But Jack Lifton has some strong words for investors who get excited about rare earth exploration companies. He believes that investors are not investing in the right things. Recently, at the Hard Assets Rare Earths Investment Summit (which immediately followed the San Francisco Hard Assets Investment Conference), he spoke in a session called The Rare Earth Market with Chinese Characteristics.

Mr. Lifton is an expert in the metals industry, but not on the mining side. He is a consultant who works with institutional investors on natural resources and, in particular, on metals that contribute to technology. He is the founder of Technology Metals Research.

We've summarized his speech below. In his speech to the Hard Assets Rare Earths investment Summit, Mr. Lifton started out by educating attendees on the political landscape in China. "There's a gentleman called the President of China and he has a cabinet. But you never hear the President of China [making decisions]. It's the China State Consul [that make the decisions]. China is a communist state. The goal is not to make profits. The goal is to raise the standard of living of all the Chinese people. We have forgotten about this because China has adopted capitalism with Chinese characteristics in order to advance their goal."

Then he talked about a modern American misconception about Chinese communism: "The Soviet Union was a horribly mismanaged economy. It was a dictatorship of a ruthless man, followed by [several] incompetents. They collapsed the economy of the Soviet Union. Supposedly, the lesson we have learned is that the communists are too stupid to compete with us free market capitalists. That is not China. They watched the Russians self-destruct and they learned some lessons."

Next, he talked about Chinese production of rare earths and how they are influencing the market. The Chinese are producing rare earths at a very rapid rate – even in overproduction. Then Mr. Lifton explained what it meant in real terms: "There is going to be a shortfall of Dysprosium in 2015. It means that China won't be able to make as many high-performance cars as they would like to make. But [in America], it means that won't be able to make any at all."

China is the central figure in the rare earths story. Mr. Lifton said: "90% of the rare earth demand market is in Southeast Asia. If you want to supply the rare earth market, you'd better supply something that the Southeast Asian market demands." Then later he added: "Since 1998, the Chinese have completely absorbed the total supply chain. It doesn't matter how much [rare earths] you produce in California or Alaska… What are you going to do with it? We don't have a supply chain." The he gave a stern warning to investors: "Stop worrying about mines. There are so many mines. Start thinking about the total supply chain."

Later, Mr. Lifton continued with his warning to investors by describing some of the work he does. When he introduces explorers to buyers, he reminds the explorers that the buyers don't care how many drills are in the ground and how many Ph.D.s are on the team. All buyers care about is whether or not the explorers can consistently deliver the mineral when it says it will. "You're asking the wrong questions," he continued saying to investors. "The first question [to ask a potential rare earth investment] is: When will you deliver? The second question is: How much? Third: What is your ramp-up chart? I don't want to hear about mines anymore. I want to know what you're going to do with this stuff."

Next, he gave some insight to investors who are hoping to find the next big thing in rare earths: "The rare earth market has reached an inflection point. It doesn't matter anymore whether [someone] has a mine. The next thing is: What are you going to do with it? What's it going to cost? If you are the low-cost provider (of anything) and you can actually produce it on a regular basis, you've got it made."

Right now, according to Mr. Lifton, there are inventories that China is burning through. He said: "China might want to import Dysprosium in 2013 or 2014. I think everybody is working on inventories. Accumulated stocks are being worked out. They are going to exhaust these stocks in the next year and you're going to see another price bump."

Next, Mr. Lifton described an interesting phenomenon that investors will see in the rare earths market that they probably won't see elsewhere – and it has to do with price, timeline, and the way rare earths are mined: "The rare earth market doesn't exist. There's a market for the individual metals. The strongest priced stock is Dysprosium because the people who use the stock know that it's in short supply. The market for Lanthanum, in the near-term, stinks. The market for Cerium stinks. Neodymium looks good. The market for Terbium and Dysprosium is excellent. The problem is you can't produce any of those on their own." That is an interesting challenge that investors will need to consider when they invest in a rare earth company.

So, based on Mr. Lifton's strong warning to investors, what companies does he think are worth looking at? He referenced a blog post he wrote last month in which he listed them: "These are the companies that will probably survive that are really in heavy rare earths. Avalon Rare Metals (TSX: AVL), Great Western Minerals Group (TSX.V: GWG), Matamec Explorations (TSX.V:MAT), Quest Rare Minerals (TSX.V:QRM), Rare Element Resources (TSX.V:RES), Tasman Metals (TSX.V:TSM), and Ucore Rare Metals (TSX.V:UCU)."

According to Mr. Lifton, investors are getting too excited about rare earth investment possibilities and aren't spending enough time thinking about the supply chain. Unfortunately, there aren't a lot of companies thinking about the rare earth supply chain right now anyway.

REFERENCES

Jack Lifton's site, Technology Metals Research: http://www.techmetalsresearch.com

Hard Assets Rare Earths Investments Summit: http://www.hardassetsres.com/

Here's a blog that Mr. Lifton referenced in his speech: http://www.techmetalsresearch.com/2011/11/decoupling-the-rare-earth-junior-mining-market-from-emphasis-on-molycorp-and-lynas/#more-4649

Avalon Rare Metals: http://avalonraremetals.com/

Great Western Minerals Group: http://www.gwmg.ca/index.cfm

Matamec Explorations: http://www.matamec.com/

Quest Rare Minerals: http://www.questrareminerals.com/

Rare Element Resources: http://www.rareelementresources.com/s/Home.asp

Tasman Metals: http://www.tasmanmetals.com/s/Home.asp

Ucore Rare Metals: http://ucore.com/