ALCAN INC. $47 (Toronto symbol AL; Conservative Growth Portfolio, Resources sector; SI Rating: Average) is the world’s second-largest producer of aluminum, after U.S.-based Alcoa Inc. Canada accounts for about half of Alcan’s aluminum production, while the other half comes from operations in 14 other countries.

The company is also a leading producer of aluminum products, including aluminum sheet, foil, wire and cable, auto parts and construction products. Alcan gets about 45% of its revenue from bulk aluminum sales, and 55% from aluminum products.

Alcan’s revenue fell from $12.6 billion in 2001 to $12.5 billion in 2002 (all amounts except share price in U.S. dollars). In late 2003, Alcan acquired European aluminum producer Pechiney SA. That pushed revenue up to $13.6 billion in 2003, and to $24.9 billion in 2004. To satisfy competition regulators, Alcan spun off its rolled aluminum product operations as a separate company called Novelis Inc. Consequently, revenue in 2005 fell to $20.3 billion.

Profits before one-time items fell from $1.65 a share (total $538.0 million) in 2001 to $0.76 a share ($251.4 million) in 2003. The company began to realize some of the expected $400 million in annual savings from the Pechiney acquisition, and profits rose to $1.75 a share ($645.8 million) in 2004, and to $2.21 a share ($825.0 million) in 2005.

Demand for aluminum has soared in the past few years due to spreading industrialization in Asia and other countries. Alcan now aims to take advantage of higher prices by expanding some of its existing smelters, and building new ones. These projects will cost it $4 billion over the next five years, and will increase its annual production by 20%.

Almost half of this ($1.8 billion) will go to modernize its Kitimat, B.C. smelter with technology developed by Pechiney that greatly cuts power use. Aluminum smelters use lots of electricity, and higher power costs have squeezed Alcan’s profit margins lately. But the company gets half of its power from its own power plants, which helps keep its energy costs down.

Capital spending is to rise 3.5%, from $4.93 a share in 2005 to $5.10 in 2006. But Alcan’s cash flow should grow 68.6%, from $5.10 to $8.60, so it can easily afford these projects.

Alcan is a buy.