Sierra Metals : Q1 2024 Financial

SIERRA METALS INC.

Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2024 and 2023 (unaudited)

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May 10, 2024

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 Board of Directors approved the Company's unaudited condensed interim consolidated financial statements.

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

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Sierra Metals Inc.

Condensed Interim Consolidated Statements of Financial Position (unaudited)

As at March 31, 2024 and December 31, 2023

(In thousands of United States dollars)

	Note	March 31, 2024	December 31, 2023
		$	$
ASSETS
Current assets:
Cash and cash equivalents		11,220	9,122
Trade and other receivables	3	24,346	23,304
Income tax receivable		6,621	6,870
Prepaid expenses		2,059	2,053
Inventories	4	26,104	24,912
		70,350	66,261
Assets held for sale
Total current assets		5,111	5,591
		75,461	71,852
Non-current assets:
Property, plant and equipment	5	244,300	242,264
Total assets		319,761	314,116
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities	6	71,362	64,048
Loans payable	7	78,217	53,388
Decommissioning liability		3,126	3,506
Other liabilities		14,473	17,191
Liabilities related to assets held for sale		395	395
		167,573	138,528
Non-current liabilities:
Loans payable	7	-	25,089
Deferred income tax		13,246	14,492
Decommissioning liability		17,487	17,290
Other liabilities		9,232	8,866
Total liabilities		207,538	204,265
EQUITY
Share capital	8	246,877	245,799
Accumulated deficit		(179,764)	(180,923)
Other reserves		10,917	10,388
Equity attributable to owners of the Company		78,030	75,264
Non-controlling interest	9	34,193	34,587
Total equity		112,223	109,851
Total liabilities and equity		319,761	314,116

Contingencies (notes 7 and 16)

Going Concern (note 2(c))

Approved on behalf of the Board and authorized for issue on May 10, 2024:

"Oscar Cabrera"	"Wendy Kaufman"
Chair of the Board	Chair 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 (unaudited)

For the three months ended March 31, 2024 and 2023

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

		Three months ended March 31,
		2024	2023
	Note	$	$
Revenue	15	63,140	53,537
Cost of sales
Mining costs	10	(36,668)	(30,094)
Depletion, depreciation and amortization	10	(9,383)	(6,730)
		(46,051)	(36,824)
Gross profit from mining operations		17,089	16,713
General and administrative expenses		(6,574)	(5,660)
Selling expenses		(3,279)	(2,153)
Income from operations		7,236	8,900
Other income (expenses and losses)		409	(456)
Foreign currency exchange loss		(2,164)	(1,220)
Interest expense and other finance costs		(2,405)	(2,191)
Income before income tax		3,076	5,033
Income taxes expense		(1,446)	(1,324)
Net income from continuing operations		1,630	3,709
Net loss from discontinued operations		(865)	(1,570)
Net income		765	2,139
Net income (loss) attributable to:
Shareholders of the Company		1,159	2,053
Non-controlling interests	9	(394)	86
		765	2,139
Weighted average shares outstanding (000s)
Basic		209,624	164,332
Diluted		214,388	165,366
Basic income per share		0.01	0.01
Diluted income per share		0.01	0.01

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 (unaudited) For the three months ended March 31, 2024 and 2023

(In thousands of United States dollars)

	Three months ended March 31,
	2024	2023
	$	$
Net income	765	2,139
Other comprehensive income
Items that may be subsequently classified to net income:
Currency translation adjustments on foreign operations	1,348	4
Total comprehensive income	2,113	2,143
Total comprehensive income (loss) attributable to:
Shareholders	2,507	2,057
Non-controlling interests	(394)	86
Total comprehensive income attributable to:	2,113	2,143

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 (unaudited) For the three months ended March 31, 2024 and 2023

(In thousands of United States dollars)

	Common Shares	Other	Accumulated	Total attributable	Non-controlling	Total Shareholder's
	Shares	Amounts	reserves	deficit	to shareholders	Interest	equity
		$	$	$	$	$	$
Balance at January 1, 2024	207,700,426	245,799	10,388	(180,923)	75,264	34,587	109,851
Exercise of RSUs	1,967,120	1,078	(1,078)	-	-	-	-
Share-based compensation expense
(related to RSUs)		-	259	-	259	-	259
Total comprehensive income		-	1,348	1,159	2,507	(394)	2,113
Balance at March 31, 2024	209,667,546	246,877	10,917	(179,764)	78,030	34,193	112,223
	Common Shares	Other	Accumulated	Total attributable	Non-controlling	Total Shareholder's
	Shares	Amounts	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)	-	-	-	-
Share-based compensation expense
(related to RSUs)		-	(67)	-	(67)	-	(67)
Total comprehensive income (loss)		-	4	2,053	2,057	86	2,143
Balance at March 31, 2023	164,593,066	233,686	9,454	(159,536)	83,604	34,666	118,270

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 (unaudited)

For the three months ended March 31, 2024 and 2023

(In thousands of United States dollars)

		Three months ended March 31,
	Note	2024	2023
		$	$
Cash flows from operating activities
Net income from operations		765	2,139
Items not affecting cash:
Depletion, depreciation and amortization		9,634	7,543
Share-based compensation		634	102
Loss on disposals and write-offs		39	-
Interest expense and other finance costs		2,405	2,199
Income tax expense		1,446	1,374
Unrealized foreign currency exchange loss (gain)		1,563	(506)
Operating cash flows before movements in working capital		16,486	12,851
Net changes in non-cash working capital items	14	2,955	(4,070)
Decomissioning liabilities settled		(441)	(283)
Income tax paid		(2,525)	(1,824)
Cash generated from operating activities		16,475	6,674
Cash flows used in investing activities
Capital expenditures		(11,826)	(7,437)
Proceeds from sale of property, plant and equipment		442	-
Cash used in investing activities		(11,384)	(7,437)
Cash flows used in financing activities
Proceeds from loans and credit facilities	7	5,854	7,924
Repayment of Senior Secured Corporate Credit facility with BCP	7	(6,250)	(6,250)
Interest paid		(2,003)	(1,602)
Repayment of leases		(529)	(528)
Cash used in financing activities		(2,928)	(456)
Effect of foreign exchange rate changes on cash and cash equivalents		(65)	9
Increase (decrease) in cash and cash equivalents		2,098	(1,210)
Cash and cash equivalents, beginning of period		9,122	5,074
Cash and cash equivalents, end of period		11,220	3,864

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 (unaudited) For the three months ended March 31, 2024 and 2023

(In thousands of United States dollars, except per share amounts and unless otherwise stated)

• 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 common shares (the "Common Shares") are listed and traded on the Toronto Stock Exchange (the "TSX") under the symbol "SMT" and on the US Over-the-Counter "OTCQX" under the symbol "SMTSF". The registered office of the Company is 200 Bay Steet, South Tower, Suite 2800, Toronto, Ontario M5J 2J3 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.

• Material accounting policies and going concern
  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, 2023. The Company's material accounting policies were presented in note 2 to the consolidated financial statements for the year ended December 31, 2023, 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 May 10, 2024.
  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 March 31, 2024 are as follows:

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Sierra Metals Inc.

Notes to the Condensed Interim Consolidated Financial Statements (unaudited) For the three months ended March 31, 2024 and 2023

(In thousands of United States dollars, except per share amounts and unless otherwise stated)

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
   As of March 31, 2024, the Company continues to be in breach of its debt covenants 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 reclassify $25.0 million of its long term debt into short- term (Note 7). The Company has obtained waivers related to the covenant breaches from the lenders for each of the quarters until the end of 2023. However, if the Company is unable to obtain such waivers for any current or 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.
   On March 31, 2024, the Company reported a cash and cash equivalent balance of $11.2 million and a negative working capital of $92.1 million, which includes the reclassification of $25.0 million of the term loan as a current liability.
   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 is in an advanced stage of discussion with a syndicate of banks to refinance its credit facilities.
   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 operations, exploration projects and meet its ongoing corporate overhead costs. Although the Company has been successful in obtaining debt or equity financing in the past, 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 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.

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Sierra Metals Inc.

Notes to the Condensed Interim Consolidated Financial Statements (unaudited) For the three months ended March 31, 2024 and 2023

(In thousands of United States dollars, except per share amounts and unless otherwise stated)

1. 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 and consisted of the following:

	March 31, 2024 December 31, 2023
	$	$
ASSETS
Non-current assets:
Property, plant and equipment	5,111	5,591
Total non-current assets	5,111	5,591
Total assets held for sale	5,111	5,591
LIABILITIES
Non-current liabilities:
Decommissioning liability	395	395
Total non-current liabilities	395	395
Total liabilities related to assets held for sale	395	395

Net loss from the Cusi Mine for the three-months ended March 31, 2024 and 2023 was calculated as follows:

	Three months ended March 31,
	2024	2023
	$	$
Revenue	(79)	4,989
Cost of sales
Mining costs(1)	(746)	(5,230)
Depletion, depreciation and amortization	-	(582)
	(746)	(5,812)
Gross loss from mining operations	(825)	(823)
General and administrative expenses	-	(284)
Selling expenses	(1)	(243)
Income from operations	(826)	(1,350)
Other expenses and losses	(39)	(10)
Foreign currency exchange gain (loss)	-	(152)
Interest expense and other finance costs	-	(8)
Loss before income tax	(865)	(1,520)
Income taxes	-	(50)
Net loss	(865)	(1,570)

1. Care and maintenance costs for the three-months ended March 31, 2024.

The net assets of the disposal group classified as held for sale were measured at the lower of their carrying amount and fair value less costs to sell as at March 31, 2024. The fair value of the disposal group was determined based on current third party offers received by management.

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