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Tickers in this Article: AA, AL, RTP
Aluminum is the second most used metal in the world, behind only iron.

Alcoa (AA), the world's top aluminum producer, reported earnings per share of $0.74 on Tuesday, January 9, 2007.

Aluminum is used largely for transportation vehicles including cars, aircraft, railroad cars, bicycles, packaging items and construction.

Institutional investors have taken notice of the world's need for aluminum and Alcoa's ability to deliver it by snatching up more than 78 million shares over the past few months.

Aluminum is expected to be in high demand in countries that fall under the BRIC moniker (Brazil, Russia, India and China) for the next 10 to 15 years. China alone is expected to increase its demand for aluminum by 14% this year and 14% in 2008.

Industry trends including the push for lighter fuel efficient vehicles and aircraft will also continue to push the demand for aluminum.

For the first nine months of 2006 Alcoa sales increased $3.5 billion or 18% from the same period in 2005.

Alcoa cited elevated prices in alumina and aluminum along with rising demand from transportation, aerospace and construction industries as the drivers of the increase.

With a P/E ratio of 11.90 and a PEG ratio of 0.96, Alcoa appears to be fairly valued against its peers in the metal mining industry. Smaller competitor Alcan (AL) and larger competitor Rio Tinto (RTP) have similar valuation ratios, but Alcoa in my opinion stands out as the best bargain of the bunch.


Alcoa may be in a sweet spot to respond to global commodity demand, but it does face obstacles in trying to expand its operating facilities. Residents from the islands of Trinidad and Jamaica have rejected the expansion of Alcoa in their countries. Earlier this month, environmental activists in Jamaica were successful in rebuffing Alcoa's impending bauxite mining operations. In Trinidad, Alcoa's planned aluminum smelter was scuttled by local government in the name of keeping the proposed area pollution free.

In domestic news Alcoa was able to come to terms with the United Auto Workers who had been on strike from their Cleveland, OH plant for several weeks over medical coverage and wage related issues.


The long term growth story of the emerging BRIC countries is the driving factor behind my support of Alcoa and overshadows the near term hurdles of Alcoa's expansion. In September of 2006 Alcoa sold off its Home Exteriors business which accounted for $600 million in sales in 2005. During the same month Alcoa completed the acquisition of an aluminum brazing sheet operation in China. Alcoa also has an 8% stake in China's largest state-run aluminum producer.

Alcoa is the dominate force in the industry that will benefit for the simple fact that emerging nations need commodities like oil, copper and aluminum to lay their foundations for the future. Alcoa's difficulties in working with the countries in the Caribbean are nicely balanced with its successful string of productive agreements with Chinese aluminum companies. While Alcoa's earnings announcement may sway analysts opinions the long term investor should focus on the driving factors of demand and market leadership that will ultimately benefit Alcoa investors.

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