HispanicBusiness

Surface drilling decreased by 36% during the six month period ending December 31, 2012 to $16.93 million due to projects finishing earlier than anticipated in the Canadian operations. Underground drilling increased by 24% during the six month period ending December 31, 2012 to $5.49 million, as compared to $4.44 million during the comparable period in fiscal 2012. The increase came primarily from underground drilling operations in the Ontario and Atlantic divisions.

Direct costs for the six months ended December 31, 2012 were $18.31 million compared to $24.93 million in the comparable period in fiscal 2011. Gross margins for the six months ended December 31, 2012 were 20.4% compared to 20.4% during the six months ended December 31, 2011, when direct costs include depreciation expenses (or 25.8% compared to 24.1% for the respective periods, when direct costs are adjusted to exclude depreciation expense). Although margins in Canada were lower, the Company was able to maintain higher margins in the international operations.

General and administrative expenses decreased by approximately 5% or $171,245 from $3.71 million in the first six months of fiscal 2012 to $3.54 million in the first six months of fiscal 2013. The decrease is primarily a result of decreased salary costs from restructuring the Canadian operations and fewer travel expenditures.

Net income after tax for the first six months of fiscal 2013 was $125,061 compared to net income after tax of $1.96 million earned in the comparable period of fiscal 2012. The main difference is the $710,889 extraordinary gain recorded in the first quarter of fiscal 2012 and lower revenues reported in the first six months of fiscal 2013, as compared to the first six months of fiscal 2012.

Cash flow from operations (before changes in non-cash operating working capital items) was $1.69 million during the first six months of fiscal 2013, compared to $2.58 million during the first six months of fiscal 2012.

Projecting global exploration expenditures in 2013 is a real challenge. In general, the outlook for base metal commodity prices is stable. While gold and silver commodity prices are flirting with lows seen in mid-2011 and mid-2012, the overall opinion of the analysts suggests that these commodity prices will improve to the levels experienced in the second half of 2012. However, the mining project budget reductions and deferrals by the mid-tier and major mining companies, as well as the lack of equity financings for junior exploration companies, will likely result in lower drilling activity through mid-2013. We still believe that there will be a turn to the positive in the last half of 2013 and into 2014; however, the dearth of financings for the junior sector to date is cause for concern. While Cabo Drilling's business is no longer largely founded on the junior mineral exploration sector, the overall health of the drilling services sector is very much impacted by the financial position, whether negative or positive, of the junior mineral exploration sector. Around 50% of all drills in the mineral exploration mining sector worldwide are operated by small family or single operator drilling companies, whose financial health is largely impacted by the financial position of the juniors. These drillers will underbid for work in slow times, which can cause significant price adjustment in the overall drilling industry. We have not yet experienced major adjustments in most areas, but unless there is a turn in the financial markets in the latter half of 2013, it appears this could happen.