Family Office – Major Investor Megeve Investments, Nicolas Banados (Transcript)

Interview with Nicolas Banados, Managing Director of Family Office Megeve Investments and Investor in Serabi Gold (TSX:SBI)

Megeve Investments, a non-discretionary portfolio of Fratelli Investments Family Office, is a single-family office located in Santiago, Chile. Its main asset is Chilean retail chain colossus, Farabella. The firm offers asset management and public/private equity investment services. Banados is Managing Director of Private Equity and attorney-in-fact at Megeve Investments. His focus in on direct investment in Latin American companies.

Megeve Investment first invested in Serabi Gold 8 years ago, where Nicolas Banados now serves as the Non-Executive Director for the family office. Megeve Investment already owns a copper company and a gold company in Chile, in addition to a forestry (natural resource) company in Colombia.

Therefore, Serabi Gold sat in a familiar area of the industry and was in a prime position for Megeve Investments to obtain c.50% (now voluntarily diluted down to 32.8% after the 25.3% investment from Greenstone Resource II LP). While the timing of Megeve Investment’s involvement in Serabi Gold was far from ideal given the plummeting gold prices at the time, Banados is still glad he made the decision to invest.

In addition to working on efficiencies at current Serabi Gold operations, Banados is open to the idea of additional acquisitions, like the Coringa Mine, in the future, to further enhance the production capabilities of Serabi Gold and solidify its position as a seriously profitable player. Banados spends a great deal of time working with Serabi Gold to align their strategies, resulting in a more cogent business plan that reduces the risk and provides clarity for existing and prospective investors.

Banados’ primary source of excitement comes from the opportunity for growth and exploration in a huge, gold-saturated country: while Brazil is a developed mining country, particularly of iron ore, the gold marketplace is yet to be fully mechanised.

Moreover, Banados sees immense potential in organic and green-field areas to increase production towards the ‘magic’ 100,000oz/y number. Lastly, Banados touches on South American operations and clearly explains the company’s priorities lie in areas it has established a sense of comfort: Chile, Brazil, Peru, Colombia and Paraguay. What did you make of Nicolas Banados? Are you intrigued by Megeve Investments’ involvement in the Serabi Gold story? Comment below.

We Discuss:
1:18 – Megeve Investments: An Introduction. What Sectors Do They Focus On?
4:19, 22:07 – The Growth Component: How Does Serabi Gold Fit Their Portfolio?
10:51 – Working with Serabi Gold on Increasing Production Capabilities
13:11 – Future for Serabi and Their Investment: Was it the Right Choice?
17:28 – Operating in South America: Positives and Negatives

Company page: https://www.serabigold.com/

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Matthew Gordon: We are with with Nicolas Banados. He is an investor in Serabi Gold, the AIM listed gold producer. Hello, Nicholas, how are you?

Nicolas Banados: Very good. Thank you.

Matthew Gordon: Thanks for joining us here in London. You normally work in South America.

Nicolas Banados: I’m usually based in Santiago, Chile. I travel around Latin America doing our investments in Chile, Peru, Colombia and Brazil.

Matthew Gordon: We’re really pleased to have you here because Family Offices are more and more an important part of the mining investment scene. We’re delighted to be talking to you today to try to understand how Family Offices think. Tell us just a little bit about the group.

Nicolas Banados: Megeve Investments, is the manager of Fratelli. It’s a single-family office. It’s a Chilean family which its main asset is a Latin-American retailer called Farabella. It has department stores, shopping centres, financing consumer loans and supermarkets, it’s a little bit of everything in the whole region. And we manage their other investments, we have public equities, debt, private equity globally, but with a strong focus to Latin America, which is our market. I run the private equity division of the company. We have a five-person team. We mostly do direct investments in companies in Latin America. We operate in Chile, Peru, Colombia and Brazil. Only those countries.

Matthew Gordon: I think you’re being quite modest. It’s a very large group.

Nicolas Banados: It’s an important group.And one of the things that you probably know about family office, is that we don’t disclose numbers.

Matthew Gordon: You started in retail. That’s where the wealth comes from, from a long time. Over 100 years ago, right?

Nicolas Banados: Yes. 120 years.

Matthew Gordon: But you have migrated and morphed into other things.

Nicolas Banados: The family still owns their retailer. They are still active there. I work with the second generation of the family. They are still one of the three brothers. One is still the executive chairman of the retailer. So, what we do here is we want to diversify the family into other businesses, not retail. So, I’m forbidden to do any retail related investment. So, we mostly do traditional industries, mature like mining, infrastructure or real estate. We have a cemetery company. We have a host of investments that we did recently. We have some technology infrastructure businesses as well.

Matthew Gordon: You’re spreading far and wide. Mitigating the retail risk.

Nicolas Banados: Not only to mitigate the risks, but all also to avoid conflict because retail is so important in Chile and Brazil and Peru and Colombia, that any retail investment that we do might have a conflict, so we want to avoid any conflict.

Matthew Gordon: May I talk about the natural resource space? You have got other investments in South America. Where does Serabi Gold sit in that portfolio? Was it one of the latest or earliest or…

Nicolas Banados: Well we have been Serabi Gold or eight years now. In natural resources, we have three mining companies, including Serabi Gold. So, we have another copper company and a gold company in Chile. We have forestry which sits within natural resources in Colombia. That was a Greenfield project. And power which is not a natural resource, but it’s related to in some way. I would say in all these projects we have been investing in the last 15 years. I’ve been with the company 15 years. We have always grown the company and built something. Sometimes like the forestry investment, we build it from scratch. In others like Serabi Gold and the other mining companies, we built a project that was already there, and we funded to build it, the construction of the plant or development of the mine or whatever it is.

Matthew Gordon: These are growth stories you’re looking for. That’s where you get the capital appreciation. Your money is long-hold, long-term money in that you will follow your money and give it a chance to grow, to breathe and become something.

Nicolas Banados:  Exactly. We’re not a fund, so we don’t have to exit. As long as we see a growth story continue. So, sometimes we have investments that have lasted for 25 years. Other investments have lasted all of 3 or 4 years.

Matthew Gordon: Got it. On more of a private equity type investment. But in that growth story, you’re looking for a revenue to start. That’s important to you.

Nicolas Banados: Yes.Within the initial investment that we do and the follow on or the M&A that the company that we’re investing in will do, we always look for, let’s say, projects that can be built just like the hot potato game. This is not what we do.

Matthew Gordon: It’s not a promotional thing.

Nicolas Banados: Not a promotional thing. We just want to make sure that whatever we buy, it’s something that could be built, generate revenues and positive cash flow.

Matthew Gordon: It’s safe to say when you invested in Serabi Gold, you knew what you were getting into. A space you understood, in a jurisdiction you understood and a story which you felt met the criteria which you’ve just outlined.

Nicolas Banados: When we invested initially in Serabi Gold in 2011 when the company IPO’d in Canada, we met Mike Hodgson and Clive Line, the CEO and the CFO. And what we did initially is that they had this project and we wanted to know more. Our initial funding was $200,000 and we funded the PEA of Palito. We funded the project with the objective of after getting that study, if the study was positive, then we will fund the CapEx of the project. So, that’s actually what happened after a few months, it took like 6-months, we received the study, it looked pretty good. So, we funded the CapEx. We went to the market a little bit. It was not so easy to market at that time. The project was built on budget on time. So, in some way the management built a track record with us, which was very important for us. Then we, Serabi Gold, bought a neighbouring project again. We liked it. We said OK we’ll fund the CapEx again. The market still was not so good. Well, that’s what we have been doing. Both are operating today. And then we started to look at other funding sources because we want other people to fund it as well.

Matthew Gordon: I think it’s safe to say that the market has been quite quiet for juniors or producers under a certain level for the last 6-years. You’ve given the chance for the company to survive, because you have a different mentality from institutional money, which needs to see revenues, returns or share price appreciation.

Nicolas Banados: I would say we funded it because, of course there is always the risk of the gold price, but assuming a conservative gold price, we said this investment that we are making, it will have a return regardless of the market, other than gold price. So, we felt confident that the share price can go up or down, but the cash flow would be there. We want to see growth over time, but we want the companies to deliver safe growth. So, it has to grow, but with conservative assumptions. We want Serabi Gold to grow and build other projects and merge with other ones that continue to work. Because in this industry being bigger, it scales the company up, the economics of scales, and reduces costs, that’s important.

Matthew Gordon: You’ve just got your second asset, which the guys are working out how to mine efficiently at the moment, that should double production That takes you towards 100,000oz pa number which everyone wants to see. Your view is that if there are other assets available, that you would encourage the team to consider some kind of acquisition or joint venture etc. that’s your mentality.

Nicolas Banados: Yes, as we have done in the past. We started with Palito, and then we bought Sao Chico, then we bought Coringa. We also see a very good opportunity for organic growth that can be done in parallel of these more inorganic…

Matthew Gordon: So how do you work with the team then? And are you sitting on the side-lines shouting at them?

Nicolas Banados: I sit on the board.We talk often. They run the company.

Matthew Gordon: Do they have the same mentality. Do you want to work at different speeds? Or do you have joined up thinking?

Nicolas Banados: We spend a lot of time aligning the strategy. It’s not that we get to a board meeting and they say one thing and I say the other. That doesn’t happen.

Matthew Gordon: You’re heading in the same direction.

Nicolas Banados: We head in the same direction. There is another board member from Fratelli called Eduardo. He’s a mining engineer and he has worked with Mike before Serabi Gold, other than Greenstone that also brings a strong mining experience. But we talk often, we visit, we help with the local knowledge. Mike knows Brazil very well but having a Latin American investor that can bring help with their banks, with other things and the culture, it helps.

Matthew Gordon: Your view is there’s some way to go on this. You’re happy with the way that the growth has gone, its cash flowing, it’s producing. What is the picture in your head about where Serabi Gold is heading?

Nicolas Banados: Brazil, it’s developed in terms of mining and developed in terms of iron ore, some other minerals, but not much in terms of gold. So, there is a huge opportunity for growth, exploration. It’s probably going to be more brownfield, greenfield projects, not that much because there are not many projects that we can just acquire operating producers. But there is a huge opportunity. It’s a big country with a lot of gold and we have the opportunity there, so we want to grow. Probably I would like to see that faster. But more than that, I would like the products to be delivered, to do it right, is more important. But if we can go faster, then that’s good news for me.

Matthew Gordon: Your team has known Mike for a long time and Mike knows Brazil and you’re heading in the same direction. The path forward all sounds rosy. But at some point Megeve will to monetize this.

Nicolas Banados: When Greenstone came in,we diluted because we thought it was not good for the company that one shareholder owned 50% or more to sell. And so, we decided to dilute, even though it was not the price that I wanted but we decided it was good for the company. Actually, it happened to be a good thing. So, in the future, we’ll probably dilute a little bit more. The company has to be seen as an independent company, it’s definitely not run by us. I’m in Chile. I come here, I can go to Brazil, but I am definitely not running the company. It’s run by Mike and Clive and the rest of the board and the management. And that’s what we believe is the company. And so, we can continue to support the company and we will continue to support the company. But we want also to have more liquidity to open spaces for other people.

Matthew Gordon: Do you think that you made a good investment decision and investing in Serabi?

Nicolas Banados: Yes. The initial investment, the timing of the market at that time was not the best. We were investing when the gold price was $1,800. So, and then it went down to $1,100. Who knew that would happen. Nobody. But I would do it again, definitely because we still see there is a huge opportunity ahead of us.

Matthew Gordon: Do you think they can become a mid-tier producer?

Nicolas Banados: Yes. And I think that Serabi’s also getting the attention of a lot of miners and when a gold company, mid or large cap, want to enter in Brazil. Who are the players there? There are not many. Who has built a mine in the last 5-years other than Serabi Gold. Or one or two?

Matthew Gordon: Not successfully.

Nicolas Banados: So, we havein some way we’ve become a target.

Matthew Gordon: Could you give us a bit of an overview of operating in South America? I know you operate in specific countries and South America, so again some of the questions that we get asked about, especially from AIM. North American investors are comfortable with South America. They know it, travel there, they holiday there etc. Europeans have seen some difficult times in South America.

Nicolas Banados: There are countries in which we do operate and others that we don’t. I would say only the one’s that we do – Brazil of course, Chile is another one, Peru and Colombia and we have one investment in Paraguay. So, we don’t do the other ones. In those countries we feel comfortable about safety. I can travel to those countries. I don’t feel comfortable traveling to some of the other countries. I can travel, I can do business.

Matthew Gordon: Tell me about Brazil, because this is about Serabi Gold, we’re talking about today and the fact that you’ve invested in them. So, Brazil, again, had a bit of a strange few years politically. Bit up and down economically.

Nicolas Banados: All the politics in Brazil happens in Sao Paolo and Rio and Brasilia. We are far from that. We are not in Sao Paulo. We are not in Rio. We’re not in Brasilia, we are not in the cities. We are up north in Parastate. It’s a remote location for business people, but it’s a very good infrastructure for a mining project. And we are very well received because there is not a lot of activity other than agriculture and forestry in that area. And so, we are very well received by the people, by the authorities, because they want new investment in this area.

Matthew Gordon: They want investment, they want jobs, they want taxes, royalties…

Nicolas Banados: The only good part of the political instability in Brazil is that the exchange rate is depreciated and that helps us. So, when noises about Brazil, that’s something people that are taking their money out of Brazil, that’s good news for us because that Real is going down and that exchange rate in in our benefit.

Matthew Gordon: Can I just ask about the Balsonero effect? Do you know much about what’s going on Brazil politically? Should people be worried?

Nicolas Banados: No, there may be more uncertainty in who’s going to run the country. Political uncertainty? Who knows what is going to happen? I don’t know. I have no idea who’s going to be the next President. There is no preferred candidate, but we are far from there. The only important change in environmental law because of Vale problems with the tailings, and there were some changes that we are complying to.

Matthew Gordon: But it’s business as usual.

Nicolas Banados: It’s business as usual. Of course, this trend is restricting some of the legislation. But we do comply with that because we set the standards at a higher level and it’s a completely different size. I mean, I don’t know if you know it moves like hundreds of millions of tons. Whether we are a mine that mines high grade, not high volume. We don’t fear Brazil turning into Venezuela… In Brazil, private property rule of law…. that’s going to stay.

Matthew Gordon: Mike. Clive.  Are they the guys to deliver growth for this company? The growth that you’re looking for?

Nicolas Banados: Yes. They have been for the company for a while. They have been through the tough times. They have delivered excellent results in building and operating projects.

Matthew Gordon: You trust you trust them with your money?

Nicolas Banados: Yes. We trust them with our money. In addition to Fratelli, I personally, I am aninvestor in Serabi Gold as well. I’ve put my own money in, my savings.

Matthew Gordon: So, you must trust them. Nicolas, thank you so much for talking to us. I wish you well with Serabi Gold and your other investments.

Nicolas Banados: Thank you very much. And thanks for having me.

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