  |      |  |      |          |   |      | 
|Weighted average shares outstanding (000s) |  |      |  |      |          |   |      | 
|Basic                                      |  |      |  |      | 162,554  |   |      | 
|Diluted                                    |  |      |  |      | 162,554  |   |      | 
|                                           |  |      |  |      |          |   |      | 
|Basic earnings (loss) per share            |  |      |  |      | (0.03    | ) |      | 
|Diluted earnings (loss) per share          |  |      |  |      | (0.03    | ) |      | 



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



5 | Page







Sierra Metals Inc. Consolidated Statements of Comprehensive Income (Loss) For the years ended December 31, 2017 and 2016 (In thousands of United States dollars)




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



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

6 | Page







Sierra Metals Inc. Consolidated Statements of Changes in Equity For the years ended December 31, 2017 and 2016 (In thousands of United States dollars)




|                                              |  | Common
    Shares |             |  | Other   |  |         | Retained earnings |  |  | Total attributable    |   |  | Non-controlling |         |   | Total    | 
|--------------------------------------------- |  | ----------------- | ----------- |  | ------- |  | ------- | ----------------- |  |  | --------------------- | - |  | --------------- | ------- | - | -------- | 
|                                              |  | Shares            |             |  | Amounts |  |         | reserves          |  |  | (accumulated deficit) |   |  | to shareholders |         |   | Interest | 
|                                              |  |                   |             |  | $       |  |         | $                 |  |  | $                     |   |  | $               |         |   | $        | 
|Balance at January 1, 2017                    |  |                   | 162,073,293 |  |         |  | 228,326 |                   |  |  | 12,718                |   |  |                 | (80,776 | ) |          | 
|                                              |  |                   |             |  |         |  |         |                   |  |  |                       |   |  |                 |         |   |          | 
|Exercise of RSUs                              |  |                   | 739,471     |  |         |  | 1,957   |                   |  |  | (1,957                | ) |  |                 | -       |   |          | 
|Share-based compensation expense              |  |                   | -           |  |         |  | -       |                   |  |  | 1,198                 |   |  |                 | -       |   |          | 
|Dividends paid to non-controlling interest    |  |                   | -           |  |         |  | -       |                   |  |  | -                     |   |  |                 | -       |   |          | 
|Distribution of capital of Plexmar net assets |  |                   | -           |  |         |  | -       |                   |  |  | -                     |   |  |                 | (2,700  | ) |          | 
|Total comprehensive income (loss)             |  |                   | -           |  |         |  | -       |                   |  |  | 450                   |   |  |                 | (4,645  | ) |          | 
|Balance at December 31, 2017                  |  |                   | 162,812,764 |  |         |  | 230,283 |                   |  |  | 12,409                |   |  |                 | (88,121 | ) |          | 



|                                           |  | Common
    Shares |             |  | Other   |  |         | Retained earnings |  |  | Total attributable    |   |  | Non-controlling |         |   | Total    | 
|------------------------------------------ |  | ----------------- | ----------- |  | ------- |  | ------- | ----------------- |  |  | --------------------- | - |  | --------------- | ------- | - | -------- | 
|                                           |  | Shares            |             |  | Amounts |  |         | reserves          |  |  | (accumulated deficit) |   |  | to shareholders |         |   | Interest | 
|                                           |  |                   |             |  | $       |  |         | $                 |  |  | $                     |   |  | $               |         |   | $        | 
|Balance at January 1, 2016                 |  |                   | 161,746,240 |  |         |  | 227,969 |                   |  |  | 11,471                |   |  |                 | (68,511 | ) |          | 
|                                           |  |                   |             |  |         |  |         |                   |  |  |                       |   |  |                 |         |   |          | 
|Exercise of RSUs                           |  |                   | 327,053     |  |         |  | 357     |                   |  |  | (357                  | ) |  |                 | -       |   |          | 
|Share-based compensation expense           |  |                   | -           |  |         |  | -       |                   |  |  | 819                   |   |  |                 | -       |   |          | 
|Dividends paid to non-controlling interest |  |                   | -           |  |         |  | -       |                   |  |  | -                     |   |  |                 | -       |   |          | 
|Total comprehensive income (loss)          |  |                   | -           |  |         |  | -       |                   |  |  | 785                   |   |  |                 | (12,265 | ) |          | 
|Balance at December 31, 2016               |  |                   | 162,073,293 |  |         |  | 228,326 |                   |  |  | 12,718                |   |  |                 | (80,776 | ) |          | 



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

7 | Page







Sierra Metals Inc.

Consolidated Statements of Cash Flows

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








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



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



8 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 1 | Description of business
                                         and nature of operations
| | - | -----------------------------------------------------------------------------------------



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



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



The Company owns an 81.84%
interest in the polymetallic Yauricocha Mine in Peru and a 100% interest in the Bolivar and Cusi Mines in Mexico. In addition
to its producing mines, the Company also owns various exploration projects in Mexico and Peru.



| | 2 | Significant accounting
                                         policies
| | - | ------------------------------------------------------------------------



The significant accounting
policies used in the preparation of these consolidated financial statements are as follows:



| | (a) | Basis of preparation
| | --- | --------------------



These consolidated financial
statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting
Interpretations Committee (“IFRIC”). The financial statements were approved by the Board of Directors on March 20,
2018.



| | (b) | Basis of consolidation
| | --- | ----------------------



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



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



9 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



The 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.



| | (c) | Foreign currency
                                         translation
| | --- | ---------------------------------------------------------------------



| | (i) | Functional
                                         currency
| | --- | ------------------------------------------------------------



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



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



| | (ii) | Presentation currency
| | ---- | ---------------------



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



| | (iii) | Transactions and balances
| | ----- | -------------------------



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



10 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



| | (d) | Cash and cash
                                         equivalents
| | --- | ------------------------------------------------------------------



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



| | (e) | Financial Instruments
| | --- | ---------------------



| | (i) | Initial
                                         measurement
| | --- | ------------------------------------------------------------



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



| | (ii) | Classification
                                         and subsequent measurement
| | ---- | ----------------------------------------------------------------------------------



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



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



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



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



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



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



11 | Page









Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



| | (iii) | Impairment
                                         of financial assets
| | ----- | -----------------------------------------------------------------------



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



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



| | (f) | Segment reporting
| | --- | -----------------



Operating
segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief
operating decision-maker is responsible for allocating resources and assessing performance of the operating segments and has been
identified as the President and Chief Executive Officer of the Company.



| | (g) | Inventories
| | --- | -----------



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



The
supplies and spare parts inventories will be used for exploration and production and are valued at the lower of average cost and
net realizable value. Cost includes acquisition, freight and other directly attributable costs.



12 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



| | (h) | Exploration
                                         and evaluation expenditure
| | --- | -------------------------------------------------------------------------------



Exploration
and evaluation expenditure comprises costs that are directly attributable to:



| | · | Researching
                                         and analysing existing exploration data;
| | - | ---------------------------------------------------------------------------------------------



| | · | Conducting
                                         geological studies, exploratory drilling and sampling;
| | - | ----------------------------------------------------------------------------------------------------------



| | · | Examining
                                         and testing extraction and treatment methods; and /or
| | - | --------------------------------------------------------------------------------------------------------



| | · | Compiling
                                         pre-feasibility and feasibility studies
| | - | ------------------------------------------------------------------------------------------



Exploration
expenditures are costs incurred in the search for resources suitable for commercial exploitation and these costs are expensed
in the period incurred. Evaluation expenditures are costs incurred in determining the technical feasibility and commercial viability
of a mineral resource. Evaluation expenditures are capitalized when there is a high degree of confidence in the project’s
viability and thus it is probable that future economic benefits will flow to the Company. Any items of property, plant and equipment
used for exploration and evaluation are capitalised within property, plant and equipment. Capitalized evaluation expenditures
are considered to be tangible assets as they form part of the underlying mineral property and are recorded within property, plant
and equipment - exploration and evaluation expenditures.



| | (i) | Property, plant
                                         and equipment
| | --- | ----------------------------------------------------------------------



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



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



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



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



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



13 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



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



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



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



| | (j) | Impairment
                                         of non-financial assets
| | --- | ---------------------------------------------------------------------------



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



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



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



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



| | (k) | Borrowing costs
| | --- | ---------------



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



14 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



| | (l) | Revenue recognition
| | --- | -------------------



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



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



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



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



| | (m) | Deferred revenue
| | --- | ----------------



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



| | (n) | Share capital
| | --- | -------------



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



| | (o) | Share-based payments
| | --- | --------------------



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



| | (p) | Share repurchases
| | --- | -----------------



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



15 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



| | (q) | Earnings (loss)
                                         per share
| | --- | ------------------------------------------------------------------



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



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



| | (r) | Income taxes
| | --- | ------------



Tax
expense comprises current and deferred income and resource taxes. Current income, deferred income and resources taxes are recognized
in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in
other comprehensive income.



Current
tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.



Deferred
tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the
initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting
nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent
that the parent is able to control the timing of the reversal of the temporary difference and it is probable that they will not
reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences
when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.



Deferred
tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they
intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.



A deferred tax asset is recognized
for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable
profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit will be realized.



| | (s) | Decommissioning
                                         and restoration liabilities
| | --- | ------------------------------------------------------------------------------------



Decommissioning
and restoration costs include the dismantling and demolition of infrastructure, the removal of residual materials and the remediation
of disturbed areas. These costs are a normal consequence of mining activity and the majority of these expenditures are expected
to be incurred at the end of the life of mine. Estimated decommissioning and restoration costs are provided in the accounting
period when the obligation arising from the related disturbance occurs, based on the net present value of the estimated future
costs discounted using the credit adjusted risk free rate. This provision is adjusted in each reporting period to reflect known
developments, e.g. revisions to costs estimates and the timing of cash out flows.



16 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 2 | Significant accounting
                                         policies (continued)
| | - | ------------------------------------------------------------------------------------



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



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



| | 3 | Significant accounting
                                         estimates and judgments
| | - | ---------------------------------------------------------------------------------------



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



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



| | (a) | Impairment
                                         review of asset carrying values
| | --- | -----------------------------------------------------------------------------------



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



17 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 3 | Significant accounting
                                         estimates and judgments	 (continued)
| | - | ----------------------------------------------------------------------------------------------------



| | (b) | Mineral
                                         reserves and resources
| | --- | -----------------------------------------------------------------------



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



| | (c) | Deferred
                                         tax assets and liabilities
| | --- | ----------------------------------------------------------------------------



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



| | (d) | Decommissioning
                                         and restoration liabilities costs
| | --- | ------------------------------------------------------------------------------------------



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



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



18 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | (e) | Functional
                                         currency
| | --- | ------------------------------------------------------------



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



| | 4 | Adoption
                                         of new accounting standards and future accounting changes
| | - | -----------------------------------------------------------------------------------------------------------



Future accounting changes



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



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



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



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



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



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



IFRS 16, Leases
(“IFRS 16”)



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



Adoption of new
accounting standards



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



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



19 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 5 | Trade and other receivables
| | - | ---------------------------



|                      |  | December 31, |        |  | December 31, | 
|--------------------- |  | ------------ | ------ |  | ------------ | 
|                      |  | 2017         |        |  | 2016         | 
|                      |  | $            |        |  | $            | 
|Trade receivables     |  |              | 20,613 |  |              | 
|Sales tax receivables |  |              | 7,210  |  |              | 
|Other receivables     |  |              | 53     |  |              | 
|                      |  |              | 27,876 |  |              | 



| | 6 | Inventories
| | - | -----------



|                         |  | December 31, |        |  | December 31, | 
|------------------------ |  | ------------ | ------ |  | ------------ | 
|                         |  | 2017         |        |  | 2016         | 
|                         |  | $            |        |  | $            | 
|                         |  |              |        |  |              | 
|Stockpiles               |  |              | 1,554  |  |              | 
|Concentrates             |  |              | 3,839  |  |              | 
|Supplies and spare parts |  |              | 15,406 |  |              | 
|                         |  |              | 20,799 |  |              | 



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



20 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 7 | Property, plant and
                                         equipment
| | - | ----------------------------------------------------------------------



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



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



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



21 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 8 | Accounts payable and
                                         accrued liabilities
| | - | ---------------------------------------------------------------------------------



|                                       |  | December 31, |        |  | December 31, | 
|-------------------------------------- |  | ------------ | ------ |  | ------------ | 
|                                       |  | 2017         |        |  | 2016         | 
|                                       |  | $            |        |  | $            | 
|                                       |  |              |        |  |              | 
|Trade payables                         |  |              | 19,004 |  |              | 
|Other payables and accrued liabilities |  |              | 13,315 |  |              | 
|                                       |  |              | 32,319 |  |              | 



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



| | 9 | Current and deferred
                                         income tax liability
| | - | ----------------------------------------------------------------------------------



| | (a) | Income
                                         and resource taxes
| | --- | ------------------------------------------------------------------



|                      |  | 2017 |         |   | 2016 | 
|--------------------- |  | ---- | ------- | - | ---- | 
|                      |  | $    |         |   | $    | 
|Current Tax Expense   |  |      |         |   |      | 
|                      |  |      |         |   |      | 
|Current income tax    |  |      | 23,416  |   |      | 
|                      |  |      | 23,416  |   |      | 
|                      |  |      |         |   |      | 
|Deferred Tax Recovery |  |      |         |   |      | 
|                      |  |      |         |   |      | 
|Deferred Tax Recovery |  |      | (13,068 | ) |      | 
|                      |  |      | (13,068 | ) |      | 
|                      |  |      |         |   |      | 
|Total tax expense     |  |      | 10,348  |   |      | 



22 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 9 | Current and deferred
                                         income tax liability (Continued)
| | - | ----------------------------------------------------------------------------------------------



| | (b) | Tax
                                         rate reconciliation
| | --- | ----------------------------------------------------------------



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



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



| | (c) | Deferred
                                         tax asset and liability
| | --- | -------------------------------------------------------------------------



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



|                               |  | 2017 |        |   | 2016 | 
|------------------------------ |  | ---- | ------ | - | ---- | 
|                               |  | $    |        |   | $    | 
|Non-capital and capital losses |  |      | 35,512 |   |      | 
|Property, plant and equipment  |  |      | 60     |   |      | 
|Mineral properties             |  |      | 2,445  |   |      | 
|Other                          |  |      | (385   | ) |      | 
|                               |  |      | 37,632 |   |      | 



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



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



23 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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










| | 9 | Current and deferred
                                         income tax liability (continued)
| | - | ----------------------------------------------------------------------------------------------



| | (d) | Tax
                                         losses
| | --- | ---------------------------------------------------



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



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



| | (e) | Unrecognized
                                         deferred tax liabilities
| | --- | ------------------------------------------------------------------------------



As at December 31, 2017, the
Company has taxable temporary difference of $16,315 (2016 - $13,477) relating to investments in subsidiaries that has not been
recognized because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred
in the foreseeable future.



| | 10 | Loans payable
| | -- | -------------



|                                                             |  | December 31, |        |  | December 31, | 
|------------------------------------------------------------ |  | ------------ | ------ |  | ------------ | 
|                                                             |  | 2017         |        |  | 2016         | 
|                                                             |  | $            |        |  | $            | 
|                                                             |  |              |        |  |              | 
|Current                                                      |  |              |        |  |              | 
|                                                             |  |              |        |  |              | 
|Acquisition loan with Banco de Credito del Peru (a)          |  |              | 6,141  |  |              | 
|Operating loan with Banco de Credito del Peru (b)            |  |              | 6,309  |  |              | 
|Revolving credit facility with Banco de Credito del Peru (c) |  |              | 15,000 |  |              | 
|Notes payable to Scotiabank and Interbank in Peru (d)        |  |              | -      |  |              | 
|Other credit facilities (e)                                  |  |              | -      |  |              | 
|Loan with FIFOMI (f)                                         |  |              | 1,527  |  |              | 
|                                                             |  |              | 28,977 |  |              | 
|                                                             |  |              |        |  |              | 
|Non-current                                                  |  |              |        |  |              | 
|                                                             |  |              |        |  |              | 
|Acquisition loan with Banco de Credito del Peru (a)          |  |              | 34,236 |  |              | 
|Operating loan with Banco de Credito del Peru (b)            |  |              | -      |  |              | 
|Loan with FIFOMI (f)                                         |  |              | 1,647  |  |              | 
|                                                             |  |              | 35,883 |  |              | 
|                                                             |  |              |        |  |              | 
|Total loans payable                                          |  |              | 64,860 |  |              | 



24 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 10 | Loans payable (continued)
| | -- | -------------------------



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



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



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



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



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



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



| | · | One
                                         year principal repayment grace period
| | - | ----------------------------------------------------------------------------------



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



| | · | Term
                                         of the Facility extended for 5 Years
| | - | ----------------------------------------------------------------------------------



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



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



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



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



| | (b) | Corona
                                         Operating Loan with BCP
| | --- | -----------------------------------------------------------------------



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



25 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 10 | Loans payable (continued)
| | -- | -------------------------



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



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



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



| | (c) | DBP
                                         Credit Facility with BCP
| | --- | ---------------------------------------------------------------------



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



| | (d) | Corona
                                         Notes payable with Scotiabank and Interbank Peru
| | --- | ------------------------------------------------------------------------------------------------



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



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



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



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



| | (e) | Other
                                         credit facilities
| | --- | ----------------------------------------------------------------



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



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



26 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 10 | Loans payable (continued)
| | -- | -------------------------



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



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



| | (f) | FIFOMI
                                         loan
| | --- | ----------------------------------------------------



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



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



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



| | 11 | Deferred revenue
| | -- | ----------------



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



27 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 12 | Decommissioning liability
| | -- | -------------------------



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



The Company’s decommissioning
liability represents the present value of estimated costs for required future decommissioning and other site restoration activities.
The majority of the decommissioning and site restoration expenditures occur at the end of each operation’s life. During
2017 and 2016, the decommissioning liability was calculated based on the following key assumptions:



|                                      |  | 2017   |       |  | 2016 | 
|------------------------------------- |  | ------ | ----- |  | ---- | 
|                                      |  | Mexico |       |  | Peru | 
|                                      |  |        |       |  |      | 
|Estimated undiscounted cash flows ($) |  |        | 1,021 |  |      | 
|Discount rate (%)                     |  |        | 6.0   |  |      | 
|Settlement period  (years)            |  |        | 6     |  |      | 



| | 13 | Other liabilities
| | -- | -----------------



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



| | (a) | Profit
                                         sharing and other employee related obligations
| | --- | ----------------------------------------------------------------------------------------------



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



28 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 14 | Share capital and
                                         share-based payments
| | -- | -------------------------------------------------------------------------------



| | (a) | Authorized
                                         capital
| | --- | -----------------------------------------------------------



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



| | (b) | Stock
                                         options
| | --- | ------------------------------------------------------



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



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



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



| | (c) | Restricted
                                         share units (“RSUs”)
| | --- | ------------------------------------------------------------------------



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



|                                 |  | December 31, |           |   | December 31, | 
|-------------------------------- |  | ------------ | --------- | - | ------------ | 
|                                 |  | 2017         |           |   | 2016         | 
|Outstanding, beginning of period |  |              | 1,771,877 |   |              | 
|Granted                          |  |              | 1,126,254 |   |              | 
|Exercised                        |  |              | (739,471  | ) |              | 
|Forfeited                        |  |              | (842,346  | ) |              | 
|Outstanding, end of period       |  |              | 1,316,314 |   |              | 



29 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 14 | Share capital and
                                         share-based payments (continued)
| | -- | -------------------------------------------------------------------------------------------



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



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



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



30 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 15 | Non-controlling interest
| | -- | ------------------------



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



|Summarized balance sheet     |  |              |         |   |              | 
|---------------------------- |  | ------------ | ------- | - | ------------ | 
|                             |  | December 31, |         |   | December 31, | 
|                             |  | 2017         |         |   | 2016         | 
|                             |  | $            |         |   | $            | 
|Current                      |  |              |         |   |              | 
|Assets                       |  |              | 67,867  |   |              | 
|Liabilities                  |  |              | (39,466 | ) |              | 
|Total current net assets     |  |              | 28,401  |   |              | 
|                             |  |              |         |   |              | 
|Non-current                  |  |              |         |   |              | 
|Assets                       |  |              | 155,259 |   |              | 
|Liabilities                  |  |              | (39,404 | ) |              | 
|Total non-current net assets |  |              | 115,855 |   |              | 
|Net assets                   |  |              | 144,256 |   |              | 



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



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



31 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 16 | Expenses by nature
| | -- | ------------------



Mining costs include mine production
costs, milling and transport costs, royalty expenses, site administration costs but not the primary mine development costs which
are capitalized and depreciated over the specific useful life or reserves related to that development and ore included in depreciation
and amortization. The mining costs for the year ended December 31, 2017 and 2016 relate to the Yauricocha, Bolivar and Cusi Mines.



| | (a) | Mining
                                         costs
| | --- | -----------------------------------------------------



|                                   |  | 2017 |         |  | 2016 | 
|---------------------------------- |  | ---- | ------- |  | ---- | 
|                                   |  | $    |         |  | $    | 
|Employee compensation and benefits |  |      | 23,046  |  |      | 
|Third party and contractors costs  |  |      | 43,041  |  |      | 
|Depreciation                       |  |      | 58,175  |  |      | 
|Consumables                        |  |      | 27,659  |  |      | 
|Changes in inventory and other     |  |      | 7,233   |  |      | 
|                                   |  |      | 159,154 |  |      | 



| | (b) | General
                                         and administrative expenses
| | --- | ----------------------------------------------------------------------------



|                                     |  | 2017 |        |  | 2016 | 
|------------------------------------ |  | ---- | ------ |  | ---- | 
|                                     |  | $    |        |  | $    | 
|Salaries and benefits                |  |      | 6,405  |  |      | 
|Consulting and professional fees     |  |      | 6,583  |  |      | 
|Other                                |  |      | 1,581  |  |      | 
|Office expenses                      |  |      | 1,604  |  |      | 
|Marketing and communication expenses |  |      | 925    |  |      | 
|Share-based compensation expense     |  |      | 1,162  |  |      | 
|Listing and filing fees              |  |      | 390    |  |      | 
|Director expenses                    |  |      | 1,168  |  |      | 
|Travelling expense                   |  |      | 521    |  |      | 
|                                     |  |      | 20,339 |  |      | 



| | 17 | Other income (expenses)
| | -- | -----------------------



|                                          |  | 2017 |     |  | 2016 | 
|----------------------------------------- |  | ---- | --- |  | ---- | 
|                                          |  | $    |     |  | $    | 
|                                          |  |      |     |  |      | 
|Gain on sale of supplies and fixed assets |  |      | 58  |  |      | 
|Interest income                           |  |      | 36  |  |      | 
|Reversal of legal accrual                 |  |      | -   |  |      | 
|Miscellaneous income (expenses)           |  |      | 724 |  |      | 
|                                          |  |      | 818 |  |      | 



32 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 18 | Interest expense
                                         and other finance costs
| | -- | ---------------------------------------------------------------------------------



|                                           |  | 2017 |       |  | 2016 | 
|------------------------------------------ |  | ---- | ----- |  | ---- | 
|                                           |  | $    |       |  | $    | 
|                                           |  |      |       |  |      | 
|Interest expense on BCP loan               |  |      | 2,370 |  |      | 
|Interest expense on other liabilities      |  |      | 4     |  |      | 
|Amortization of loan transaction costs     |  |      | 46    |  |      | 
|Interest cost on decommissioning liability |  |      | 843   |  |      | 
|                                           |  |      | 3,263 |  |      | 



| | 19 | Segment reporting
| | -- | -----------------



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



The reporting segments identified
are the following:



| | · | Peru
                                         – Yauricocha Mine
| | - | ---------------------------------------------------------------



| | · | Mexico
                                         – Bolivar and Cusi Mines
| | - | ------------------------------------------------------------------------



33 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 19 | Segment reporting
                                         (continued)
| | -- | ----------------------------------------------------------------------



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



|                                                               |  | Peru            |          |   | Mexico       |  |         |           |  |  | Canada    |   |  |       |        
|-------------------------------------------------------------- |  | --------------- | -------- | - | ------------ |  | ------- | --------- |  |  | --------- | - |  | ----- | -------
|                                                               |  | Yauricocha Mine |          |   | Bolivar Mine |  |         | Mexico    |  |  | Corporate |   |  | Total |        
|Year ended December 31, 2017                                   |  | $               |          |   | $            |  |         | Cusi Mine |  |  | $         |   |  | $     |        
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Revenue                                                        |  |                 | 154,153  |   |              |  | 44,949  |           |  |  | 6,016     |   |  |       | -      
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|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    | ) |  |       | -      
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Income (loss) from operations                                  |  |                 | 29,428   |   |              |  | (1,328  | )         |  |  | (3,818    | ) |  |       | (6,200 
|Loss on spin out of Plexmar net assets                         |  |                 | -        |   |              |  | -       |           |  |  | -         |   |  |       | (4,412 
|Interest expense and other finance costs                       |  |                 | (2,801   | ) |              |  | -       |           |  |  | (462      | ) |  |       | -      
|Other income (expense)                                         |  |                 | 1,156    |   |              |  | (910    | )         |  |  | (153      | ) |  |       | 725    
|Foreign currency exchange loss                                 |  |                 | 222      |   |              |  | (723    | )         |  |  | (128      | ) |  |       | (1,108 
|Income (loss) before income tax                                |  |                 | 28,005   |   |              |  | (2,961  | )         |  |  | (4,561    | ) |  |       | (10,995
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Income tax expense                                             |  |                 | (10,047  | ) |              |  | (269    | )         |  |  | (32       | ) |  |       | -      
|                                                               |  |                 |          |   |              |  |         |           |  |  |           |   |  |       |        
|Net income (loss) from operations                              |  |                 | 17,958   |   |              |  | (3,230  | )         |  |  | (4,593    | ) |  |       | (10,995





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





|                                                               |  | 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     |   |  |       | -     
|Income (loss) from operations                                  |  |                 | 1,149   |   |              |  | (7,125  | )         |  |  | 3,757     |   |  |       | (3,938
|Interest expense and other finance costs                       |  |                 | (3,093  | ) |              |  | (335    | )         |  |  | (583      | ) |  |       | 335   
|Other income                                                   |  |                 | 919     |   |              |  | 540     |           |  |  | 119       |   |  |       | (4    
|Foreign currency exchange gain (loss)                          |  |                 | (312    | ) |              |  | 1,578   |           |  |  | 346       |   |  |       | (317  
|Income (loss) before income tax                                |  |                 | (1,337  | ) |              |  | (5,342  | )         |  |  | 3,639     |   |  |       | (3,924
|Income tax (expense) recovery                                  |  |                 | (3,913  | ) |              |  | (1,511  | )         |  |  | (333      | ) |  |       | -     
|                                                               |  |                 |         |   |              |  |         |           |  |  |           |   |  |       |       
|Net income (loss) from operations                              |  |                 | (5,250  | ) |              |  | (6,853  | )         |  |  | 3,306     |   |  |       | (3,924









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





34 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 19 | Segment reporting
                                         (continued)
| | -- | ----------------------------------------------------------------------



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



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



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



35 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 20 | Financial instruments
                                         and financial risk management
| | -- | --------------------------------------------------------------------------------------------



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



| | (a) | Financial
                                         assets and liabilities by category
| | --- | -------------------------------------------------------------------------------------



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



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



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



| | (b) | Fair
                                         value of financial instruments
| | --- | ----------------------------------------------------------------------------



As at December 31, 2017 and
2016, the fair value of the financial instruments approximates their carrying value.



| | (c) | Fair
                                         value hierarchy
| | --- | -------------------------------------------------------------



Financial instruments carried
at fair value are categorized based on a three level valuation hierarchy that reflects the significance of inputs used in making
the fair value measurements as follows:



Level 1 – quoted prices
(unadjusted) in active markets for identical assets and liabilities



Level 2 – inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly
(i.e., derived from prices)



36 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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










| | 20 | Financial instruments
                                         and financial risk management (continued)
| | -- | --------------------------------------------------------------------------------------------------------



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



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

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



|                          |  | December 31, 2017 |   |  | December 31, 2016 | 
|------------------------- |  | ----------------- | - |  | ----------------- | 
|                          |  | Level 1           |   |  | Level 2           | 
|Recurring measurements    |  | $                 |   |  | $                 | 
|Trade
    receivables (1) |  |                   | - |  |                   | 
|                          |  |                   | - |  |                   | 



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



There were no transfers between
level 1 and level 2 during the years ended December 31, 2017 and 2016.



| | (d) | Financial
                                         risk management
| | --- | ------------------------------------------------------------------



The Company is exposed to financial
risks, including credit risk, liquidity risk, currency risk, interest rate risk and price risk. The aim of the Company’s
overall risk management strategy is to reduce the potential adverse effect that these risks may have on the Company’s financial
position and results. The Company’s Board of Directors has overall responsibility and oversight of management’s risk
management practices. Risk management is carried out under policies approved by the Board of Directors. The Company may from time
to time, use foreign exchange contracts and commodity price future and forward contracts to manage its exposure to fluctuations
in foreign currency and metals prices. The Company does not ordinarily enter into hedging arrangements to cover long term commodity
price risk unless it has the obligation to so under a credit facility, which would be approved of the Board of Directors.



37 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 20 | Financial instruments
                                         and financial risk management (continued)
| | -- | --------------------------------------------------------------------------------------------------------



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



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



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



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



|                                       |  | December 31, 2017 |       
|-------------------------------------- |  | ----------------- | ------
|                                       |  | CAN dollar        |       
|                                       |  |                   |       
|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  



38 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 20 | Financial instruments
                                         and financial risk management (continued)
| | -- | --------------------------------------------------------------------------------------------------------



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



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



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



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



Interest rate risk is the risk
that the fair values or future cash flows of the Company will fluctuate because of changes in market interest rates. The Company
is exposed to interest rate risk on its loans payable (note 10). The Company monitors its exposure to interest rates closely and
has not entered into any derivative contracts to manage its risk. The weighted average interest rate paid by the Company during
the year ended December 31, 2017 on its loans and notes payable in Peru was 4.31% (2016 – 4.47%). With all other variables
unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $541 (2016 - $635). The interest
rate paid by the Company during the year ended December 31, 2017 on its loans payable in Mexico was 5.74% (2016 – 5.83%).
With all other variables unchanged a 1% increase in the interest rate would have increased the Company’s net loss by $60
(2016 - $65).



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



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



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



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



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





39 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 20 | Financial instruments
                                         and financial risk management (continued)
| | -- | --------------------------------------------------------------------------------------------------------



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



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



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



|                                         |  | Within 1 year |        |  | 1-2 years |  |       | 2-5 years |  |  | After 5 years |  |  | Total |   |  | As at December 31,  2017 | 
|---------------------------------------- |  | ------------- | ------ |  | --------- |  | ----- | --------- |  |  | ------------- |  |  | ----- | - |  | ------------------------ | 
|                                         |  | $             |        |  | $         |  |       | $         |  |  | $             |  |  | $     |   |  | $                        | 
|                                         |  |               |        |  |           |  |       |           |  |  |               |  |  |       |   |  |                          | 
|Accounts payable and accrued liabilities |  |               | 32,319 |  |           |  | -     |           |  |  | -             |  |  |       | - |  |                          | 
|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.



40 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 20 | Financial instruments
                                         and financial risk management (continued)
| | -- | --------------------------------------------------------------------------------------------------------



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



|                          |  | December 31, |        |  | December 31, | 
|------------------------- |  | ------------ | ------ |  | ------------ | 
|                          |  | 2017         |        |  | 2016         | 
|                          |  | $            |        |  | $            | 
|Cash and cash equivalents |  |              | 23,878 |  |              | 
|Trade receivables         |  |              | 20,613 |  |              | 
|                          |  |              | 44,491 |  |              | 



| | 21 | Capital management
| | -- | ------------------



The
Company’s objectives of capital management are to safeguard its ability to support the Company’s normal operating
requirements on an ongoing basis; continue the development and exploration of its mining properties and pursue strategic growth
initiatives, while minimizing the cost of such capital; and to provide an adequate return to its shareholders.



The
capital of the Company consists of items included in equity attributable to owners of the Company and debt, net of cash and cash
equivalents as follows:



|                                             |  | December 31, |         |   | December 31, | 
|-------------------------------------------- |  | ------------ | ------- | - | ------------ | 
|                                             |  | 2017         |         |   | 2016         | 
|                                             |  | $            |         |   | $            | 
|Equity attributable to owners of the Company |  |              | 154,571 |   |              | 
|Loans payable                                |  |              | 64,860  |   |              | 
|                                             |  |              | 219,431 |   |              | 
|Less: Cash and cash equivalents              |  |              | (23,878 | ) |              | 
|                                             |  |              | 195,553 |   |              | 



In
order to facilitate the management of capital requirements, annual budgets are prepared and updated as necessary based on various
factors, many of which are beyond the Company’s control. In assessing liquidity, the Company takes into account its expected
cash flows from operations, including capital asset expenditures, and its cash and cash equivalents. The Board of Directors reviews
the annual and updated budgets.



The
Company ensures that there are sufficient committed credit facilities to meet its short term requirements. At December 31, 2017,
the Company expects its current capital resources to be sufficient to support its normal operating requirements on an ongoing
basis and planned development and explorations programs. At December 31, 2017, the Company was in compliance with the external
capital requirements.



41 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 22 | Related party transactions
| | -- | --------------------------



| | (a) | Related
                                         party transactions
| | --- | -------------------------------------------------------------------



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



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



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



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



| | 23 | Supplemental cash
                                         flow information
| | -- | ---------------------------------------------------------------------------



Changes in working capital



|                                         |  | 2017 |         |   | 2016 | 
|---------------------------------------- |  | ---- | ------- | - | ---- | 
|                                         |  | $    |         |   | $    | 
|Trade and other receivables              |  |      | (10,092 | ) |      | 
|Financial and other assets               |  |      | (427    | ) |      | 
|Income tax receivable                    |  |      | 61      |   |      | 
|Inventories                              |  |      | (1,624  | ) |      | 
|Accounts payable and accrued liabilities |  |      | 5,116   |   |      | 
|Income taxes payable                     |  |      | (339    | ) |      | 
|Other liabilities                        |  |      | (594    | ) |      | 
|                                         |  |      | (7,899  | ) |      | 



42 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 24 | Contingencies
| | -- | -------------



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



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



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



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



| | 25 | Distribution of Cautivo
                                         Mining Inc. Shares
| | -- | -----------------------------------------------------------------------------------



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



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



43 | Page







Sierra Metals Inc.

Notes to the Consolidated Financial Statements

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








| | 25 | Distribution of Cautivo
                                         Mining Inc. Shares (continued)
| | -- | -----------------------------------------------------------------------------------------------



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



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



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



44 | Page