By Ian Wyatt



) - The run in rare earth mining stocks continues. As I mentioned in Wednesday's article,

How Beijing's Policies Could Mean no More Smart-phones

, I think that we'll be hearing a lot more about these companies throughout 2011.

These stocks offer tremendous potential for investors. The risk is pinpointing the legitimate contenders in the race to replace the stockpiles that China has decided to hold back from rest of the world.

As I previously told you, rare earth elements really aren't all that rare; finding substantial deposits that are economically feasible to exploit is what takes time, effort - and capital. Here are a couple of my favorite players.

Since I last covered




Rarest Resources Offer Biggest Gains

back in October, the stock has shot up 110 percent, and is up over 330 percent since its August IPO.

As you can see from this chart, this former small-cap is probably surprising even the most speculative of investors.

The company, which is reopening a rare earths mine in the Mojave Desert that's been closed since 2002, now has a market cap of $4.7 billion.

In my previous article, I also covered

Avalon Rare Metals


, and a lot has been happening for this Canadian company. Avalon moved off the often-overlooked over-the-counter market. Since joining Amex on December 27, Avalon's shares are up 21 percent, double where they were trading when I pointed them out in October.

TheStreet Recommends

Investors looking for broad exposure could be attracted to Molycorp -- and who knows, as Molycorp becomes more cash-rich and in a position to make acquisitions, Avalon might show up on that company's short list of targets.

Why buy both stocks? Because Molycorp's Mountain Pass, California, mine is mainly a source of the light rare earth elements, which have lower atomic numbers, and not the heavy ones with atomic numbers of 62 and higher.

That's where Avalon comes in. The company owns the Nechalacho Rare Earth Element Deposit located in Canada's Northwest Territories. Avalon thinks this property is one of the best-undeveloped deposits of heavy rare earth elements anywhere. They're the ones that are going to be especially in demand in the next four or five years -- just about when Avalon expects that site to start producing.

The biggest drawback that Avalon is facing is that it will have to extract the minerals via underground mining, rather than the cheaper open pit method.

In addition to now trading on the AMEX, Avalon also gained some prestige by being added to the S&P-TSX Global Mining Index and the S&P-TSX Base Metals Index.

Right now I'm also looking at another Canadian exploration company,

Quest Rare Minerals

, which is a candidate to follow Avalon onto the AMEX and into more mainstream U.S. trading beyond over-the-counter market and Toronto's Venture Exchange.

Like Avalon, Quest Rare Minerals is hunting for rare earth deposits, but is focusing its attention on the Strange Lake area of north-eastern Québec, the Kenora area of north-western Ontario and the Plaster Rock area of north-western New Brunswick. This former gold miner was named the 2010 Prospector of the Year by the Quebec Mineral Exploration Association for its Strange Lake discoveries. And Strange Lake is expected to reach production stage in 2016, as a lower-cost open-pit mine, which gives Quest a cost advantage over Avalon.

In Canadian trading, Quest Rare Minerals was the best performer on the Venture Exchange in 2009, climbing 5,530 percent in value. For 2010, gains were a more muted 53 percent. If the company decides to head over to the AMEX, its shares could see the same kind of pop that Avalon's have.

If you haven't been paying much attention to the rare earths brouhaha, now is the time to take a look. Many of the exploration companies are still small, and their stocks have a lot of room to run --- especially if China continues to clamp down on its exports of the minerals.

I've prepared a special report about investing in small-cap stocks that offers every investor valuable insights into ferreting out the best companies available.

You can find this report here

and you'll have the opportunity to sign up for a risk-free subscription to

Small Cap Investor PRO

. Right now, we have an average gain of 46 percent on open positions, with gains on 89 percent of open positions.

Keep sending in your comments on rare earth investing to

. I'll be publishing comments and answering questions in tomorrow's letter.

Ian Wyatt, editor of

Wyatt Investment Research, founded in 2001 as a publisher of newsletters, offers independent investment research of financial markets, stocks, bonds, ETFs and mutual funds to about 250,000 individual investors. The company is led by founder Ian Wyatt, who serves as publisher and chief investment strategist.