Make a "Precious" Exception for This $4 Stock

You know exactly where I stand on gold, and what my stance is on silver.

You know I'm bullish on palladium, too. And platinum.

But metals don't have to be shiny or precious to make you money.

Indeed, the only "precious" thing about the metal I'm recommending today is its profit potential.

It's huge.

And Mick Davis knows it...

A $1 Billion Bet

Davis, the former CEO of Xstrata, knows commodities. He converted his mining company from a patchwork of projects into a multi-billion-dollar resources leader.

Then he converted the company's leadership position into profits, when Xstrata was acquired in an all-share deal by Glencore (now Glencore Xstrata PLC, LON: GLEN), valuing it at $29 billion in 2010.

And now he's at it again...

Davis sees a lot of value in the resource sector. So much so, he's established a new private company, X2 Resources, and has already raised $1 billion to go hunting for deals.

Half of that amount came from Noble Group Limited (SGX: N21), a Hong Kong firm that trades on the Singapore exchange. Noble is one of the world's largest commodities traders and marketers. The other $500 million was contributed by TPG, an American private investment firm managing $55.3 billion in assets.

X2, however, is not done fundraising. That's because Davis believes the current weakness in the commodities space will not last, and share prices are well oversold. Even Glencore took a $7.7 billion writedown on its Xstrata purchase this past August, thanks to weakness in commodity markets.

But in a recent Globe and Mail article, Davis said, "We're seeing ongoing demand in the developing world and the rise of consumer markets there."

He thinks the waterfall of major writedowns, cuts in capital expenditures, and asset fire sales make for ripe purchases and takeover opportunities. He should know, he's been there and done that. And he's looking to do it all over again.

As part of the deal, Noble said it "... will be X2 Resources' preferred marketer and provider of supply chain management and logistics services."

It turns out one of Noble's core commodities is aluminum, one of the most consumed metals on the planet.

And given that aluminum is one of the most attractive metals in the resources space, in terms of price, it's by no means a stretch to figure that that's where Davis has set his sights...

A Closer Look at the Forgotten Sister

The chart below, at right, shows aluminum prices over the past 24 years...

Aluminum producers tend to go through similar boom and bust cycles.

And right now, it's bust...that's why I'm interested.

The undisputed leader for this metal is aluminum giant Alcoa Inc. (NYSE: AA).

After peaking at $18 per share back in early 2011, Alcoa has trended downwards ever since. It's been a long bottoming process, but the worst may be behind us.

AA's trailing P/E is a rich 31, but its forward P/E is considerably lower at 20, so analysts expect significantly stronger earnings over the next 12 months. Shares are trading around $8.60, yet book value per share is pegged at $11.97. Morningstar has a $14 fair-value target on the stock.

In the most recent Q3 earnings, Alcoa booked net income of $24 million, a big improvement over last year's Q3 $143 million loss.

Management's kept its sights on restructuring, transitioning from selling ingots to providing value-added "solutions." Downstream engineered products provided a 22% gain in after-tax income.

Prospects are strong, as AA continues to push productivity gains and further penetrate sectors like aerospace and automotive. As automobiles look to improve fuel consumption, the average U.S. car will likely go from about 14 lbs. to 55 lbs. of aluminum in just the next three years. Alcoa CEO Klaus Kleinfeld thinks cars will contain 135 lbs. of aluminum within twelve years.

The Even Better-Looking Sister Is...

Another way to play aluminum might be through Alumina Ltd. (ADR) (NYSE: AWC).

Alumina owns 40% of the world's largest alumina business, Alcoa World Alumina and Chemicals (AWAC), with Alcoa owning and managing the other 60%.

AWAC mines and refines bauxite and produces and markets alumina to smelters around the world. It's also the world's largest producer of alumina. Interestingly, AWAC is a low-cost producer, with many operations in the lower-cost quartiles.

To be sure, Alumina Ltd. is a riskier play on the sector than Alcoa. But it trades at about $4.00 per share right now, below its book value of around $4.25 per share. And Morningstar's fair-value estimate is $11.

Remember, commodities investing is highly cyclical. Sectors go through booms and busts.

And right now, aluminum is bust.

I'll bet Mick Davis thinks so. He didn't raise a billion dollars for nothing.

And get this...

Davis is targeting the other "forgotten metal," too.

More on that to follow...