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

November 29 2019, 19:14 GMT

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. Interview Highlights:

  • Megeve Investments: An Introduction. What Sectors Do They Focus On?
  • The Growth Component: How Does Serabi Gold Fit Their Portfolio?
  • Working with Serabi Gold on Increasing Production Capabilities
  • Future for Serabi and Their Investment: Was it the Right Choice?
  • Operating in South America: Positives and Negatives

Click here to watch the full interview.

Matthew Gordon: We are with with Nicolas Banados. He is an investor in Serabi Gold, the AIM listed gold producer. Thanks for joining us here in London. You normally work in South America.

NicolasBanados: I’m usually based in Santiago, Chile. I travel around LatinAmerica doing our investments in Chile, Peru, Colombia and Brazil.

MatthewGordon: We're really pleased to have you here because Family Offices are moreand more an important part of the mining investment scene. We’re delighted tobe talking to you today to try to understand how Family Offices think. Tell usjust a little bit about the group.

NicolasBanados: Megeve Investments, is the manager of Fratelli. It's a single-familyoffice. It's a Chilean family which its main asset is a Latin-American retailercalled Farabella. It has department stores, shopping centres, financingconsumer loans and supermarkets, it’s a little bit of everything in the wholeregion. And we manage their other investments, we have public equities, debt,private equity globally, but with a strong focus to Latin America, which is ourmarket. I run the private equity division of the company. We have a five-personteam. We mostly do direct investments in companies in Latin America. We operatein Chile, Peru, Colombia and Brazil. Only those countries.

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

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

MatthewGordon: You started in retail. That's where the wealth comes from, from a longtime. Over 100 years ago, right?

Nicolas Banados: Yes. 120 years.

MatthewGordon: But you have migrated and morphed into other things.

NicolasBanados: The family still owns their retailer. They are still activethere. I work with the second generation of the family. They are still one ofthe three brothers. One is still the executive chairman of the retailer. So, whatwe do here is we want to diversify the family into other businesses, notretail. So, I’m forbidden to do any retail related investment. So, we mostly dotraditional industries, mature like mining, infrastructure or real estate. Wehave a cemetery company. We have a host of investments that we did recently. Wehave some technology infrastructure businesses as well.

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

NicolasBanados: Not only to mitigate the risks, but all also to avoidconflict 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 toavoid any conflict.

MatthewGordon: May I talk about the natural resource space? You have got otherinvestments in South America. Where does Serabi Gold sit in that portfolio? Wasit one of the latest or earliest or…

NicolasBanados: Well we have been Serabi Gold or eight years now. In naturalresources, we have three mining companies, including Serabi Gold. So, we haveanother copper company and a gold company in Chile. We have forestry which sitswithin natural resources in Colombia. That was a Greenfield project. And power whichis not a natural resource, but it's related to in some way. I would say in allthese projects we have been investing in the last 15 years. I’ve been with thecompany 15 years. We have always grown the company and built something.Sometimes like the forestry investment, we build it from scratch. In otherslike Serabi Gold and the other mining companies, we built a project that wasalready there, and we funded to build it, the construction of the plant ordevelopment of the mine or whatever it is.

MatthewGordon: These are growth stories you're looking for. That's where you get thecapital appreciation. Your money is long-hold, long-term money in that you willfollow your money and give it a chance to grow, to breathe and become something.

NicolasBanados:  Exactly. We're not afund, 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 investmentshave lasted all of 3 or 4 years.

MatthewGordon: Got it. On more of a private equity type investment. But in that growthstory, you're looking for a revenue to start. That's important to you.

NicolasBanados: Yes.Within theinitial investment that we do and the follow on or the M&A that the companythat we're investing in will do, we always look for, let's say, projects thatcan be built just like the hot potato game. This is not what we do.

MatthewGordon: It’s not a promotional thing.

NicolasBanados: Not a promotional thing. We just want to make sure thatwhatever we buy, it's something that could be built, generate revenues andpositive cash flow.

MatthewGordon: It's safe to say when you invested in Serabi Gold, you knew what youwere getting into. A space you understood, in a jurisdiction you understood anda story which you felt met the criteria which you've just outlined.

NicolasBanados: When we invested initially in Serabi Gold in 2011 when the companyIPO’d in Canada, we met Mike Hodgson and Clive Line, the CEO and the CFO. Andwhat 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 theproject with the objective of after getting that study, if the study waspositive, then we will fund the CapEx of the project. So, that's actually whathappened after a few months, it took like 6-months, we received the study, itlooked pretty good. So, we funded the CapEx. We went to the market a littlebit. It was not so easy to market at that time. The project was built on budgeton time. So, in some way the management built a track record with us, which wasvery important for us. Then we, Serabi Gold, bought a neighbouring projectagain. We liked it. We said OK we’ll fund the CapEx again. The market still wasnot 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 otherpeople to fund it as well.

MatthewGordon: I think it's safe to say that the market has been quite quiet forjuniors or producers under a certain level for the last 6-years. You've giventhe chance for the company to survive, because you have a different mentalityfrom institutional money, which needs to see revenues, returns or share priceappreciation.

NicolasBanados: I would say we funded it because, of course there is alwaysthe risk of the gold price, but assuming a conservative gold price, we saidthis investment that we are making, it will have a return regardless of themarket, other than gold price. So, we felt confident that the share price cango 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 withconservative assumptions. We want Serabi Gold to grow and build other projectsand merge with other ones that continue to work. Because in this industry beingbigger, it scales the company up, the economics of scales, and reduces costs,that's important.

MatthewGordon: You’ve just got your second asset, which the guys are working out howto mine efficiently at the moment, that should double production That takes youtowards 100,000oz pa number which everyone wants to see. Your view is that ifthere are other assets available, that you would encourage the team to considersome 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 webought Sao Chico, then we bought Coringa. We also see a very good opportunityfor organic growth that can be done in parallel of these more inorganic…

MatthewGordon: So how do you work with the team then? And are you sitting on the side-linesshouting at them?

NicolasBanados: I sit on the board.Wetalk often. They run the company.

MatthewGordon: Do they have the same mentality. Do you want to work at differentspeeds? Or do you have joined up thinking?

NicolasBanados: We spend a lot of time aligning the strategy. It's not thatwe get to a board meeting and they say one thing and I say the other. Thatdoesn’t happen.

MatthewGordon: You’re heading in the same direction.

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

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

NicolasBanados: Brazil, it’s developed in terms of mining and developed interms 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 bemore brownfield, greenfield projects, not that much because there are not manyprojects that we can just acquire operating producers. But there is a hugeopportunity. 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 thanthat, I would like the products to be delivered, to do it right, is moreimportant. But if we can go faster, then that's good news for me.

MatthewGordon: Your team has known Mike for a long time and Mike knows Brazil andyou're heading in the same direction. The path forward all sounds rosy. But atsome point Megeve will to monetize this.

NicolasBanados: When Greenstone came in,we diluted because we thought it was not good for the company that oneshareholder owned 50% or more to sell. And so, we decided to dilute, eventhough it was not the price that I wanted but we decided it was good for thecompany. Actually, it happened to be a good thing. So, in the future, we'llprobably dilute a little bit more. The company has to be seen as an independentcompany, it’s definitely not run by us. I’m in Chile. I come here, I can go toBrazil, but I am definitely not running the company. It’s run by Mike and Cliveand the rest of the board and the management. And that's what we believe is thecompany. And so, we can continue to support the company and we will continue tosupport the company. But we want also to have more liquidity to open spaces forother people.

MatthewGordon: Do you think that you made a good investment decision and investing inSerabi?

NicolasBanados: Yes. The initial investment, the timing of the market at thattime 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 Iwould do it again, definitely because we still see there is a huge opportunityahead of us.

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

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

MatthewGordon: Not successfully.

NicolasBanados: So, we haveinsome way we’ve become a target.

MatthewGordon: Could you give us a bit of an overview of operating in South America? Iknow you operate in specific countries and South America, so again some of thequestions that we get asked about, especially from AIM. North Americaninvestors are comfortable with South America. They know it, travel there, theyholiday there etc. Europeans have seen some difficult times in South America.

NicolasBanados: There are countries in which we do operate and others thatwe don’t. I would say only the one’s that we do - Brazil of course, Chile isanother one, Peru and Colombia and we have one investment in Paraguay. So, wedon’t do the other ones. In those countries we feel comfortable about safety. Ican travel to those countries. I don't feel comfortable traveling to some ofthe other countries. I can travel, I can do business.

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

NicolasBanados: 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 inBrasilia, we are not in the cities. We are up north in Parastate. It's a remotelocation for business people, but it's a very good infrastructure for a miningproject. And we are very well received because there is not a lot of activityother than agriculture and forestry in that area. And so, we are very wellreceived by the people, by the authorities, because they want new investment inthis area.

MatthewGordon: They want investment, they want jobs, they want taxes, royalties…

NicolasBanados: The only good part of the political instability in Brazil isthat 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 goodnews for us because that Real is going down and that exchange rate in in ourbenefit.

MatthewGordon: Can I just ask about the Balsonero effect? Do you know much aboutwhat's going on Brazil politically? Should people be worried?

NicolasBanados: No, there may be more uncertainty in who's going to run thecountry. Political uncertainty? Who knows what is going to happen? I don'tknow. I have no idea who's going to be the next President. There is no preferredcandidate, but we are far from there. The only important change inenvironmental law because of Vale problems with the tailings, and there weresome changes that we are complying to.

MatthewGordon: But it’s business as usual.

NicolasBanados: It’s business as usual. Of course, this trend is restrictingsome of the legislation. But we do comply with that because we set the standardsat a higher level and it's a completely different size. I mean, I don't know ifyou know it moves like hundreds of millions of tons. Whether we are a mine thatmines 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.

MatthewGordon: Mike. Clive.  Are they the guysto deliver growth for this company? The growth that you're looking for?

NicolasBanados: Yes. They have been for the company for a while. They havebeen through the tough times. They have delivered excellent results in buildingand operating projects.

MatthewGordon: You trust you trust them with your money?

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

MatthewGordon: 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.

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

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