Sierra Metals : Q3 2023 Financial

SIERRA METALS INC.

Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(unaudited)

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November 9, 2023

Management's Responsibility for Financial Reporting

Management is responsible for the preparation of the unaudited condensed interim consolidated financial statements. These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting" using accounting policies consistent 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 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 financial statements and to discuss audit and internal control related matters.

The Audit Committee reviews the results of the condensed interim consolidated financial statements prior to their submission to the Board of Directors for approval. The condensed interim consolidated financial statements have not been audited.

"Ernesto Balarezo"	"Jose Fernandez-Baca Llamosas"
Ernesto Balarezo	Jose Fernandez-Baca Llamosas
Chief Executive Officer	Chief Financial Officer

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Sierra Metals Inc.

Condensed Interim Consolidated Statements of Financial Position

As at September 30, 2023 and December 31, 2022

(In thousands of United States dollars, unaudited)

	Note	September 30, 2023	December 31, 2022
		$	$
ASSETS
Current assets:
Cash and cash equivalents		6,052	5,074
Restricted cash	9 (a)	12,113	-
Trade and other receivables	3	22,381	25,110
Income tax receivable		14,431	16,423
Prepaid expenses		2,331	2,233
Inventories	4	22,255	22,428
		79,563	71,268
Assets held for sale	2 (d)	5,505	6,589
Total current assets		85,068	77,857
Non-current assets:
Property, plant and equipment	5	240,281	232,586
Total assets		325,349	310,443
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities	6	65,722	57,989
Loans payable	7	81,098	82,800
Decommissioning liability		3,008	2,314
Other liabilities	8	16,223	12,567
Liabilities related to assets held for sale	2 (d)	392	329
		166,443	155,999
Non-current liabilities:
Deferred income tax		15,376	19,591
Decommissioning liability		12,062	12,843
Other liabilities	8	9,022	5,816
Total liabilities		202,903	194,249
EQUITY
Share capital	9	233,686	233,576
Amount raised through private placement	9	12,113	-
Accumulated deficit		(167,199)	(161,589)
Other reserves		9,810	9,627
Equity attributable to owners of the Company		88,410	81,614
Non-controlling interest	10	34,036	34,580
Total equity		122,446	116,194
Total liabilities and equity		325,349	310,443

Going Concern (note 2(c))

Contingencies (notes 7 and 16)

Approved on behalf of the Board and authorized for issue on November 9, 2023

"Oscar Cabrera"	"Miguel Aramburu"
Oscar Cabrera	Miguel Aramburu
Chairman of the Board	Chairman of the Audit Committee

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

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Sierra Metals Inc.

Condensed Interim Consolidated Statements of Income (Loss)

For the three and nine months ended September 30, 2023 and 2022

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

		Three months ended September 30	Nine months ended September 30
		2023	2022	2023	2022
	Note	$	$	$	$
Revenue	15	56,963	35,198	168,911	126,959
Cost of sales
Mining costs	11	(39,578)	(33,083)	(105,306)	(103,120)
Depletion, depreciation and amortization	11	(9,036)	(8,634)	(24,202)	(25,023)
		(48,614)	(41,717)	(129,508)	(128,143)
Gross profit (loss) from mining operations		8,349	(6,519)	39,403	(1,184)
General and administrative expenses		(7,158)	(5,332)	(18,204)	(14,903)
Selling expenses		(2,884)	(1,676)	(8,173)	(5,269)
Asset impairment		-	(25,000)	-	(25,000)
Income (loss) from operations		(1,693)	(38,527)	13,026	(46,356)
Other incomes and gains (expenses and losses)		103	(999)	(488)	(1,495)
Foreign currency exchange gain (loss)		972	405	(869)	(1,657)
Interest expense and other finance costs		(2,624)	(1,390)	(7,536)	(3,057)
Income (loss) before income tax		(3,242)	(40,511)	4,133	(52,565)
Income tax recovery		484	2,409	566	421
Net income (loss) from continuing operations		(2,758)	(38,102)	4,699	(52,144)
Net loss from discontinued operations	2 (d)	(6,608)	(9,012)	(10,853)	(8,580)
Net loss		(9,366)	(47,114)	(6,154)	(60,724)
Net income (loss) attributable to:
Shareholders of the Company		(9,301)	(46,150)	(5,610)	(61,047)
Non-controlling interests	10	(65)	(964)	(544)	323
		(9,366)	(47,114)	(6,154)	(60,724)
Weighted average shares outstanding (000s)
Basic		164,593	163,934	164,507	163,768
Diluted		164,593	163,934	164,507	163,768
Basic income (loss) per share
Continuing operations		(0.02)	(0.22)	0.04	(0.32)
Discontinued operations		(0.04)	(0.06)	(0.07)	(0.05)
Total		(0.06)	(0.28)	(0.03)	(0.37)
Diluted income (loss) per share
Continuing operations		(0.02)	(0.22)	0.04	(0.32)
Discontinued operations		(0.04)	(0.06)	(0.07)	(0.05)
Total		(0.06)	(0.28)	(0.03)	(0.37)

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

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Sierra Metals Inc.

Condensed Interim Consolidated Statements of Comprehensive Income (Loss) For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States dollars, unaudited)

	Three months ended September 30	Nine months ended September 30
	2023	2022	2023	2022
	$	$	$	$
Net loss	(9,366)	(47,114)	(6,154)	(60,724)
Other comprehensive income (loss)
Items that may be subsequently classified to net income:
Currency translation adjustments on foreign operations	23	(300)	4	(490)
Total comprehensive income (loss)	(9,343)	(47,414)	(6,150)	(61,214)
Total comprehensive income (loss) attributable to:
Shareholders	(9,278)	(46,450)	(5,606)	(61,537)
Non-controlling interests	(65)	(964)	(544)	323
Total comprehensive income (loss)	(9,343)	(47,414)	(6,150)	(61,214)

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

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Sierra Metals Inc.

Condensed Interim Consolidated Statements of Changes in Equity

For the nine months ended September 30, 2023 and 2022

(In thousands of United States dollars, unaudited)

	Common Shares	Private	Other	Accumulated	Total attributable	Non-controlling	Total Shareholder's
	Shares	Amounts	placement (1)	reserves	deficit	to shareholders	Interest	equity
		$	$	$	$	$	$	$
Balance at January 1, 2023	164,251,465	233,576	-	9,627	(161,589)	81,614	34,580	116,194
Exercise of RSUs	341,601	110	-	(110)	-	-	-	-
Proceeds from private placement			12,113			12,113		12,113
Share-based compensation expense
(related to RSUs)		-	-	289	-	289	-	289
Total comprehensive income (loss)		-	-	4	(5,610)	(5,606)	(544)	(6,150)
Balance at September 30, 2023	164,593,066	233,686	12,113	9,810	(167,199)	88,410	34,036	122,446
	Common Shares		Other	Accumulated	Total attributable	Non-controlling	Total Shareholder's
	Shares	Amounts		reserves	deficit	to shareholders	Interest	equity
		$		$	$	$	$	$
Balance at January 1, 2022	163,428,150	232,915		10,420	(74,086)	169,249	35,383	204,632
						-		-
Exercise of RSUs	513,315	603		(603)	-	-	-	-
Share-based compensation expense								-
(related to RSUs)		-		579	-	579	-	579
Total comprehensive income (loss)		-		(490)	(61,047)	(61,537)	323	(61,214)
Balance at September 30, 2022	163,941,465	233,518		9,906	(135,133)	108,291	35,706	143,997

(1) See note 9(a). No shares were issued as at September 30, 2023 due to the pending approval from the TSX.

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

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Sierra Metals Inc.

Condensed Interim Consolidated Statements of Cash Flows For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, unaudited)

	Note
Operating Activities
Net loss from operations
Decomissioning liabilities settled
Items not affecting cash:
Depletion, depreciation and amortization
Share-based compensation
Asset impairment
Loss on disposals and write-offs
Interest expense and other finance costs
Other non-cash items
Income tax recovery
Unrealized foreign currency exchange gain
Operating cash flows before movements in working capital
Net changes in non-cash working capital items	14
Decomissioning liabilities settled
Income tax paid
Cash generated from operating activities
Investing Activities
Capital expenditures
Cash used in investing activities
Financing Activities
Proceeds from loans and credit facilities (net)	7 (a)
Proceeds from private placement	9 (a)
Repayment of loans and credit facilities	7 (a) & (c)
Interest paid

Repayment of leases

Cash generated from financing activities

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Additional information related to discontinued operationsOperating cash flows from discontinued operations

Cash used in investing activities

Three months ended September 30	Nine months ended September 30
2023	2022	2023	2022
$	$	$	$
(9,366)	(47,114)	(6,154)	(60,724)
9,580	9,765	26,390	28,381
460	253	648	579
2,500	32,000	2,500	32,000
441	48	520	778
2,641	968	7,628	2,243
357	-	357	-
(484)	(2,409)	(566)	(421)
(116)	(279)	(871)	(533)
6,013	(6,768)	30,452	2,303
2,547	11,069	8,609	25,076
(116)	(102)	(638)	(655)
(1,079)	(3,556)	(3,119)	(20,601)
7,365	643	35,304	6,123
(10,727)	(8,675)	(32,484)	(31,223)
(10,727)	(8,675)	(32,484)	(31,223)
9,699	12,500	10,746	25,000
12,113	-	12,113	-
(2,083)	(6,250)	(4,167)	(18,750)
(1,941)	(699)	(6,646)	(1,728)
(538)	(227)	(1,724)	(685)
17,250	5,324	10,322	3,837
(116)	(6)	(51)	24
13,772	(2,714)	13,091	(21,239)
4,393	16,404	5,074	34,929
18,165	13,690	18,165	13,690
(3,506)	(1,098)	(6,921)	1,841
860	389	3,119	2,707

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

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Sierra Metals Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2023 and 2022

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

• Description of business and nature of operations
  Sierra Metals Inc. ("Sierra Metals" or the "Company") was incorporated under the Canada Business Corporations Act on April 11, 1996 and is a diversified Canadian mining company focused on the production, exploration and development of precious and base metals in Peru and Mexico. The Company's key priorities are to generate strong cash flows and to maximize shareholder value.
  The Company's shares are listed on the Toronto Stock Exchange ("TSX") and its registered office is 77 King Street West, Suite 400, Toronto-Dominion Centre, Toronto, Ontario M5K 0A1 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. The Company placed Cusi in care and maintenance in Q3 2023 and initiated the process for the sale of the mine, which is subject to the corresponding legal and/or regulatory approvals In addition to its producing mines, the Company also owns various exploration projects in Mexico and Peru.

• Significant accounting policies, going concern and assets held for sale
  The significant accounting policies used in the preparation of these condensed interim consolidated financial statements are as follows:
• 1. Basis of preparation
     These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2022. The Company's significant accounting policies were presented in note 2 to the consolidated financial statements for the year ended December 31, 2022, and have been consistently applied in the preparation of these condensed interim consolidated financial statements. These condensed interim consolidated financial statements were authorized for issuance by the Board of Directors on November 9, 2023.
  2. Basis of consolidation
     These condensed interim consolidated financial statements include the accounts of the Company and its subsidiaries, which are entities controlled by the Company. Control exists when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date that control commences until the date that control ceases.
     Non-controlling interests represent equity interests in subsidiaries owned by outside parties. Changes in the parent company's ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.
     The principal subsidiaries of the Company and their geographical locations as at September 30,
     2023 are as follows:

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Sierra Metals Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2023 and 2022

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

Name of the subsidiary	Ownership interest	Location
Dia Bras EXMIN Resources Inc.	100%	Canada
Sociedad Minera Corona, S. A. ("Corona") 1	81.84%	Perú
Dia Bras Peru, S. A. C. ("Dia Bras Peru") 1	100%	Perú
Dia Bras Mexicana, S. A. de C. V. ("Dia Bras Mexicana")	100%	México
EXMIN, S. A. de C. V.	100%	México
Servicios de Produccion Y Extraccion de Chihuahua, S.A. de C.V	100%	México

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

1. Going concern
   On October 18, 2022, the Company announced that it was facing liquidity challenges as a result of the recurring operating losses from its Bolivar and Cusi operations and the temporary suspension of operations at the Yauricocha Mine, following a mudslide incident in September 2022.
   As a result of these events the Company has been in breach of its debt covenants since Q4 2022, related to its senior secured corporate credit facility (the "Corporate Facility") and the term loan ("the Term Loan") with Banco de Credito del Peru ("BCP") and Banco Santander S.A. ("Santander") (together, referred to as "the lenders"), requiring the Company to disclose the entire balance as short-term loan (Note 7). The shares in Sociedad Minera Corona S.A. are held as a collateral for these loans. The Company has obtained waivers from the lenders related to the covenant breaches for its credit facilities as of December 31, 2022, March 31, 2023 and June 30, 2023. If the Company is unable to obtain such waivers for the Q3 2023 breach or any potential future breaches of its debt covenants, it could materially and adversely affect the Company's future operations, cash flows, earnings, results of operations, financial condition and the economic viability of its projects.
   Despite the successful refinancing of part of the corporate credit facility and improved operational performance, the Company continues to be in breach of some of its debt covenants, since these are calculated on a rolling four-quarter basis. Hence the working capital continues to be negative due to the result of the reclassification of the long-term portion of the corporate facility and term loan to current. On September 30, 2023, the Company reported a negative working capital of $78.9 million.
   The conditions described above indicate the existence of material uncertainties that may cast significant doubt on the Company's ability to realize its assets and discharge its liabilities in the normal course of business and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
   The Company's ability to continue as a going concern is dependent on its ability to repay or refinance its current loans, obtain the necessary financing to advance its exploration projects and meet its ongoing corporate overhead costs. During Q2 2023, the Company announced finalization of its definitive agreement with the lenders to refinance $18.8 million of the $25.0 million principal debt repayment obligations that are due in 2023 under the Company's Corporate Facility (note 7(a)). In Q3 2023, the Company raised $12.1 million through a non-brokered private placement. (note 9(a)). Although the Company has been successful in obtaining debt or equity financing, there is no assurance that it will be able to do so in the future or that such arrangements will be on terms advantageous to the Company. These consolidated financial statements are prepared on a going concern basis which assumes that the Company will continue for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. Accordingly, these consolidated financial statements do not include adjustments to the recoverability and classification of recorded asset and liabilities and related expenses that might be necessary should

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Sierra Metals Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2023 and 2022

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

the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities and commitments in other than the normal course of business at amounts different from those in the accompanying consolidated financial statements. Such adjustments could be material.

(d) Asset held for sale

During Q1 2023, the Company declared the Cusi Mine as a non-core asset. On September 20, 2023, the Company placed Cusi in care and maintenance, and initiated the process for the sale of the mine, which is subject to the corresponding legal and/or regulatory approvals.

The assets and liabilities of the Cusi Mine were classified as held for sale in the Company's consolidated statement of financial position as of September 30, 2023 and consisted of the following:

	September 30, 2023	December 31, 2022
	$	$
ASSETS
Non-current assets:
Property, plant and equipment	5,505	6,589
Total non-current assets	5,505	6,589
Total assets held for sale	5,505	6,589
LIABILITIES
Non-current liabilities:
Decommissioning liability	392	329
Total non-current liabilities	392	329
Total liabilities related to assets held for sale	392	329

Net loss from the Cusi Mine for the three and nine-months ended September 30, 2023 and 2022 was calculated as follows:

		Three months ended September 30	Nine months ended September 30
		2023	2022	2023	2022
	Note	$	$	$	$
Revenue	14	2,502	3,589	11,745	19,010
Cost of sales
Mining costs	10	(5,852)	(3,655)	(17,072)	(15,708)
Depletion, depreciation and amortization	10	(482)	(1,115)	(1,607)	(3,172)
		(6,334)	(4,770)	(18,679)	(18,880)
Gross profit from mining operations		(3,832)	(1,181)	(6,934)	130
General and administrative expenses		(294)	(312)	(706)	(1,557)
Selling expenses		(186)	(154)	(682)	(770)
Asset impairment		(2,500)	(7,000)	(2,500)	(7,000)
Income from operations		(6,812)	(8,647)	(10,822)	(9,197)
Other incomes and gains (expenses and losses)		29	(116)	89	416
Foreign currency exchange gain (loss)		192	(258)	(28)	242
Interest expense and other finance costs		(17)	9	(92)	(41)
Income before income tax		(6,608)	(9,012)	(10,853)	(8,580)

The net assets of the disposal group classified as held for sale were measured at the lower of its carrying amount and fair value less costs to sell as at September 30, 2023, resulting in the recognition of a write-down of $2.5 million, included as part of the discontinued operations in the statement of profit or loss. The fair value of the disposal group was determined based on current third party offers received by management.

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