Are you really investing if you don’t end up with egg on your face every now and then?

When I had my interview with Andrew just a few weeks ago, I mentioned I bought Atlas Pearls ~2 years ago at 14c, ~3x earnings at the time and it was yielding a huge ~18% Dividend. I surmised, for that price, at that rate or return, you don’t need to wait long to get your capital back.

As of this morning, its earnings are negative and it’s Divi yield is precisely 0%. That makes for a very long payback period!

H1 FY26 was a textbook cyclical downturn. Revenue fell 27% as realised prices dropped 47% to $33 per pearl, with higher volumes masking a sharp deterioration in mix as low-grade pearls surged to 53% of sales; revenue ex-low grade fell 36% and normalised EBITDA halved, showing clear operating leverage in reverse. Inventory declined materially from ~$6.0m to ~$3.5m as pearls on hand dropped from 219k to 93k, meaning the company sold down stock into a weaker market. The deemed cost of pearls sold ($12.5m) exceeded harvest additions $10.1m, tightening working capital and contributing to negative operating cash flow.

Biological asset fair value assumptions moved lower, compounding the earnings swing. Separately, a $1.8m impairment was taken for loans advanced to a formerly consolidated Indonesian entity of the group, which it turns out ATP didn’t actually have control over. This lifted total provisions to ~$3.4m against a ~$6m exposure, did someone say Country Risk Premium? I’ve never loved Expected Credit Loss (ECL) calcs, because this is where us accountants become magicians. An imaginative management team can justify almost any assumptions to produce almost any answer. In this case, an entity we loaned money to, but lost control over, is apparently going to pay us back one day! But in a half where earnings have already collapsed, why not just take the full bath, clean up the balance sheet and move on?

Altogether this wasn’t just softer pricing and mix, it was margin compression, inventory drawdown, valuation pressure and balance sheet reassessment all occurring simultaneously, exactly how price-taking commodity businesses behave on the downswing.

Pearls may sound like a luxury, but is just a commodity, and one with opaque global pricing. Part of my thesis was that buying cheaply enough meant I’d be roughly fairly protected in a downturn when that happened. However the Risk Premiums came home to roost much quicker than I had hoped….

It’s probably a good buy at 11.5cps.. ;)

Cheers

JM+Chatty