Why you should pack a bag for Hoboken if you want Germanium

Another day, another crisis in geopolitics land. Cue another wire on institutionalized stupidity. The backing track of my choice would be Talking Heads: Life During Wartime.

Forgive me for being cynical. I was born around the time of the Bay of Pigs crisis. That event proved highly instructive on the dangers of groupthink. Here is a nice summary:

As examples of groupthink go, there are few better than the 1961 Bay of Pigs incident. US President John F. Kennedy was convinced that a rapid invasion was best, but he was surrounded by advisors who either agreed with him or didn’t dare give a dissenting opinion. The result was a botched invasion and embarrassment for the US government. But JFK learned a valuable lesson.

That opinion piece from logistics firm DHL, goes on to say:

The very next year, during the Cuban Missile Crisis, the President took a different approach. He appointed a devil’s advocate who always argued for the opposing viewpoint. He skipped meetings to ensure his opinion didn’t sway others on the team. The result was a more considered set of decisions that helped narrowly avoid nuclear war.

Thankfully, President John F. Kennedy was a tad smarter the next time around, more agile in thought, and possessed an ego that was large enough to get serious things done, but tame enough to actually take the expert Devil's Advocate advice.

In light of the recent RoboDebt findings, I would hope all Australians might urge our leaders to take expert advice, seek out those who will sacrifice career prospects in the Australian Public Service to give frank and fearless advice, and allow Australia, the nation, to move forward.

You won't get that message from our National Press Gallery, so read on.

The definition of Groupthink

The term "Groupthink" was introduced in a 1972 article by American psychologist Janis L. Irving with the following definition which you will recognize as timely:

Defines "groupthink" as a psychological drive for consensus at any cost that suppresses dissent and appraisal of alternatives in cohesive decision-making groups.

The article provided helpful context for the application of this principle: Victims of groupthink: A psychological study of foreign-policy decisions and fiascoes. 

You can see the application to our conundrums of the moment. 

There is widespread consensus on a lot of issues, but if you were to confront those opinions with facts they often dissolve into an insubstantial:

Yeah, but, Nah, but, Yeah. Gee, I dunno. Nah. Go away. Leave me alone!

There is precious little substantive basis for many of the geopolitical assertions that we are now expected to swallow, without objection.

This is nowhere more evident than in discussions of the global supply chain.

An (over)abundance of blind panic over global supply chains

Of course, we know, and it is true, that China dominates supply chains for critical minerals. However, what is often forgotten is that the dominance is most apparent in downstream applications of mineral processing technologies and metallurgy.

In simple terms, China has invested a lot of capital, and effort, in developing the generally complex and environmentally dirty plant, equipment, and operations that will convert the mineral concentrates that come from the mine gate, into finished metals and chemicals.

The prevalent groupthink, that is beloved of the many national security think tanks, all over this planet, is that China did this specifically to gain national security advantage. The commerce bit was pure bait and switch.

In short, they took on all of the dirty work which the 1970s environment protests that I lived through ensured could no longer be done in the developed market economies.

When you put it that way, we should all understand, and vehemently agree, that China is a no good, down and dirty, evil-doing nation, that is absolutely single-minded about screwing us, all of us. You, me, and the pooch.

I won't shame the think tanks by naming them, but you all know who they are.

The result is that we are now, all of us, with little prospect of escape, enmeshed in a brand-new Cold War, which for those who lived through the last one, and warned publicly about the real danger of a new one, already looks to be well on course to be a lot dumber, and even more dangerous, than the first.

I say dumber, advisedly, because the real hazard of all this excitable war talk is that we may very well soon find ourselves in one, an actual real war. What started as a political game to name "adversaries" soon moves to the next level of naming "enemies", and so the mess will progress.

Due to the high levels of Chinese delivery of esential materials in downstream minerals processing activities we may find ourselves with a global economy that is rent asunder.

Sure, China will have no semiconductors, which means no laptops for you, no cars for you, and no gadgets that were made there. That activity can all move to another communist nation, like Vietnam, who were our actual declared enemies, with whom we fought a war. Alternatively, it might all move to India. They can buy oil from Russia and send us semiconductors.

You see what I mean.

There is a ton of talk about de-coupling, and de-risking, whatever that means, but right now, at the moment I write this, our largest trading partner is China. 

We send the Chinese iron ore and lithium, get paid, and are now using that cash to buy solar panels and electric vehicles.

In the most recent report that I saw, around 89% of new electric vehicles that were imported to Australia came from China. Some of those are Teslas made in Shanghai, like the Model 3 that I ordered last year, and received about two months ago. These are 95% Chinese content. Oh, dear. De-risking no longer looks risk-free if cars from China are 95% made in China.

I could go on, and on, and on, and on... but I won't.

You can see my point on groupthink and the urgent need to ignore facts in policy discussion.

The need to discuss viable alternatives

Janis Irving was a wise man, with a timely message to impart to decision-makers at that time, in the early 1970s, when the first Cold War was just heating up to be fully dangerous. This was a full eleven years before Lieutenant Colonel Stanislaw Petrov saved us all, by not pressing the button, when all sensors, systems, and standing orders, told him to end the human race.

At some point, in that progression, people like nine-year-old me began to realize that a great deal of what we were being served up by our media was a veritable crock of nonsense.

I was smart enough, at that age, to know what groupthink was and how to avoid it. Growing up in a Cold War teaches you the value of facts.

Perhaps this is why I chose a first career in scientific research. That involves cultivating a degree of personal honesty about what the facts are, and why knowing them matters.

In my later career, as a professional investor, I have benefited by knowing that most of my peers have very little interest in facts and prefer to tell stories about what might be, if the underlying world was not shaped as we find it. 

This is a perfect strategy for marketing.

In fact, as any behavioral psychologist will tell you, most people prefer to make decisions on the basis of a compelling narrative, a good story, rather than bother with rational analysis.

Personally, I think that this approach is great for choosing friends and partners, or maybe that place you should really try for lunch, but I think it is a rotten strategy for making investments.

As an aside, this is one reason why I actually like investing in mining stocks. For those who take the trouble to learn what a JORC Mining Code is, and why it matters, the mining industry is one of the few places where factual information is visibly elevated to occupy center stage.

It is easy to have a swing at mining for being an inherently dirty business, but that is because it is of this Earth. Moreover, the accounting system of Nature, in putting minerals where she did, of different type, grade, and recoverability, cannot be fooled.

So, it shall soon prove to be the case with the global supply chain panic.

Let us focus on Janis Irving's key message about the hazard of groupthink:

...(the) psychological drive for consensus at any cost that suppresses dissent and appraisal of alternatives...

The suppression of dissent impedes the appraisal of alternatives.

If there is no dissent, nobody looks at the facts, and nobody will consider the alternatives.

I have made this point once already, with my article on how the USA is the largest exporter of unseparated rare earths to China. In that article, I proved, using facts from the respected US Geological Survey, that MP Materials mines enough light rare earths in the august State of California, USA, to supply their entire domestic industrial needs. 

The reason they cannot do that right now is because of groupthink.

In all these years, if not decades, of national think tank hand wringing over the issue of rare earths, the United States of America has not been able to get its act together to spend around one billion dollars to build the necessary separation plant, and a few hundred million dollars for a slew of downstream magnet factories. 

If they did that, they would not have a problem.

Some people might mention the issue with heavy rare earths.

I have a ready reply. The Northern Minerals Pilot Plant, at one fifth the scale of the intended final operational plant scale, was already producing about 500 tonnes per annum of the necessary Dysprosium concentrate to satisfy present US demand, in full.

You might think that someone might have told the Australian Federal Government.

Um, yeah, did that. Told them. There was a room exactly like the one in the cartoon.

That is what groupthink does to geopolitics and national security. 

You wind up risking World War III because you are too dozy to actually do the math on your own national security needs for (admittedly) vital commodities like rare earths.

This would all be wonderful black comedy if it were not so downright dangerous. We are now well on the way to global war because our think tanks cannot do basic math! 

Sacré bleu! 

The only thing we are left with is a French Sledge from behind a high wall.

Okay, so what about Gallium and Germanium?

In my previous article, on MP Materials and rare earths, I introduced the US Geological Survey Mineral Commodities Survey, which is an annual series with rich data and estimates on the global reserves, production rates, and US import-export balance for commodities.

I have been using this source since 2010, when my team at Macquarie Group were first asked by a Japanese client to develop a global rare metals investment strategy.

The idea of investing in critical minerals is not new to me.

When I saw the news on Gallium and Germanium, and the Chinese limitations on their export I did not actually need to even read the latest issue of the USGS MCS. 

I already knew the answer.

The estimated value of germanium consumed in 2022, based on the annual average germanium metal price, was $39 million dollars.

Estimated consumption of germanium products in the USA is about 30,000 kg. The average price is around $1,000 kg, give or take. 

Of course, I laugh when I read of Australian miners going off to explore for Germanium. Good luck with that plan. Raise capital before anybody reads this post.

If you read closely the USGS material, or any respectable source on critical minerals metallurgy, it is zinc smelter product. What we call a smelter co-product.

There is a circa $40 million revenue opportunity, for the entire US market, if you can find a zinc smelter, and spend maybe $10m to bolt a germanium circuit on the back.

Given our prior experience with US National Security Think Tanks, there is probably a good ten years of needless fuss and commotion in the good 'ole U.S. of A before they work that out.

These people are not the sharpest tools in the shed.

The numbers, by weight, are a little more impressive for Gallium:

Imports of gallium metal and gallium arsenide (GaAs) wafers were valued at about $5 million and $220 million, respectively.

Since you can recover both gallium and germanium from zinc smelters, there is perhaps a $300 million revenue opportunity serving the US market. This is provided that your business plan includes building a Gallium-Arsenide wafer factory.

Perhaps World War III looks cheap compared to that level of financial impost!

I don't know. I don't work in a national security think tank. I was not born stupid.

Where to invest, in the (very) first instance?

Like I said, I first advised Japanese clients on rare metals about 13 years ago.

Figuring out where to invest, for starters, is as easy as remembering which of the few companies that you knew about then are still in business. This is the zinc smelter business, which is not very pretty to look at.  Responsible investors hate them.

Zinc and lead smelters are not what most ESG folks would line up to pitch you.

However, there you go, that is the circular economy, in practice.

Hate to say it, but the circular economy is about pyrometallurgy and hydrometallurgy. If we floated in tanks, a la the Matrix, it would be about software, but we don't, so it isn't. The solution to this social problem may involve advertising. Work on the pitch.

There are two smelter firms I could think of right away.

There is the (formerly) Australian Nyrstar which has the appropriate smelters and appetite.

The stock is listed in Europe, but that is a 2% stub interest following a debt restructure that saw the other 98% of the business land with commodities trader Trafigura. They are a good outfit, but taking on such a minority interest makes little sense to investors.

The other obvious choice is the Belgian group Umicore. They are big in Europe for the circular economy activity of metals recycling. You would think that the circular economy, doing it for real, and not via PowerPoint, would appeal to ESG investors. If you check out the stock price chart, and the attractive valuation, you can see that most ESG investors will happily run a mile into the thicket of virtue-signaling theory, rather than put a single dollar to work in practice.

This service doesn't appear to have stock tickers for Europe.

Nyrstar is NYR, listed in Belgium, you can find a stock chart here.

Umicore is UMI, listed in Belgium, you can find a stock chart here.

The Hoboken gag relates to the name of the famous smelter in Belgium.

Hoboken, New Jersey is named after the place in Belgium.

If they moved the smelter to New Jersey, then maybe the Americans would be happy.

Other opportunities

I did not mention the many other smelters I know about which produce critical minerals.

I think I will just launch a fund and be done with it.

This financial market will not figure out any of this stuff for years, if they ever even try.

Photo: Umicore smelter at Hoboken in Belgium, Europe, not New Jersey, USA.

Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.