Globalization, Goldman-Sachs, Rare Earths, American Security, and the blind wise men of the Potomac.
The Thursday night before Good Friday the DoD released its latest and long-awaited (by a very few people, most of whom were stock promoters) “report” on the military’s appraisal of its situation with respect to the supply of the rare earth elements it has determined that it needs for its current weapons systems. This kind of “report” is usually issued on a Friday night so that it will be forgotten by Monday’s news cycle. But this being a holiday weekend even release times purposely chosen to minimize the readership and the impact had to give way to the very few religious people in Washington who still believe in God and the DoD even had to pretend to respect the vast majority of the mainstream newspersons who believe in taxpayer funded holidays for servants of the people. I am trying to say that releasing the document on the eve of Good Friday/Passover was equivalent to not releasing it at all with regard to the impact it would (and in fact did (not)) have on the news cycle for Easter/Passover weekend.
Anyway I got an email on Good Friday morning from a procurement department person at a large defense contractor who asked me if I’d seen the “report,” and told me that the reaction of his colleagues, who had seen it, was of the type, “We waited a year and a half for this!”
My observation is that the idea repeated in the report that the US military uses so little and their belief that a certain high market capitalization company, herein to be referred to as HMCC, has told them that it has mastered the total supply chain for rare earth permanent magnets is so great that “the” problem is solved.
Bullshit like this is pervasive in Washington, which uses blind wise men extensively. If there isn’t a low GSA rating for such a job there should be. No one can possibly be paid little enough to justify the skillsets required to research and draft this quality of sycophantic nreport.
The high market capitalization company, HMCC, recently offered to buy (as of this writing I do not think the “deal” has closed, because the “fully funded” high market capitalization company now has to raise the capital to do the deal) a Canadian headquartered company the largest and original operations of which are in the Peoples Republic of China. This acquisition, the HMCC, management assures us, will give the HMCC the wherewithal to produce commercial magnet alloys in China of the type that the US Military does not use, and through the commercial offshore operations of the foreign companies who are signatories to its most recent and still active letters of intent and memoranda of understanding will be allowed and enabled to somehow also make the type of magnets that the US Military does use. I have to say that I am having a problem understanding the HMCC’s story that its (Canadian)-Chinese operations will be able to get the raw materials necessary to produce the type of magnets that the US military actually uses when last year the Canadian-Chinese company’s CEO told me he was having a problem obtaining dysprosium enough to fill the demand he had.
In any case I think the HMCC has said that through their various arrangements with technology based companies that actually know what they’re doing the HMCC will be able to produce the type of magnets that the military actually uses in California one day soon. Of course such production won’t be using either American technology or American dysprosium, but as the HMCC has also said, we don’t really need it. Of course that was before they said that we do need it. Doesn’t that somehow sound political? As a Washington Borg Queen might say: “Their thoughts have been assimilated to the (BS) collective.”
So what’s this story, the DoD “report,” got to do with globalization or Goldman Sachs.
Goldman Sachs was one of the original financial backers of the HMCC; it was in fact, by contrast to the original others, a giant among relative pygmies. A Goldman Sachs, GS, manager at the time (2009) told me enough so that I reasoned out that that GS was trying to construct a global REE producer. He meant, I thought, that GS would invest in a variety of REE juniors and then assemble a well-managed globe spanning conglomerate, which it could then sell to “investors.” At the 2009 Metal Pages Minor Metals and Rare Earths’ Conference in Hong Kong I had to control my smirk as each of, as I remember, seven REE juniors told me that “confidentially” they were meeting with GS. I never did tell them until now that I was also meeting with GS and being asked to assess each one of them.
I wrote a version of this story at the time and posted it on the Resource Investor blog. Shortly after it went up I got a frantic call from the GS manager who had asked me for advice on juniors in Hong Kong. He asked me to take down the story immediately. I asked “why.” He said that I had actually guessed correctly GS’ strategy and that the company would think he had disclosed it to me. He said he could be fired or have something even more dire happen to him such as losing his privileges at the club or being shunned by his peers. In those days I was able to successfully ask the very professional editor of Resource Investor to take it down.
So folks, you now know, why I was alerted and began watching intensely as GS, about a year after the events above, suddenly pulled out of a done deal for bonds with Lynas and then later on pulled out of the HMCC before it went public. I knew that GS had decided that the global REE supplier was not a big enough deal upon which to bet its capital. On an unrelated visit to One Wall Street (GS’s very unassuming address) I asked directly about it and was told “We have better things to do with $400,000,000.00. End of discussion. Out of fashion already and forgotten immediately apparently in 2010!
GS is made up of a very smart group of people making a great deal of money, and their strategies are long term. I am not saying that the REE juniors should just dry up and blow away (although most of the LREE only ones should) just because GS doesn’t love them anymore. I am saying that GS is the epitome of the “me” generation and it is, the me generation’s, most successful business venture. It’s very important for all of us lesser mortals to pay attention to what future society GS is already working within and helping obviously to create, because GS has a much better track record than any government or pundit at predicting the future. If you disagree then think about how much money GS made shorting the market in 2007 and in even modeling the response of the clueless US Federal Government to the bailouts, such as for AIG, that enriched GS beyond any dreams of avarice you ever had by socializing the risk while, of course, retaining any gain..
So now what’s this got to do with globalization and or American INDUSTRIAL security? Well first of all that HMCC that Goldman bailed out of before it went public has now discovered or decided what some of us told it in 2009 that without the recreation of a total supply chain domestically there is no point to an American rare earth producer except to be a raw material supplier to China and Japan in case either one ever need a supplier that isn’t the other one.
Remember that the original American klaxon was sounded by the HMCC when it told us that it, the HMCC, was a critical component for an independent American military strategy as a supplier of an item that the military could not do without. Gee, I guess that total supply problem has been solved at least according to the DoD. Apparently now even though the HMCC has not made (at least with the current management and in the 21st century) any sintered dysprosium modified neodymium iron boron permanent magnets to tight military specifications nor any of the samarium-cobalt types that the US military buys every day only from a domestic supplier, which is not the HMCC, nonetheless the US DoD will depend on the good intentions of the HMCC’s CHINA operations to assuage any fear it, the DoD, has of a shortage of what is, actually they ADMIT, A SMALL NUMBER OF MAGNETS ANYWAY! I note that the CHINESE unit of the HMCC has ZERO experience of supplying such materials to the US DoD. I guess things have changed since I worked for a DoD supplier as a young man. Milspecs were so tight in those days that we sweated the acceptance of every component. Of course they were being used in Viet Nam and lives depended upon them. Not like now, right.
I worked at Hughes Aircraft for a while in the late 60s in a clean room operation assembling solid-state devices using the then new IC “chips.’ I remember a joke told at the lunch table. A colleague suggested that we airdrop our components that failed QC (Quality control) testing over North Vietnam so that the “enemy” would utilize them in his military hardware and their weapons would fail. We all laughed because we realized that the Russian “junk (our term for Soviet Era electronics) they were using wasn’t sophisticated enough for our chips. To be safe though we encapsulated them in epoxy (a chemical type that formed an intractable polymer around the components leaving no way to get at them without physically destroying their usefulness or study value. (Attention knowledgable readers don’t tell me about connecting an oscilloscope-do they still use them?-to the out put from the epoxy block and putting a signal into the other lead to see what happens. That only ever worked to determine a physical structure for Mr Spock with a tricorder.
Let’s jump now from memory lane to www.nakedcapitalism.com dated Saturday, April 7, 2012:
Go there and read US weapons ‘full of fake Chinese parts
After you read the article please then comment for me and for everyone else why you believe that the best policy for the US DoD is to buy critical MILITARY components fabricated (in China for the present) by the HMCC. I cannot reason it out myself, but I’d like to see the reasoning, and I invite any one representing the HMCC to comment, please!
Now back to GS. The Financial Times (of London, UK) for April 6, 2012. has a story about the reopening of what was once the world’s largest copper mine in beautiful Andalusia, in Spain, by the river that gave a very large mining company its name (and which originally operated the mine until the grade and price both declined), El Rio Tinto. The relatively small company re-opening this mine is backed by among others, A Chinese mining company, and, guess who, GS. The world’s largest consumer of copper, in one nation, is, of course, the PRC. China has recently announced a new policy of looking to acquire base metals mined overseas (0verseas from China) so that any environmental issue will arise outside of China. One way mentioned in the Chinese announcement was to buy into the mining and/or the refining companies and to buy control wherever possible.
National interests are by definition political.
Chinese “private” companies do not simply send delegations of M&A managers to land at the Madrid Airport and ask the first passer-by where they might buy into or control of a local mining or refining venture. That function is done for them at least initially by GS, which is paid by them to scout out deals and to raise capital where necessary so that any new “partners” can do deals with the Chinese and be beholden to them, the Chinese, even more than it appears through GS “investing on is own-behalf= if needed.
I am not trying to judge the actions of GS, the PRC, or the HMCC, all of which I have mentioned in this article. I am only trying to describe and analyze what is going on. My sole ambition is to make the USA and Canada as competitive as possible within the globalized world into which the cosmopolitan (owing allegiance to no nation-state) operations of GS are leading us.. The GS bankers are much more perceptive and capable than the elected permanent representatives of themselves who increasingly populate Washington and whose sole interest is in power, not money per se.
I want America to be rich and strong and for Americans to be free to do whatever they wish including the open ended ability to earn what they are worth and pay only those taxes needed to keep us strong and to give a helping hand to those of us in need for whatever reason. I don’t believe in political hand-outs to give a leg-up to favored classes who repay their benefactors with votes or money rather than with the jobs that are hypocritically promised. Most of the high tech jobs being funded by Washington require a working knowledge of Mandarin and a home within an easy commute of a major Chinese city.
I rate any company in any industry by its ability to produce goods for the common good as well as the common defense.
I am not against subsidies if they are to capitalize security, freedom, or health, but I think they are best given when the chance of being repaid by the creation of wealth and of permanent American jobs is highest not when they are political bribes.
A Brooking’s Institution paper published last Thursday, April 5, 2012, jointly by an American and a mainland Chinese official analyst pointed out that the Chinese government operates on the principal that America’s strategic decline is already self-evident.
Even if that should be true we can still turn it around or at least stop it by making ourselves as self-sufficient as possible in every category. Without jobs Americans become fodder for morally corrupt politicians who then throw coins at the masses to protect their own unearned privileges from the encroachment of those from who they take the coins. This is oligarchy and plutocracy; its not democracy.
China is making a great success out of “Capitalism with Chinese characteristics.” American capitalism is losing ground as an equal opportunity source of wealth. We need to creatively destroy our model of socialist capitalism and try to construct a new one. The Chinese care less each day about what we do or don’t do in the market place. The DoD is the best in the world at high-tech combat; It’s not so good at long range planning to maintain ots supplies of critical components.