**EXHIBIT 99.3***-***MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ITEM 7 TOREGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,2004)**

**OVERVIEW**

The recovery of the global economythat started in the latter stages of 2003 broadened and gained momentum during2004. Strong stimulus provided by the U.S. economy together with surging growthin China contributed significantly to world economic expansion, fuelingincreased demand and higher prices for oil and other commodities. Alsocontributing to the rise in commodity prices denominated in U.S. dollars was afurther weakening of the U.S. dollar against most currencies.  

For the first time since 2000, worldprimary aluminum demand exceeded available supply.  As a consequence, WesternWorld* inventories of aluminum fell by 685 kt during 2004 and ended the year atabout nine weeks of supply, a low level by aluminum industry standards.  Whilethe weaker U.S. dollar provided strong impetus for aluminum prices beginning inthe second half of 2003, it was mainly the strengthening industry fundamentalsthat pushed prices higher on the London Metal Exchange (LME) during 2004.  Forthe year, primary aluminum prices averaged $1,721 per tonne, 21% higher thanthe average for the previous year.  Prices also rose when viewed in terms ofother currencies, a situation that was markedly different than in 2003. 

Reflecting the robust externalenvironment, the underlying performance of Alcan's businesses was solid in2004.  While the Company benefited from higher prices for aluminum andincreased demand for its products, results were dampened by the impact of theweaker U.S. dollar and higher costs for oil, freight and other raw materials.  Synergiesarising from the acquisition of Pechiney yielded $101 million of pre-tax benefitsin 2004, well above the Company's target for the year.  Net income was reducedby a non-cash pre-tax charge of $154 million for the impairment of goodwillrelated to the acquisition.

The year was especially noteworthy interms of strategic developments. Following on the heels of the Pechineyacquisition at the end of 2003, Alcan took another major step towards unlockinggreater value for shareholders. In May 2004, the Company announced itsintention to spin-off substantially all of its rolled products businesses intoa new, independent company, later named Novelis Inc.  The successful completionof the transaction in January 2005 resulted in the creation of two strongindustry leaders in their respective businesses.  Going forward, Alcan willfocus on leveraging its favourable positions in bauxite and alumina, smelting,engineered products and packaging.  With increased financial strength followingthe spin-off, Alcan is well positioned to take advantage of profitable growthopportunities across its portfolio. 

*The tables presented in Management'sDiscussion and Analysis include Pechiney's results as of January 1, 2004.  Pechiney's balance sheetis included beginning on December 31, 2003.*

**MARKET REVIEW**

**World Primary AluminumBalance**

***Supply and Demand***World primary aluminum demandgrew by close to 10% in 2004 to about 30.5 Mt.  The strong growth reflected theimpact of customer inventory restocking ahead of rising end-market demand andthe growing influence of China.  During the year, China's scrap aluminumimports rose 84%, which reduced scrap availability in the Western World,pushing up prices for secondary alloys and spurring the substitution ofrecycled aluminum with primary aluminum in certain end markets. 

World primary aluminum productionincreased by about 7% to 29.8 Mt in 2004.  Once again, the largest increasecame from China, which was up 20% to 6.6 Mt.  China now produces almost aquarter of the world's primary aluminum.  Output in the C.I.S. was up 4% toabout 4.1 Mt.  Primary production grew only 3% in the Western World asproducers idled or closed an additional half a million tonnes of capacity in North America.  Since there were few smelter expansion projects that came on stream during2004 in the Western World, increased production came mainly from the full-yearoperation of the many expansions completed during 2003. 

**Defined as the worldexcluding the Commonwealth of Independent States (C.I.S.), Eastern Europe and China.*

 

1

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***World Primary AluminumSupply and DemandMt/y***

|                           | *Q1 * | *Q2* | *Q3 * | *Q4* |
|--------------------------------|------------|------|------------|------|
| *Supply*                       |
| 2000                           | 24.0       | 24.1 | 24.3       | 24.7 |
| 2001                           | 25.5       | 25.4 | 25.2       | 25.7 |
| 2002                           | 25.2       | 25.7 | 26.2       | 26.9 |
| 2003                           | 27.2       | 27.5 | 28.1       | 29.0 |
| 2004                           | 29.1       | 29.6 | 29.7       | 30.3 |
| *Demand (seasonally adjusted)* |
| 2000                           | 24.5       | 25.0 | 24.8       | 24.9 |
| 2001                           | 23.7       | 23.8 | 24.1       | 24.3 |
| 2002                           | 24.7       | 24.7 | 26.4       | 26.6 |
| 2003                           | 27.3       | 27.4 | 27.8       | 28.6 |
| 2004                           | 31.0       | 29.9 | 31.1       | 30.0 |

***Balance***With demand increasing more quicklythan supply in 2004, the primary aluminum market was in deficit by about 685 ktas compared to a surplus position of about 157 kt in 2003.  By the end of 2004,inventories held by the LME, the New York Mercantile Commodities Exchange(COMEX) and aluminum producers had fallen to 3.9 Mt, or the equivalent of aboutnine weeks of supply, from over 4.5 Mt at the end of 2003.  Driven by both thedeclining inventories and the weakening U.S. dollar, the average 3-month LMEaluminum price rose about 21% in 2004 to $1,721/t, up from $1,428/t in 2003.

***Total Aluminum Inventoriesand Ingot Prices***

|                                           | *Q1*  | *Q2*  | *Q3*  | *Q4*  |
|------------------------------------------------|-------|-------|-------|-------|
| *LME 3-month aluminum price (US$/t)*           |
| 2000                                           | 1,652 | 1,502 | 1,587 | 1,527 |
| 2001                                           | 1,562 | 1,511 | 1,404 | 1,337 |
| 2002                                           | 1,395 | 1,377 | 1,329 | 1,358 |
| 2003                                           | 1,392 | 1,379 | 1,420 | 1,521 |
| 2004                                           | 1,666 | 1,686 | 1,716 | 1,814 |
| *Total inventories (IAI*, LME and COMEX) (kt)* |       |
| 2000                                           | 3,919 | 3,612 | 3,552 | 3,488 |
| 2001                                           | 3,743 | 3,799 | 3,887 | 3,910 |
| 2002                                           | 4,084 | 4,226 | 4,250 | 4,312 |
| 2003                                           | 4,401 | 4,290 | 4,438 | 4,535 |
| 2004                                           | 4,242 | 3,975 | 3,711 | 3,896 |
| **  International Aluminium Institute*    |       |

***Outlook***Given that apparent demandlevels in 2004 were inflated by the impact of customer inventory restocking, a smaller increase in primary aluminumdemand is expected for 2005 versus 2004.  Shipments are expected to rise about1% in the Western World and about 4% globally, boosted by another year ofdouble-digit growth in China. If 2004 shipments are adjusted to remove theimpact of restocking, the underlying demand growth in 2005 would be 5% to 6% globally.  Onthe supply side, there are three major smelter expansion projects startingoperation in 2005, namely in Bahrain, Canada and India, which collectivelywill represent about 871 kt/y of capacity.  Capacity restarts totaling overhalf a million tonnes have also begun or been announced for Canada, the United States and Ghana.  In China, major changes in export taxes and rebates willlikely cut exports and slow production growth to around 12%.  Primaryproduction is expected to rise about 4% in the Western World and about 6%globally.  Based on forecasted primary shipments and production, Alcan expectstotal inventories to decline by about 200 kt in 2005.

**Western World TotalAluminum Consumption**

Western World total aluminumconsumption grew by an estimated 5.6% in 2004 to about 30.6 Mt. This represented a newrecord, exceeding the previous high of 29.4 Mt reached in 2000.  Of thealuminum consumed in 2004, about 22.8 Mt was sourced from primary aluminum. Thebalance of 7.8 Mt was sourced from secondary/recycled metal.  

 

2

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In 2004, aluminum consumption was upin all major regions of the world.  Strong growth in almost all forms and enduses led to an estimated 7% increase in North America, 7% in Asia (excluding China) and 8% in Latin America.  For North America, this was a rebound from the low level of growthseen in 2003. For Asia and Latin America, the increases represented the thirdstraight year of strong, above-average growth.  While Western Europe continuedto lag other regions, its 3% growth in 2004 was the highest in five years. China continued to experience rapid growth in 2004 with aluminum consumption up 16% ascompared to 26% in 2003.

For the first time in fiveyears, aluminumconsumption increased in every end-use market.  Aluminum usage in thetransportation market grew by 7% in 2004, making it the fastest growing as wellas the largest market for the metal. The strong growth reflected increasedlight vehicle production worldwide, which was up between 4% and 5%, increasedmedium and heavy truck production and greater aluminum usage in cars, particularly in Europe.  Aluminum consumption in thecontainers and packaging market grew 3% to 4.9 Mt, its highest annual increasein six years. Can stock demand was up 2% in 2004 and other packaging,principally foil, rose by 5% to 1.4 Mt. Consumption in the building and construction sector rose5% to 5.5 Mt, led mainly by strong construction growth in the WesternHemisphere.  U.S. housing starts rose a further 5% last year, while Japanesehousing starts were up 3%.  The weakest major region in the world was Western Europe, where consumption growth was only 2% in 2004. The electrical market had its firstsignificant gain in four years, rising 4% to 2.5 Mt, though this was still slightlybelow the peak of over 2.6 Mt reached in 2000.  Again the weakest region was Western Europe. Consumptionin all other markets increased by 6% to 8.2 Mt in 2004.  This segment includes2.5 Mt from the machinery and equipment market and 2.0 Mt from the consumerdurables market.  

***Western World Consumptionby End-Use Market - 2004***

| *Containers and Packaging*  | *16%*  |
|-----------------------------|--------|
| *Building and Construction* | *18%*  |
| *Electrical*                | *8%*   |
| *Transportation*            | *31%*  |
| *Consumer Durables*         | *6%*   |
| *Machinery and Equipment*   | *8%*   |
| *Other*                     | *12%*  |
| *Total*                     | *100%* |

***Western World Consumptionby Geographic Market - 2004***

| *North America*      | *37%*  |
|----------------------|--------|
| *Europe*             | *30%*  |
| *Asia*               | *27%*  |
| *South America*      | *3%*   |
| *Africa and Oceania* | *3%*   |
| *Total*              | *100%* |

***Alcan's Revenues by**Geographic Market - 2004***

| *North America*       | *35%*  |
|-----------------------|--------|
| *Europe*              | *45%*  |
| *Asia/Pacific/Africa* | *16%*  |
| *South America*       | *4%*   |
| *Total*               | *100%* |

 

3

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**RESULTSOF OPERATIONS**

**Presentation of FinancialInformation**Alcan has historicallyprepared and filed its consolidated financial statements in accordance withCanadian generally accepted accounting principles (GAAP) with a reconciliation toUnited States (U.S.) GAAP.  Beginning January 1, 2004, the Company adopted U.S.GAAP as its primary reporting standard for presentation of its consolidatedfinancial statements. The Company has adopted U.S. GAAP to improvecomparability of financial information with its competitors and peer group, aswell as to promote a common financial language within Alcan. The financialinformation contained in this Management's Discussion and Analysis (MD&A)is based on Alcan's financial statements prepared in accordance with U.S. GAAP. 

The operating results, anygain (loss) on disposal and any impairment gain (loss) for assets held for saleare disclosed separately as discontinued operations.  Prior years' financialinformation has been reclassified to present these businesses as discontinuedoperations on the consolidated statement of income, as assets held for sale andliabilities of operations held for sale on the consolidated balance sheet andas cash flows from (used for) discontinued operations on the consolidatedstatement of cash flows.  The financialinformation contained in the MD&A has been revised from the informationpresented in prior annual reports to reflect the reclassifications. 

The results of discontinued operations in 2004 includethe copper and ores and concentrates trading businesses, the PechineyÉlectrométallurgie (PEM) ferroalloy business, the Company's interest inAluminium de Grèce S.A. (AdG) as well as certain non-core engineered products andpackaging operations, including the packaging operations of the Boxal Group andSuner Cartons.  Certain assets of the ores and concentrates trading business,including zinc and lead, and all of the discontinued packaging operations havebeen sold in 2004. The aluminum rolling mill in Ravenswood, West Virginia, previously included in discontinued operations, has been reclassified intocontinuing operations as the Company is no longer required to divest thefacility. Forfurther details on discontinued operations, refer to note 5, DiscontinuedOperations and Assets Held for Sale, of the consolidated financial statements.

At the end of 2003, Alcanacquired Pechiney, an international producer of aluminum and packaging products. Pechiney is included in Alcan's consolidated balance sheet as at December 31,2003. Pechiney's results of operations and cash flows are included in Alcan'sconsolidated financial statements beginning January 1, 2004.

**Novelis Spin-Off**On January 6, 2005, Alcan completed the spin-off ofsubstantially all of the aluminum rolled products businesses it operated priorto the 2003 acquisition of Pechiney, together with some of its alumina andprimary metal businesses in Brazil and four former Pechiney rolling facilitiesin Europe.  The spin-off created a company that was named Novelis Inc.

Since the Novelis spin-off was effective on January 6, 2005,the information contained in the MD&A and consolidated financial statementsinclude the businesses transferred to Novelis Inc. for all periods presented. Alcan's consolidated financial statements for all periods subsequent to January1, 2005, will not include the balance sheets, statements of income and cashflows of the businesses transferred to Novelis Inc.  

Subsequent to the spin-off, Alcan willcontinue to have significant cash flows from Novelis related to the supply ofmetal and alumina, the provision of transitional and technical services, thelicensing of certain of Alcan's patents, trademarks and other intellectualproperty, and the use of certain buildings, machinery and equipment, technologyand employees.  As a result of the significant continuing involvement and thesignificant cash flows from Novelis, the spin-off did not meet the criteria forclassification as a discontinued operation.

**Results of Operations**

***Income from ContinuingOperations***

| ** **                                                                                                                     | **2004**   | 2003  | 2002  |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------|-------|
| Income from continuing operations  (US$M)                                                                                      | **252**    | 262   | 421   |
| Foreign currency balance sheet translation                                                                                     | ** ** |       |       |
|    and Other Specified Items (US$M)                                                                                  | **(548)**  | (283) | (150) |
| LME 3-month aluminum price (US$/t)                                                                                             | **1,721**  | 1,428 | 1,365 |
| **Income from continuing operations for 2004 was little  changed from the prior year despite significant impairment charges.** |

In 2004, income fromcontinuing operations was $252 million, $10 million lower than in 2003. Resultsfor 2004 were affected by a negative year-over-year change in Other Specified Items(OSIs) of $438 million, offset in part by a positive impact of $173 millionresulting from lower foreign currency balance sheet translation losses.  OSIsand translation effects are discussed below.  During 2004, the Companybenefited from significantly higher price realizations, increased volumes, animproved product mix, cost-reduction initiatives and synergies associated withthe Pechiney and VAW Flexible Packaging (FlexPac) acquisitions. LME aluminumprices were up on average 21% compared to 2003, mainly reflecting improvedaluminum industry fundamentals. Results were somewhat dampened by a number ofexternal factors including increased costs for raw materials, mainly oil-based,and the impact of the weaker U.S. dollar on operating costs.  

 

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In 2003, income fromcontinuing operations was $262 million, a decrease of $159 million from 2002.The decline largely reflected the negative effects of foreign currency balancesheet translation and an unfavourable year-over-year change in mark-to-marketadjustments on the revaluation of certain derivative instruments, partiallyoffset by a positive net year-over-year change in OSIs. The Company estimatesthat the weakening of the U.S. dollar and higher external cost pressuresreduced earnings by approximately $180 million in 2003.

After including theresults of discontinued operations and the cumulative effect of accounting changes,the Company's reported net income was $258 million in 2004 as compared to $64million in 2003 and a loss of $348 million in 2002.  After-tax income fromdiscontinued operations was $6 million in 2004 compared to losses of $159million and $21 million in 2003 and 2002, respectively.  Net income in 2003 wasreduced by a charge of $39 million for the cumulative effect of an accountingchange related primarily to costs for spent potlining disposal. The loss in2002 included a charge of $748 million for the cumulative effect of anaccounting change relating to goodwill impairment.  Goodwill is furtherdiscussed under Costs and Expenses.

| ***Net Income****(in millions of US$)*                                                            | **2004**   | 2003  | 2002  |
|---------------------------------------------------------------------------------------------------|------------|-------|-------|
|                                                                                                   |            |       |       |
| Included  in income from continuing operations are:                                               | ** ** |       |       |
| Foreign  currency balance sheet translation                                                       | **(153)**  | (326) | (41)  |
| Other  Specified Items:                                                                           | ** ** |       |       |
|       Synergy costs                                                           | **(44)**   | (14)  | -     |
|       Restructuring charges                                                   | **(41)**   | (26)  | (36)  |
|       Asset impairments                                                       | **(66)**   | (4)   | (16)  |
|       Goodwill impairments                                                    | **(154)**  | (28)  | -     |
|      Gains from non-routine  sales of assets, businesses and investments, net | **54**     | 39    | 19    |
|       Tax adjustments                                                         | **13**     | 72    | (3)   |
|       Novelis costs                                                           | **(31)**   | -     | -     |
|       Legal and environmental provisions                                      | **(7)**    | (17)  | (76)  |
|       Pechiney financing-related gains (losses)                               | **(2)**    | 65    | -     |
|      Purchase accounting  and related adjustments                             | **(112)**  | (32)  | -     |
|       Other                                                                   | **(5)**    | (12)  | 3     |
| Total Other Specified Items                                                                       | **(395)**  | 43    | (109) |
|                                                                                                   | ** ** |       |       |
| **Income from continuing operations**                                                             | **252**    | 262   | 421   |
| Income  (Loss) from discontinued operations                                                       | **6**      | (159) | (21)  |
| Cumulative  effect of accounting changes                                                          | **-**      | (39)  | (748) |
| ** Net Income (Loss)**                                                                       | **258**    | 64    | (348) |

Included in income fromcontinuing operations for 2004 were foreign currency balance sheet translation lossesof $153million compared to $326 million in 2003 and $41 million in 2002. Foreigncurrency balance sheet translation effects arise from translating monetaryitems (principally deferred income taxes, operating working capital andlong-term liabilities) denominated in Canadian and Australian dollars into U.S.dollars for reporting purposes. The translation losses in 2004 largely reflectedthe further weakening of the U.S. dollar against the Canadian and Australiandollars.  At the end of 2004, the U.S. dollar was 7% lower against the Canadian dollar and 4%lower against the Australian dollar as compared to its value at the end of2003.  At theend of 2003, the U.S. dollar was 18% lower against the Canadian dollar and 25% lower against the Australian dollaras compared to its value at the end of 2002.  Although balance sheet translationeffects are primarily non-cash in nature, they can have a significant impact onthe Company's net income. 

Income from continuingoperations for 2004 included a net after-tax loss of $395 million for OSIs.  The mostsignificant items included: a goodwill impairment charge of $154 million mainlyrelated to European fabricating assets in the Engineered Products group, acquiredas part of Pechiney; purchase accounting and other adjustments, primarily oninventory, of $112 million related to Pechiney; an asset impairment charge of$66 million related to two rolling mills in Italy; restructuring charges of $41 million mainly related to theclosures of two rolled products facilities in the United Kingdom and Belgium; synergy costs of $44 million related to the Pechiney and FlexPacacquisitions; a gain of $46 million resulting from a dilution in the Company'sinterest in an anode-producing operation in the Netherlands; and expenses of $31 million related to the spin-off ofNovelis.

 

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Income from continuingoperations for 2003 included a net after-tax gain of $43 million for OSIs.  Themost significant items included: favourable tax adjustments of $72 millionprimarily resulting from a change in tax legislation in Australia; a currency-related gain, net of financing costs, of $65 million on the funding of thePechiney acquisition; and gains of $39 million mainly from the sale of assetsin Japan, the United Kingdom, Malaysia and Italy.  These were partially offsetby: a $32-million write-off of in-process research and development undertakenby Pechiney prior to the acquisition; a goodwill impairment charge of $28million related to Engineered Products businesses; restructuring charges of $26million related to closure costs for flexible packaging operations in Europe and certaincable operations in the United States; environmental and legal provisions of $17 millionmainly due to an environmental reserve for a site in the United States; and synergycosts of $14 million related to the FlexPac acquisition. 

Income from continuingoperations for 2002 included a net after-tax charge of $109 million for OSIs.The largest of these items included: a provision of $68 million for a ruling ona contract dispute with Powerex, an affiliate of B.C. Hydro; $13 million forthe impairment of certain businesses in Italy; charges of $21 million for theclosures of the Burntisland specialty alumina plant and the Banbury R&Dfacility, both in the United Kingdom; $17 million relating to other integrationand restructuring costs; and $15 million in other miscellaneous charges.  Theseitems were partially offset by an after-tax gain of $24 million on the sale ofmore than half of the Company's remaining portfolio investment in Nippon LightMetal Company, Ltd. (NLM).

**Sales and OperatingRevenues**

***Revenues and AluminumVolumes***

|  | **2004** | 2003 | 2002 |  
Third-party sales and operating  revenues (US$M)

**24,885**

13,850

12,483

 
Total aluminum volume* (kt)

**6,443**

4,508

4,424

 
**Includes ingot and rolled product  shipments, conversion of customer-owned metal (tolling) as well as aluminum  used in engineered products and packaging.*

**Higher revenues in 2004 mainly  reflect the acquisition of Pechiney and higher prices for aluminum.**

***Sales Price Realizations***

*(US$/t)*

**2004**

2003

2002

Ingot product realizations

**1,884**

1,605

1,528

LME 3-month aluminum price 

**1,721**

1,428

1,365

**Realizations for ingot increased in  line with higher LME prices.**

Sales and operatingrevenues were $24.9billion in 2004,an increase of $11.0 billion, or 80%, compared to 2003.   Approximately$9 billion ofthe increase reflectedthe additional revenues from former Pechiney businesses acquired in December2003, with the balance largely explained by higher LME prices, which were up onaverage 21% compared to 2003.  Also contributing to the increase in sales in2004 were higher alumina prices and the impact of the stronger euro.  The valueof the U.S. dollar declined by approximately 9% against the euro year-over-year.   

In 2003, sales andoperating revenues were $13.9 billion, an increase of $1.4 billion, or 11%, compared to 2002. The increasereflected the additional revenues from the packaging and composites businessesacquired during the year, higher aluminum and alumina prices, increased ingotshipments and the impact of the stronger euro.

***Revenues by Market****-****2004***

*Packaging*

*37%*

*Aluminum Ingot*

*17%*

*Beverage Cans*

*10%*

*Building and Construction*

*6%*

*Electrical*

*3%*

*Transportation*

*8%*

*Other*

*19%*

*Total*

*100%*

 6
****
**Costs and Expenses**

** *(in millions of US$, except where indicated)***

**    2004    **

**% of  sales**

    2003     

 % of  sales

    2002     

 % of  sales

Cost of sales and operating  expenses

**20,203**

**81.2**

11,171

80.7

10,032

80.4

Depreciation  and amortization

**     1,337**

**      5.4**

         862

      6.2

         772

      6.2

Selling,  administrative and	   general expenses.................. 

**     1,612**

**      6.5**

         758

      5.5

         580

      4.6

Research  and development    expenses............................ 

**         239**

**      1.0**

         190

      1.4

         115

      0.9

Other  expenses...................... 

**         406**

**      1.6**

         131

      0.9

         119

      1.0

Over the last three years,Alcan has experienced significant cost pressure arising mainly from theweakening U.S. dollar, rising fuel prices and increased costs for freight andkey raw materials such as coke, pitch, plastics and resins. The sharp declinein the U.S. dollar has had a significant unfavourable impact on costs incurredin other currencies, which are translated into U.S. dollars for reportingpurposes. The economic impact was pronounced in countries such as Canada, Australia and the United Kingdom, where the Company's bauxite, alumina and aluminumoperations have a local currency cost base but U.S. dollar revenues.  Thisresults in escalating local costs without any offsetting increase in revenues,inflating overall costs as a percentage of sales.  Through cost reductions,increased productivity, more efficient use of raw materials and higher selling pricesfor both metal and end products, Alcan has largely been able to offset the costpenalty.

In 2003, Alcan formalizedits Continuous Improvement (CI) efforts under a common system aimed atmaximizing improvement opportunities and enhancing the Company's competitiveposition and operating efficiency.  The new system combines the complementaryapproaches of Lean Manufacturing and Six Sigma to provide a full range ofimprovement tools to the Company's businesses. The acquisition of Pechiney hasallowed Alcan to further strengthen its CI process by leveraging the combinedknowledge and expertise of both companies.  Each of Alcan's business groupshave improvement targets that are integrated into the operating plans andbudgets for the year.

With the acquisition ofPechiney, Alcan expects to realize synergies of $360 million in annual pre-taxcost savings largely through streamlined corporate and head office services,logistical and purchasing efficiencies, the optimization of productionfacilities and a focused approach to research and development (R&D). The actions required to securethese recurring annual synergies are expected to be fully implemented by theend of 2005. In order to achieve the synergies, Alcan estimates that it willneed to incur approximately $260 million in costs and make capital expendituresof $90 million.  As at December 31, 2004, Alcan has achieved an annual run rateof approximately $160 million, well ahead of its target for the year.  Realizedsavings for 2004 were $101 million as compared to a target of $41 million,which reflects faster execution of synergy plans.  The Company incurred $170million in costs in 2004, of which $107 million were treated as purchaseaccounting adjustments and $29 million were capital expenditures. 

***Value of U.S. Dollar****-****Average Annual  Percentage Change***(%)

**2004**

2003

2002

   Canadian dollar

**(7)**

(11)

1

    Australian dollar

**(11)**

(17)

(5)

    Euro

**(9)**

(16)

(5)

In 2004, cost of sales andoperating expenses were 81.2% of sales and operating revenues compared to 80.7%in 2003. Higher realized prices for aluminum, alumina and products sold throughdownstream businesses, together with increased volumes, were more than offsetby the adverse impact of the weaker U.S. dollar on operating costs andincreased costs for fuel and raw materials.  In 2003, cost of sales andoperating expenses were 80.7% of sales and operating revenues compared to 80.4%in 2002.  Benefits from cost and productivity improvements, higher realizedprices for aluminum and alumina and volume increases were more than offset byadverse currency impacts and higher costs for recycled metal, fuel, rawmaterials and employee benefits. 

***Total Aluminum Volume andPurchases***

*(kt)*

**2004**

2003

2002

Total aluminum volume *

**6,443**

4,508

4,424

Total purchases

**2,172**

1,843

1,855

** Includes ingot and rolled product shipments,  conversion of customer-owned metal (tolling) as well as aluminum used in  engineered products and packaging.*

Depreciation and amortization expensewas $1,337 million in 2004, an increase of $475 million from 2003.  Approximately 89% of the increase in 2004 was due tothe addition of Pechiney, acquired at the end of 2003, while the balance reflectedhigher capital expenditures and the weaker U.S. dollar against the euro.  In2003, depreciation and amortization expense was $862 million, an increaseof $90 million over 2002.  The increase mainly reflected the impact of theweaker U.S. dollar and the acquisition of packaging and composites businessesduring the year.   

 

7
*** ***
Selling, administrative and general(SA&G) expenses were $1,612 million in 2004, $854 million higher than in2003.  Close to 80% of the increase was due to the addition of Pechiney, whilethe balance mainly reflected costs associated with the Novelis spin-off,various compliance and governance initiatives, higher incentive compensationexpenses and the decline in the value of the U.S. dollar against the variouscurrencies in which Alcan incurs costs.  SA&G expenses were $758 million in2003, an increase of $178 million as compared to 2002.  In 2003, excluding theimpact of business acquisitions, expenses increased by approximately $150million largely due to higher pension expenses and the impact of the weakerU.S. dollar.  Over the last three years, SA&G expenses have increased as apercentage of sales and operating revenues, which in large part reflects thechanging composition of Alcan's portfolio and the greater relative weight of thepackaging business.  The percentage for 2004 was 6.5% of sales, but afteradjusting for the Novelis spin-off and Pechiney integration costs, thepercentage was 6.1%.

Alcan's R&D activities continue to be closely aligned with the needsof its core businesses. The Company is focused on improving process technologyand developing new product applications for a diverse range of markets andcustomers.  R&D spending at central research laboratories, technology centres and technical departments was $239 million in 2004, an increase of $49million, or 26%, compared to 2003.  The increase in 2004 was due to theaddition of Pechiney.  R&D expenses were $190 million in 2003, an increaseof $75 million over 2002.  The increase mainly reflected the immediateexpensing of $50 million of Pechiney's in-process R&D, as required underU.S. GAAP, as well as the impact of the weaker U.S. dollar. 

***Interest***

**2004**

2003

2002

Interest expense (US$M)

**346**

212

198

Capitalized interest (US$M)

**11**

5

-

Effective average interest rate (%)

**3.7**

         5.2

     5.1

**Increased interest expense in 2004 reflects higher  debt levels following the acquisition of Pechiney.**

Interest expense was $346million in 2004 compared to $212 million in 2003 and $198 million in 2002.  Theincrease in 2004 as compared to 2003 was due to the higher level of debtoutstanding throughout the year as a result of the debt raised to finance thePechiney acquisition in December 2003 and debt assumed on acquisition.  Theimpact of increased leverage more than offset the benefit of a lower average costof debt.  In 2003, total interest cost, including capitalized interest,increased by $19 million as compared to 2002, primarily as a result of the $3.5billion of financing raised in December 2003 to fund the acquisition ofPechiney.   

Alcan's effective averageinterest rate on debt was 3.7% in 2004 as compared to 5.2% in 2003.  The lowereffective rate in 2004 reflects the much larger proportion of floating andshort-term debt carried throughout 2004 in anticipation of the financingsettlement associated with the Novelis spin-off.  The effective averageinterest rate is derived by dividing the total interest cost on debt for theyear (refer to the Liquidity and Capital Resources section for a calculation ofdebt) by the average quarter-end debt for the year, including the prioryear-end debt balance.  In order to calculate the effective rate for 2003, the year-enddebt balance is adjusted on a pro-rata basis for the debt raised to financePechiney. This provides a more representative debt level on which interest wasincurred.  Pechiney debt assumed is excluded from the calculation because theinterest cost for the year excludes Pechiney and the debt raised to finance theacquisition is pro-rated because it was only outstanding for a portion of thefourth quarter of 2003. 

In 2004, other expenses(net of other income) of $406 million included: restructuring charges of $105 million mainly related tothe closure of certain packaging operations in the United States and Europe, the Arvida capacity shutdown and the closure of arolled products facility in the United Kingdom;asset impairment charges of $99 million mainly related to two rolling mills inItaly and a rolled products facility in the United Kingdom; foreign exchangelosses of $61 million mainly related to balance sheet translation; a gain of$46 million resulting from a dilution in the Company's interest in ananode-producing operation in the Netherlands; Pechiney integration costs of $38million; and losses of $36 million related to the marking-to-market ofderivatives. In 2003, other expenses (net of other income) of $131 millionincluded: foreign exchange losses of $116 million mainly related to balancesheet translation; a $59-million currency-related gain on the financing of the Pechineyacquisition; a gain of $34 million on the sale of the Company's remainingportfolio investment in NLM; impairment charges of $14 million related tooperations in Canada; an environmental provision of $25 million for a site inthe United States; a $30-million mark-to-market gain on the revaluation ofderivative instruments; and restructuring charges of $10 million for a cableplant in the United States. Other expenses (net of other income) of $119million in 2002 included a $100-million provision for a ruling on a contract disputewith Powerex, an affiliate of B.C. Hydro; a mark-to-market gain of $60 millionon the revaluation of derivatives; foreign exchanges losses of $51 million mainlyarising from balance sheet translation; and a gain of $37 million on the saleof part of the Company's portfolio investment in NLM.   

 

8
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**Income Taxes**

Income tax expense of $375 million for 2004represented an effective tax rate of 64%, compared to 52% in 2003 and 43% in 2002.  This comparesto a composite of the applicable statutory corporate income tax rate of 32%(39% in 2003 and 2002).  In 2004, the difference between the effective andcomposite tax rates was principally due to the non-tax deductible charges of $154million for the impairment of goodwill and $66 million for asset impairments,as well as non-deductible foreign currency balance sheet translation losses.  In2003, the difference in the rates was primarily due to foreign currency balancesheet translation losses, partially offset by one-time tax benefits in Australia, investment and other allowances and lower tax rates in foreign jurisdictions. The tax benefits in Australia relate to the implementation of a taxconsolidation regime together with the conversion to the U.S. dollar as the taxreporting currency, which the Company adopted at the earliest opportunity toreduce foreign currency volatility.  As a result of these changes inlegislation, the Company was able to reset the tax value of certain assets in Australia and record a deferred tax benefit of $74 million in 2003.  After certainuncertainties in the application of the legislation were resolved, additionaltax benefits of $23 million were recorded in 2004.  In 2002, the difference inthe rates was primarily due to currency related items and the impact ofpotential future tax benefits that were not recognized since their realizationwas not likely, partially offset by lower tax rates in foreign jurisdictionsand investment and other allowances.  

A full reconciliationbetween the Canadian composite statutory tax rate and the effective tax rate ispresented in note 11, Income Taxes, of the consolidated financialstatements.

**Goodwill**

At the end of 2004, Alcanhad $5,496 million of goodwill on its balance sheet, compared to $4,686 millionat the end of 2003 and $2,136 million at the end of 2002.  The increase in 2003mainly reflected the year-end acquisition of Pechiney, which was accounted forusing the purchase method.  The balance sheet of Pechiney was included inAlcan's consolidated financial statements as of December 31, 2003, based on apreliminary valuation and purchase price allocation. In the fourth quarter of2004, Alcan finalized the purchase accounting related to the acquisition, whichresulted in a further increase in goodwill.   

In 2002, the Companyadopted new accounting standards on goodwill. As a result of this change,goodwill is no longer amortized but carried at the lower of carrying value andfair value. Goodwill is tested for impairment on an annual basis.  In 2004, theCompany's review of goodwill resulted in an impairment charge of $154 millionmainly related to European fabricating assets acquired as part of Pechiney. Atthe time of acquisition, Pechiney's value was based on prevailing exchangerates and metal prices combined with Pechiney's internal planning assumptions.Since that time, the strong appreciation of the euro and aluminum prices,together with a reassessment of plan assumptions, have adversely affected thevalue of several fabricating facilities in the Engineered Products group,mainly in Europe.  In 2003, the review of goodwill resulted in an impairmentcharge of $28 million related to extrusions operations in Europe.  In 2002, animpairment charge of $748 million was recorded as a cumulative effect of anaccounting change as of January 1, 2002.  This non-cash adjustment reflectedthe deterioration in end-market conditions in the period from the algroupintegration in October 2000 to January 1, 2002, and did not reflect a change inthe growth prospects of the Company.

**LIQUIDITY AND CAPITAL RESOURCES**

**Operating Activities**

***Cash Flow from Operating Activities and Free Cash Flow from ContinuingOperations***
*(in millions of US$)*
**2004**

2003

2002
Cash flow from operating activities in continuing operations
**1,762**

1,801

1,519

Free cash flow from continuing  operations

**233**

752

689
**Cash flow from operating activities continued at close  to record levels in 2004.**
 

***Free Cash Flow from Continuing Operations ****(in millions of US$)*

**2004**

2003

2002

** **

Cash  flow from operating activities in continuing operations

**1,762**

1,801

1,519

Dividends

** **

    Alcan shareholders (including preference)

**(227)**

(200)

(197)

    Minority interests

**(13)**

(11)

(6)

Capital  expenditures in continuing operations

**(1,289)**

(838)

(627)

**Free Cash Flow from Continuing Operations**

**233**

752

689

Cash flow from operatingactivities in continuing operations was $1,762 million in 2004, only slightlylower than the record cash flow achieved in 2003.  On a cash basis, operatingworking capital increased by $178 million in 2004 mainly reflecting an increase inreceivables of $435 million, partially offset by an increase in payables of $233million.  The higher level of receivables and operating working capital at theend of 2004 mainly reflected the impact of rising metal prices, which were up onaverage 21% from the prior year.   In 2003, a focused attention on costs,stringent management of working capital and a disciplined approach to capitalspending yielded record cash flow from operating activities in continuingoperations of $1,801 million, an increase of 19% over 2002.  Management actionresulted in operating working capital, most notably receivables, being drawndown by $469million in 2003, following a reduction of $47 million in 2002.

 

9
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Free cash flow fromcontinuing operations consists of cash from operating activities in continuingoperations less capital expenditures and dividends. Management considers thisrelevant information for investors as it provides a measure of the cashgenerated internally that is available for investment opportunities and debtservice. GAAP does not prescribe a methodology for computing free cash flowfrom continuing operations and, accordingly, information may not be comparableto similar measures published by other companies.  Free cash flow fromcontinuing operations was $233 million in 2004, a decrease of $519 million, or 69%, comparedto 2003.  The decrease in 2004 is mainly attributable to a higher level ofcapital spending compared to 2003.  Capital expenditures are further discussedunder Investment Activities. Free cash flow from continuing operations was arecord $752 million in 2003, an increase of $63 million, or 9%, compared to2002, resulting from the record level of cash flow from operating activitiesand disciplined capital spending.  

Cash and time deposits incontinuing operations totaled $184 million at the end of 2004, down from $686 million at theend of 2003 and up from $97 million at the end of 2002. The decrease in 2004resulted from a focus on tight cash management.  The increase in 2003 includes$243 million of cash assumed on the acquisition of Pechiney, as well as fundsheld for the purchase of the remaining shares of Pechiney subsequent toyear-end. 

**Financing Activities**

***Total Borrowings andEquity***

**2004**

2003

2002

Borrowings * (US$M)

**9,405**

9,543

3,751

Equity ** (US$M)

**10,962**

10,680

8,442

Debt as a percentage of invested capital (%)

**46**

47

31

** Includes borrowings of operations held for sale.*

*** Includes minority interests and preference shares.*

**With the spin-off of Novelis, borrowings were reduced by  $2.5 billion in the first quarter of 2005.**

Cash used for financingactivities in continuing operations was $541 million in 2004, which mainlyreflected the repayment of some short-term borrowings.  In 2003, the Companygenerated $3,453 million of funds from financing activities in continuingoperations as a result of the issuance of new debt in connection with theacquisition of Pechiney.  In 2002, cash used for financing activities incontinuing operations was $673 million, which reflected the net repayment oflong and short-term debt.   

Over the last three years,Alcan has paid a quarterly dividend of 15 cents per common share.  Totaldividends paid were  $240 million in 2004 compared to $211 million in 2003 and $203million in 2002.

In April 2004, the Companyobtained a $3-billion, multi-currency, five-year, committed global creditfacility with a syndicate of international banks.  The facility is availablefor general corporate purposes. In July 2004, the Company entered into a $500-million, 18-month****term loan with a group of international banks. Proceeds from the loan were used to refinance      $500-million, callabletwo-year floating rate notes, issued in December 2003 by a wholly-ownedsubsidiary, Alcan Aluminum Corporation.  In December 2004, the Company entered intoan additional $500-million, short-term loan with a group of international banksthat was used to refinance one-year floating rate notes which were also issuedby Alcan Aluminum Corporation in 2003.  Both term loans have since been repaidin 2005.  In December 2004, a wholly-owned subsidiary, Pechiney Pacific (Pty)Ltd., obtained a $125-million, short-term committed credit facility from agroup of international banks.

In May 2003, the Companyissued $500 million of 4.5% global notes, due May 15, 2013.  The proceeds werepartially used to fund the FlexPac acquisition, with the remainder used to refinancematuring long-term debt.  In December 2003, the Company completed a $2.25-billion,four-tranche debt offering in the United States to partially fund the cash portionof the Pechiney acquisition.  The debt offering consisted of two global notesissues, one for $500 million with a coupon of 5.2%, due January 15, 2014, andthe other for $750 million with a coupon of 6.125%, due December 15, 2033, aswell as the issuance of two tranches of floating rate notes:  $500-million,one-year notes and $500-million, two-year callable notes.  The floating ratenotes, fully and unconditionally guaranteed by the Company, were issued by itswholly-owned subsidiary, Alcan Aluminum Corporation. The remaining fundingrequirements for the acquisition were obtained through a combination ofcommercial paper, available cash and a short-term bank loan. In addition to theissuance of new debt, the Company has also assumed the debt of companiesacquired, which amounted to approximately $2.1 billion in 2003.  

In January 2002, theCompany redeemed all of its $150-million, 8.875% debentures originally due onJanuary 15, 2022, for 104.15% of their face value. A loss of $6 million wasrecognized in the first quarter of 2002. In September 2002, the Company issued$500 million of 4.875% global notes, due September 15, 2012. Net proceeds wereused to repay existing long-term debt and commercial paper borrowings. 

 

10
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Alcanhas access to $3.1 billion of committed credit facilities, which are usedprimarily to support Alcan's commercial paper programs.  As of the date of thisreport, Alcan has $1.6 billion of commercial paper outstanding.  The Companybelieves that the cash from continuing operations together with availablecredit facilities will be more than sufficient to meet the cash requirements ofoperations, planned capital expenditures, dividends and any short-term debtrefinancing requirements. In addition, the Company believes that its ability toaccess global capital markets, considering its investment grade credit rating,provides any additional liquidity that may be required to meet unforeseen events.During 2004,Standard & Poor's Rating Services maintained its rating on Alcan'slong-term debt at A- and its rating on short-term debt at A2.  Comparable ratingsfrom Moody's Investors Services were Baa1 and P2, respectively.  

Debt as a percentage ofinvested capital does not have a uniform definition. Because other issuers maycalculate debt as a percentage of invested capital differently, Alcan'scalculation may not be comparable to other companies' calculations. Thereconciliation below explains the calculation. The figure is calculated bydividing borrowings by total invested capital. Total invested capital is equalto the sum of borrowings and equity, including minority interests. The Companybelieves that debt as a percentage of invested capital can be a useful measureof its financial leverage as it indicates the extent to which it is financed by debtholders. The measure is widely used by the investment community and creditrating agencies to assess the relative amounts of capital put at risk bydebtholders and equity investors.

Debt as a percentage ofinvested capital was 46% atthe end of 2004, down slightly from the rate at the end of 2003 and up from 31%at the end of 2002. The significant increase in the ratio in 2003 was mainlydue to the impact of new debt issuances and debt assumed on the Pechineyacquisition. In line with its objective to maintain a solid investment gradecredit rating, Alcan has a target debt to capitalization ratio of 35%. Thespin-off transaction on January 6, 2005 will help accelerate the achievement ofthis target.

***Debt as a Percentage of Invested Capital****As at December 31 	(in millions of US$)*

**2004**

2003

2002

Debt

    Short-term borrowings

**2,486**

1,764

378

    Debt maturing within one year

**569**

341

249

    Debt not maturing within one year

**6,345**

7,437

3,120

    Debt of operations held for sale

**5**

1

4

Total  debt

**9,405**

9,543

3,751

** **

Equity

** **

    Minority interests

**236**

403

150

    Shareholders' equity

** **

       Redeemable non-retractable preference shares

**160**

160

160

       Common shareholders' equity

**10,566**

10,117

8,132

Total  equity (including minority interests)

**10,962**

10,680

8,442

** **

Invested  capital

**20,367**

20,223

12,193

** **

** **

** **

**Debt as a Percentage of Invested Capital (%)**

**46**

47

31

**Investment Activities**

Cash used for investmentactivities in continuing operations was $1,728 million in 2004 compared to$4,594 million in 2003 and $860 million in 2002.  The higher level ofinvestment activity in 2003 principally reflected the acquisition of a 92.2%stake in Pechiney.  In February 2004, Alcan completed the acquisition of thecompany with the purchase of the remaining outstanding shares, such that it isnow a wholly owned subsidiary.  For further details, refer to the section BusinessAcquisitions below.  

***Capital Expenditures andDepreciation in Continuing Operations****(in millions of US$)*

**2004**

2003

2002

Capital expenditures for continuing  operations 

**1,289**

838

627

Depreciation and amortization expense

**1,337**

862

772

**For the last three years, the Company has maintained  capital expenditures below the level of depreciation.**

***Capital Expenditures***Capital expenditures for2004 were $1,289 million, up from $838 million in 2003 and $627 million in2002.  The increase in 2004 mainly reflects the inclusion of capitalexpenditures by former Pechiney business units as well as spending on the Govealumina refinery expansion, which began in the fall of 2004.  Nevertheless,capital spending remained below the level of depreciation and amortization expensefor a third consecutive year, a reflection of the Company's emphasis onfinancial discipline.  Spending in 2003 increased over 2002 largely due to the 307-kt expansion of theAlouette smelter in Quebec, in which Alcan has a 40% stake. By the end of 2004, theexpansion was virtually complete at a total cost to Alcan of approximately $400million of which about $207 million was spent in 2004.  In the third quarter of2004, Alcan announced that it would proceed with the 1.7-Mt expansion of its2.1-Mt Gove alumina refinery in Australia. The expansion, which is expected tocost $1.3 billion, should commence operations by early 2007.  

 

11
****
In 2005, Alcan's capital spending isexpected to be approximately $1.9 billion, reflecting additional spending onthe Gove expansion. Excluding Gove, the remaining capital expenditures areexpected to be in line with depreciation.  Of the remaining capitalexpenditures, about 75% are considered to be sustaining expendituresrequired to maintain the quality of the asset base or meet environmentalregulations, with the balance mainly targeting smaller, profitable growth initiatives.

***BusinessAcquisitions***Alcan has taken several importantstrategic steps to significantly transform its portfolio towards higher growthand higher value added businesses.  Most notable among these steps were theacquisition of Pechiney at the end of 2003 and the spin-off of the rolledproducts businesses, which was completed in early 2005.  Cash used for acquisitionswas $466 million in 2004 compared to $3,819 million in 2003 and $346 million in2002.  The higher level in 2003 mainly reflected the acquisition of Pechiney,but also a number of smaller investments. 

As discussed earlier, inFebruary 2004, Alcan acquired the remaining outstanding shares of Pechiney forcash. In March 2004, the Company finalized the joint venture agreement withQingtongxia Aluminium Group Company Limited and Ningxia Electric PowerDevelopment and Investment Co. Ltd. Under the agreement, Alcan has invested$110 million as at December 31, 2004, for a 50% participation in a 150-ktmodern pre-bake smelter located in the Ningxia autonomous region of China. 

On December 15, 2003,Alcan acquired 92.2% of Pechiney, a French *société anonyme* withinternational operations in three core businesses: primary aluminum, aluminumconversion and packaging. The total consideration for this ownership interestwas $5.5 billion, which consisted of $3.7 billion in cash (including nettransaction costs of $79 million and net of cash and time deposits acquired of$243 million), $1.7 billion in Alcan common shares (42 million shares at $39.63per share) and $80 million for Pechiney stock options held by theemployees.  In addition, the Company assumed from Pechiney total debt of $2.1billion. In early February 2004, Alcan took a number of steps to acquire theremaining shares of Pechiney for cash.  Also in 2003, the Company executedseveral value-creating transactions including the acquisition of a packagingbusiness, VAW Flexible Packaging (FlexPac),at a cost of $330 million and two composite product businesses, BaltekCorporation (Baltek) and Uniwood/Fome-Cor (Gator-Cor), at a cost of $38 millionand $95 million, respectively. These acquisitions built upon Alcan's alreadystrong market positions by extending product range and geographic reach. 

During 2002, the Companyacquired a 40% joint venture interest in the Aluminerie Alouette consortium intwo transactions. The first tranche of 20% was purchased from the Sociétégénérale de financement du Québec (SGF) and the second tranche of 20% from theCorus Group plc at costs of $172 million and $171 million, respectively.

In February 2005, Alcansigned a Shareholders' Agreement with Oman Oil Company S.A.O.C. (OOC) and AbuDhabi Water and Electricity Authority (ADWEA) for the development of a proposed325-kt/y aluminum smelter in Sohar, Oman. Under the agreement, Alcan will havea 20% equity interest in the smelter with each of the other two partners holdinga 40% share.  

**Business Divestments**Proceeds from the disposalof businesses, investments and other assets totaled $35 million in 2004compared to $63 million in 2003 and $113 million in 2002.  Assets and businessesdisposed of in 2004 included the packaging operations of the Boxal Group andSuner Cartons, certain assets of the ores and concentrates trading operations,including the lead and zinc trading business.  Proceeds on the sale of thesebusinesses are included in cash from (used for) investment activities indiscontinued operations.  In December 2004, the Company announced that it hadreached agreements for the sale of its controlling interest in Aluminium deGrèce S.A. (AdG) and Pechiney Électrométallurgie (PEM).  OnMarch 15, 2005, Alcan completed the sale of AdG.

In 2003, asset disposalsincluded the Borgofranco power station in Italy, the Banbury laboratory and assetsassociated with the Burntisland specialty alumina plant, both located in the United Kingdom, as well as the Company's remaining investment in NLM.  In addition, theCompany sold businesses that were classified as discontinued operations in itsconsolidated financial statements. These included the Fibrenyle packagingplants in the United Kingdom and the Pieve extrusions operation in Italy. Proceeds on the sale of these businesses are included in cash from (used for)investment activities in discontinued operations. Disposals in 2002 mainlycomprised moulded glass operations in the United States and China, rolled product circles operations in Italy, three Company-owned cargo ships and more thanhalf of the Company's investment in NLM. 

***Novelis Spin-Off***On January 6, 2005, Alcan completedthe spin-off of Novelis to its shareholders. Novelis consists of substantiallyall of the aluminum rolled products businesses held by Alcan prior to its 2003acquisition of Pechiney, together with some of Alcan's alumina and primarymetal-related businesses in Brazil, which are fully integrated with the rolledproducts operations there, as well as four former Pechiney rolling facilitiesin Europe.  The spin-off allows Alcan to focus on its higher growth, highermargin businesses and satisfies certain regulatory requirements associated withthe acquisition of Pechiney, including the requirement to divest either ofNeuf-Brisach or the AluNorf/Göttingen/Nachterstedt rollingfacilities in Europe and the Ravenswood facility in the United States.  

 

12
** **
The spin-off transaction resulted in apayment to Alcan by Novelis of approximately $2.6 billion shortly following theeffective date of the spin-off to settle the accounts between the two parties. These proceeds were usedto reduce two term loans and Alcan's commercial paper balance included in short-termborrowings and debt not maturing within one year in Alcan's pro forma consolidatedfinancial statements as at December 31, 2004. As a result of this payment,together with the impact of the transfer of $300 million of other debt to Novelisand the termination of the receivables securitization program, Alcan's debt hasbeen reduced by $2.5billion in its pro forma condensed consolidated balancesheet as at December 31, 2004. The final cash settlement between Alcan and Novelis related to the spin-off will happen by the end of the firstquarter of 2005 and is expected to result in a cash outflow of approximately $100million from Alcan to Novelis.  

For further details, refer to note 8,Acquisition of Pechiney, note 7, Spin-Off of Rolled Products Businesses and note 28, Commitmentsand Contingencies, of the consolidated financial statements.

**Contractual Obligations**The Company has futureobligations under various contracts relating to debt payments, capital andoperating leases, long-term purchase arrangements, pensions and otherpost-employment benefits, and guarantees.  The table below provides a summaryof these contractual obligations (based on undiscounted future cash flows) asat December 31, 2004.  There are no material off-balance sheet arrangements.

***Contractual Obligations ****As at December 31, 2004 	(in millions of US$)*

**Payments due by period**
**Total**

2005

2006-2007

2008-2009

2010 and thereafter

Long-term  debt (1)

**6,914**

569

1,559

525

4,261

Capital  leases (2)

**34**

8

12

7

7

Operating  leases (2)

**345**

83

115

62

85

Purchase  obligations (2)

**6,324**

885

1,176

1,163

3,100

Unfunded  pension plans (3)

**2,845**

76

157

163

2,449

Other  post-employment benefits (3)

**2,795**

72

148

161

2,414

Funded  pension plans (3) (4)

**(4)**

206

421

434

(4)

Guarantees  (2)

**28**

15

-

-

13
**     Total**
**1,914**

**3,588**

**2,515**

(1)  * Refer to note 23, Debt Not MaturingWithin One Year, of the accompanying consolidated financial statements.*

(2)  * Refer to note 28, Commitments andContingencies, of the accompanying consolidated financial statements.*

(3)  * Refer to note 32, Post-Retirement Benefits, of theaccompanying consolidated financial statements.*

(4) * Pension funding generally includesthe contribution required to finance the annual service cost, except where theplan is largely overfunded, and amortization of unfunded liabilities overperiods of 15 years, with larger payments made over the initial period whererequired by pension legislation.  Contributions depend on actual returns onpension assets and on deviations from other economic and demographic actuarialassumptions.  Based on management's long-term expected return on assets, annualcontributions for years after 2009 are projected to be in the same range as inprior years and to grow in relation with payroll.*

**ENVIRONMENT,HEALTH AND SAFETY (EHS)**

*EHS FIRST*, a core component ofAlcan's Integrated Management System (AIMS), ensures that environment, healthand safety performance is a top priority across all of Alcan's businesses and alllevels of the organization, from corporate offices to the shop floor.  Withthis company-wide commitment, Alcan strives to be a recognized industry leaderin EHS excellence.  *EHS FIRST* is more than just a system; it representsan attitude, a mindset and an acceptance by all employees of theirresponsibility and accountability towards implementing EHS best practicesaround the globe. 

*EHS FIRST* requires all sites to becertified under ISO 14001, an international environmental management standard,and OHSAS 18001, an international occupational health and safety managementstandard. In addition, Alcan imposes stringent requirements on its businesses.For instance, newly acquired facilities must be fully compliant with allrequirements within two years of their acquisition. By the end of 2004, 60% ofthe Company's facilities were ISO 14001 certified and 53% of the facilitieswere OHSAS 18001 certified. All wholly-owned facilities of Alcan prior to theacquisition of Pechiney are certified.  

Since the 1990s, Alcan hasbeen actively engaged in the reduction of greenhouse gases (GHG) and in 2000introduced TARGET, a program for setting voluntary reduction objectives,managing risks and reporting performance. In 2004, Alcan introduced an *EHSFIRST* performance data management system to standardize data gathering andreporting at all levels of the organization. A comprehensive overview of *EHSFIRST* performance, including GHG data, can be found in the 2004Sustainability Report available on the Company's Web site.

 

13
** **
The precautionaryprinciple inherent in *EHS FIRST* is designed to efficiently minimize therisks of new EHS-related liabilities emerging from Alcan's present or futureactivities. For liabilities originating from past Alcan activities as well asits acquired industrial activities, an Alcan-wide program has been standardizedin *EHS FIRST* to systematically manage liabilities in voluntary programsand in co-operation with local authorities.

Alcan's capitalexpenditures to protect the environment and improve working conditions were $79million in 2004 and are projected to be $131 million in 2005 and $157 millionin 2006. In addition, expenditures charged against income for environmentalprotection were $175 million in 2004, and are expected to be $218 million in2005 and $193 million in 2006.

For the fourth consecutiveyear, Alcan was selected as a member of the Dow Jones Sustainability WorldIndex. The Index recognizes Alcan as leading the aluminum industry in criteriaranging from code of conduct, risk and crisis management, environmental policyand management, human capital development and standards for suppliers. Inaddition, the Company's high ranking in the Index is a testament to how wellAlcan has set industry standards in managing climate change issues, such as thedevelopment of its carbon dioxide (CO2) inventory and GHG strategy.

**OPERATING SEGMENT REVIEW**

Throughout 2004, theCompany had six business groups or operating segments: Bauxite and Alumina;Primary Metal; Rolled Products Americas and Asia; Rolled Products Europe;Engineered Products; and Packaging. This structure included the fullyintegrated former businesses of Pechiney. 

The Company's measure ofthe profitability of its operating segments is referred to as business groupprofit (BGP).  BGP comprises earnings before interest, income taxes, minorityinterests, depreciation and amortization and excludes certain items, such ascorporate costs, restructuring costs (relating to major corporate-wideacquisitions or initiatives), impairment and other special charges, and pensionactuarial gains, losses and other adjustments, that are not under the controlof the business groups or are otherwise excluded from the measurement of theirprofitability.  These items are generally managed by the Company's corporatehead office, which focuses on strategy development and oversees governance,policy, legal, compliance, human resources and finance matters.

Financial information forindividual business groups presented in this section includes the results of certainjoint ventures on a proportionately consolidated basis, which is consistentwith past practice under Canadian GAAP and reflects the way the business groupsare managed. However, with the adoption of U.S. GAAP, the BGP of these jointventures is now removed under the caption "Equity-accounted joint ventureeliminations" and their net after-tax results are reported as equity income.

The change in the fairmarket value of derivatives has been removed from individual business groupresults and is shown on a separate line in reconciling to income fromcontinuing operations.  This presentation provides a more accurate portrayal ofunderlying business group results and is in line with the Company's portfolioapproach to risk management.  

The BGPs for prior periodshave been restated to reflect the reclassification of the foil-rollingoperations from the Packaging group to the Rolled Products Europe group.

Additional operatingsegment information is presented in note 34, Information by Operating Segments,of the consolidated financial statements.  The information that follows isreported by operating segment on a stand-alone basis. Transactions betweengroups are conducted at arm's length and reflect market prices. Accordingly,earnings from Bauxite and Alumina as well as from Primary Metal operationsinclude profit on alumina or metal produced by the Company, whether sold tothird parties or used in the Company's fabricating and packaging operations.Earnings from the downstream operations represent only the value-added portionof the profit from rolled products, engineered products and packaging products.

On January 6, 2005, Alcancompleted the spin-off of its rolled products businesses into a new,independent company named Novelis Inc. The new company comprises substantiallyall of the aluminum rolled products businesses held by Alcan prior to its 2003acquisition of Pechiney, together with some of Alcan's alumina and primarymetal-related businesses in Brazil, which are fully integrated with the rolledproducts operations there, as well as four former Pechiney rolling facilitiesin Europe, whose end-use markets and customers are similar to those of Novelis.Also included within Novelis are the assets, liabilities and operationsrelating to portions of the Sierre facility, located in Switzerland. 

Following the spin-off, Alcan willcontinue to have five aluminum rolled products facilities in four countries.The rolled products facilities retained by Alcan are Neuf-Brisach and Issoire,both in France, which are part of Engineered Products; Sierre in Switzerland, which is included in Engineered Products; Singen in Germany, which is a shared facilitybetween Engineered Products and Packaging; and Ravenswood in the United States, which is included in Engineered Products.

Financial and operating informationfor businesses transferred to Novelis in January 2005 are included in Alcan'sconsolidated financial statements and MD&A for 2004 and prior periodspresented.  

 

14
** **
Effective in 2005, Alcan's operatingmanagement structure comprises four business groups or operating segments: Bauxite and Alumina; Primary Metal; Engineered Products and Packaging. 

***Third-Party Revenues byBusiness Group - 2004***

*Bauxite and Alumina*

*6%*

*Primary Metal*

*17%*

*Engineered Products*

*21%*

*Packaging*

*25%*

*Rolled Products Americas and Asia*

*18%*

*Rolled Products Europe*

*13%*

*Total*

*100%*

**Bauxite and Alumina**The Bauxite and Alumina(B&A) group owns or is a joint-venture partner in seven bauxite mines anddeposits and ten alumina or specialty alumina refineries, excludingdiscontinued operations. It also purchases bauxite and alumina from thirdparties, and is a recognized leader and supplier of alumina refinerytechnology. Approximately 60% of the alumina produced and purchased is used to meetAlcan's own smelting requirements and the balance is sold to third parties.With the acquisition of Pechiney at the end of 2003, the group's aluminahydrate production capacity increased from 4.3 Mt/y to approximately 5.8Mt/y.  Over the last several years, the group has substantially improved itscompetitive position by successfully repositioning its production base aroundlow-cost bauxite and alumina assets in Australia.  The recently startedexpansion of the Gove refinery in Australia, discussed below, will furtherenhance the group's alumina cost position, firmly placing a majority ofproduction in the lowest quartile of the industry cost curve.

In November 2004, Alcansigned a protocol of negotiation with Alcoa World Alumina LLC and the Governmentof the Republic of Guinea for the development of a 1.5-Mt/y alumina refinery. A final decision on this project is expected within the next       12 months,following completion of a detailed feasibility study.

As a result of avalue-based review of its portfolio of assets, Alcan announced in December 2004that it had entered into a binding agreement for the sale of its controllinginterest in Aluminium**de**Grèce**S.A. (AdG).  As a consequence, AdG has beenreclassified as a discontinued operation and is therefore excluded from theoperating and financial data for the group.  On March 15, 2005, Alcancompleted the sale of AdG. 

***Sales and Production - B&A***

**2004**

2003

2002

Third-party sales and operating  revenues (US$M)

**1,501**

539

440

Intersegment sales and operating revenues (US$M)

**1,596**

873

758

Alumina hydrate production (kt)

**5,775**

4,299

4,271

**Higher production in 2004 mainly reflected the  addition of former Pechiney operations.**

In 2004, all of thegroup's alumina refineries achieved record production levels. In 2003, recordproduction levels at the Gove refinery together with higher production levelsat the Queensland Alumina joint venture in Australia were partially offset byproduction lost due to the 2002 closure of the Burntisland specialty aluminaplant in the United Kingdom.   

In September 2004, Alcanapproved a $1.3-billion investment to expand its Gove smelter-grade aluminarefinery in Australia from about 2.1 Mt/y to approximately 3.8 Mt/y.  Withsignificant efficiency and environmental enhancements integrated into theproject, the Gove mining and alumina operations will be well positioned forsuperior economic, environmental and social performance.  The expansion of therefinery is under way and is slated to be fully operational by 2007.

***BGP - B&A***

**2004**

2003

2002

BGP (US$M)

**464**

191

248

**The addition of former Pechiney operations together  with higher alumina prices contributed to higher BGP in 2004, despite increased  energy costs and negative foreign currency impacts.**

BGP in 2004 increased by$273 million, largely due to the addition of the former Pechiney businesses,which contributed $148 million to BGP, and higher alumina prices. Thesepositive factors were partly offset by the unfavourable impact of higher energyand maritime freight costs, as well as the effect of the weaker U.S. dollar onoperating costs.  While alumina prices were higher in 2003 compared to 2002,BGP in 2003 declined due to higher energy costs and the negative impact offoreign currency movements on balance sheet translation and operating costs. 

 

15
** **
In 2004, strong demandfrom China caused the alumina market to be in short supply, resulting in asharp rise in spot prices.  In addition, long-term contract prices moved up inresponse to rising prices for aluminum on the LME.  Average realized pricesalso increased in 2003 compared to 2002 in line with higher LME prices and atight alumina market.

Average production costsper tonne were 14% higher in 2004 due to the addition of higher-cost Pechineyfacilities, higher maritime freight costs and the impact of foreign currencymovements. Together, these negative factors more than offset ongoing costreduction efforts.  Average production costs per tonne were 7% higher in 2003 comparedto 2002, due to higher energy prices and the weakening U.S. dollar.

Seven alumina refineriesproduce specialty aluminas for a wide array of applications, including solidsurface products, refractory bricks, ceramics, catalysts, absorbents and publicwater treatment programs.  In 2004, operating results for the specialty aluminabusiness were 72% lower than in 2003, mainly due to the impact of formerPechiney plants.  In 2003, operating results were 85% higher than in 2002,largely as a result of the closure of the Burntisland plant in the United Kingdom.

**Primary Metal**Alcan is the secondlargest primary aluminum producer in the world, as well as the recognizedleader and supplier of smelting technology.  With the acquisition of Pechiney,the Primary Metal group operates or has interests in 24 smelters with a totalcapacity of 3.4 Mt/y, excluding discontinued operations.  Approximately50% of its capacity is supplied by Company-owned power, which is a major competitiveadvantage when compared to the industry average of only 20%.  With a sharpfocus on cost reduction, productivity improvement and technology development,Alcan seeks to continuously reinforce its low-cost primary metal position.Approximately 50% of the Company's smelter capacity is in the first quartile ofthe industry cash cost curve, while 75% of the production is at costs which arelower than the world average.  In addition to LME-grade ingot, the Primary Metal groupproduces value-added aluminum in the form of sheet ingot, extrusion billet, rodand foundry ingot for other Alcan plants or third-party customers serving thetransportation, building and construction, consumer goods and machinerymarkets. 

As a result of avalue-based review of its portfolio of assets, Alcan announced in December 2004that it had entered into a binding agreement for the sale of its controllinginterest in Aluminium**de**Grèce**S.A. (AdG).  As a consequence, AdG has beenreclassified as a discontinued operation and is therefore excluded from theoperating and financial data for the group. Likewise, the Company announced inDecember its intention to sell the Pechiney Électrométallurgie ferroalloybusiness.  It has also been reclassified as a discontinued operation. OnMarch 15, 2005, Alcan completed the sale of AdG. 

***Sales and Production****-****Primary Metal***

**2004**

2003

2002

Third-party sales and operating  revenues (US$M)

**4,275**

2,647

2,473

Intersegment sales and operating revenues (US$M)

**4,263**

2,306

2,204

Aluminum production (kt)

**3,382**

2,354

2,238

**Increased sales in 2004 reflects the addition of  former Pechiney smelters together with higher prices for aluminum.**

In 2004, Alcan'sproduction of primary aluminum was approximately one million tonnes higher thanin the prior year, reflecting the addition of former Pechiney facilities, theacquisition of a 50%-interest in a smelter in China and incremental productionimprovements at smelters in the United Kingdom, Iceland, Norway and Canada.During the year, some production was lost due to the closure of Söderberg capacity at the Arvidasmelter and a strike atthe 25%-owned Aluminerie Bécancoursmelter, both situated in Quebec. 

Fourteen of the group'ssmelters set new annual production records in 2004.  Most of Alcan's smelterproduction is in the form of value-added ingot. Record sales levels wereachieved for each of the three major product lines; sheet ingot, extrusionbillet and rod, as well as for remelt ingot. Power generation by the Company'shydroelectric facilities in Quebec also achieved a new record. 

***BGP****-****Primary Metal***

**2004**

2003

2002

BGP (US$M)

**1,518**

814

857

Average realized price (US$/t)

**1,884**

1,605

1,528

LME 3-month aluminum price (US$/t)

**1,721**

1,428

1,365

**Increased BGP reflects the addition of former Pechiney  operations and higher prices, offset in part by adverse currency effects and  higher costs for raw materials.**

In 2004, BGP fromcontinuing operations improved by $704 million, reflecting contributions fromformer Pechiney sites, acquisition synergy benefits, higher metal pricerealizations, an improved product mix and lower foreign currency balance sheettranslation losses. These favourable factors were partially offset by theadverse impact of the weaker U.S. dollar on operating costs, increased costsfor alumina, energy, freight and fuel-related raw materials and costs relatedto the Arvida closure.  For the year, BGP included balance sheet translationlosses of $31 million.

 

16
** **
In 2003, additional salesvolumes, higher metal realizations, a favourable adjustment of $40 million from asset retirementobligations and benefits from profit improvement initiatives were more thanoffset by the negative impact of the weaker U.S. dollar, higher alumina andfuel-related raw material costs, as well as higher pension expenses. For theyear, BGP included balance sheet translation losses of $82 million. 

In April 2004, in linewith Alcan's commitment to economic and environmental sustainability, the 90kt/y of Söderberg capacity at the 60-year-old Arvida smelter in Quebec, was permanently closed. The shutdown was completed on schedule and on budget.

In June 2004, the Candongahydro power plant in Brazil, with an installed capacity of 140Mw, commencedoperation. Alcan participates equally in the facility with CVRD (Companhia Valedo Rio Doce). 

Following a five-monthstrike at the 25%-owned Bécancour smelter in Quebec, a new collective labouragreement was signed in November 2004.  Two of the three potlines that had beenshut down were restarted in December 2004.  The smelter is expected to returnto full operation by April 2005. 

Work on the expansion ofthe Alouette smelter in Quebec, in which Alcan has a 40% interest, is virtuallycomplete. The first pots were operational in December 2004 and fullproduction is expected by the fall of 2005. The expansion, of which Alcan'sshare of the total cost is approximately $400 million, will increase thecapacity of the smelter from 243 kt/y to 550 kt/y. The project is ahead ofschedule and on budget. 

Detailed engineeringstudies and project cost evaluations are underway for an 80-kt/y spentpotlining treatment facility, which is expected to be built in the Saguenay*-* Lac-Saint-Jean region in Quebec using Alcan technology.  Spent potlining, which is designated a hazardous waste, isthe used refractory lining of smelter pots that is removed at the end of thepotlining's service life.

At the51.55%-owned Tomago smelter in Australia, which previously had a total capacityof 460 kt/y, work is essentially complete on a project to increase smeltercapacity by 65 kt/y through amperage increase and process improvements. Theproject is ahead of schedule and on budget. 

In June 2004,Alcan announced the signing of a Memorandum of Understanding with the Oman OilCompany S.A.O.C. (OOC) and the Abu Dhabi Water and Electricity Authority(ADWEA) for a 20% equity interest in a proposed smelter in Sohar, Oman.  In February 2005, a Shareholders' Agreement was signed with OOC and ADWEA, each owning a 40%share, for the development of the proposed 325-kt/y aluminum smelter project.Under a technology transfer agreement, Alcan will provide Sohar AluminiumCompany L.L.C. with a license and related technical services necessary toimplement Alcan's AP35 Technology. ADWEA will be providing technical servicesand management support for the power plant. Alcan would also have the right toacquire up to 60% of a planned second potline of similar capacity.  Final decisionson financing and construction are expected in the second half of 2005.Construction would begin shortly thereafter with full production expected by2008. 

A feasibilitystudy for the construction of a new aluminum smelter with the South Africangovernment and their Industrial Development Corporation was launched. The focusof this new study will be the use of the highly efficient and advanced AP30 orAP35 smelting technologies.

In2003, Alcan signed a joint venture agreement with the Qingtongxia Aluminium GroupCompany Limited and the Ningxia Electric Power Development and Investment Co.Ltd. Under the agreement, Alcan acquired 50% participation and a secure powersupply in an existing 150-kt/y modern pre-bake smelter situated in the Ningxiaautonomous region of China. Following Chinese government approval, the jointventure became effective June 2004. Alcan has the right to acquire up to an 80%interest in a 250-kt/y potline that is currently under construction. 

**Engineered Products**

The Engineered Products(EP) group comprises a portfolio of businesses that provide innovative, highvalue-added product solutions for customers in a wide range of marketsincluding aerospace, automotive, mass transportation, architectural and displaymaterials.  The group manufactures aluminum products such as soft and hardalloy extrusions, sheet, plate, castings, cable, rod and strip, as well ascomposite materials such as balsa-core, aluminum-plastic, fibre-reinforcedplastic and foam-plastic for a broad range of applications.  

In 2004, the Company'sannual testing of goodwill resulted in an impairment charge of $154 million relatedto several fabricating facilities in the EP group, mainly in Europe, acquiredas part of Pechiney. At the time of acquisition, the value of these assets was basedon prevailing exchange rates and metal prices combined with Pechiney's internalplanning assumptions. Since that time, the strong appreciation of the euro andaluminum prices together with a reassessment of plan assumptions haveadversely affected these values.  Nonetheless, the business fundamentals andgrowth prospects for the affected assets remain sound.  This non-cashimpairment charge is not reflected in BGP for the group.

 

17
** **
***Sales and BGP****-****Engineered Products***

**2004**

2003

2002

Third-party sales and operating  revenues (US$M)

**5,162**

1,760

1,601

BGP (US$M)

**324**

103

100

**Increased sales in 2004 reflects the addition of  former Pechiney businesses, most notably aerospace.**

In 2004, sales andoperating revenues were $5.2 billion, up $3.4 billion from the prior year duein large part to the addition of former Pechiney businesses. Excluding the $3-billion impact of Pechiney, revenuesincreased 21% as the group benefited from price increases, higher volumes andfavourable foreign currency exchange effects. BGP was up $221 million over2003, of which $203 million was due to Pechiney.  Excluding the impact ofPechiney, BGP rose 17% despite higher raw material, integration andrestructuring costs. 

In 2003, sales and BGPwere 10% and 3% higher, respectively. Despite difficult conditions forextrusions and distribution markets in Europe and for the cable market in North America, cost reductions across all businesses helped to mitigate the impact of theweak economic environment and higher costs for raw materials.  The group'sperformance also benefited from the acquisitions of Baltek Corporation (Baltek)and Uniwood/Fome-Cor, since renamed Alcan Gator-Cor (Gator-Cor).

***Engineered Products Revenues by Market - 2004***

*Aerospace, Transportation and Industry (ATI)*

*22%*

*Automotive Structures*

*3%*

*Cable*

*11%*

*Composites*

*11%*

*Extruded Products*

*15%*

*Alcan International Network (AIN)*

*12%*

*Alcan Service Centres (ASC)*

*8%*

*Specialty Sheet*

*15%*

*Ventures*

*3%*

*Total*

*100%*

*** ***

***Engineered ProductsBusiness Units***The Aerospace,Transportation and Industry (ATI) business unit, which accounted for 22% of thegroup's sales and operating revenues in 2004, is a new addition following theacquisition of Pechiney. ATI is a key supplier of high value-added sheet, plateand extruded products for the aerospace market, as well as products for marine,transport and industrial applications.  Third-party sales and operatingrevenues were $1,154 million in 2004 led by strong aerospace volumes and higherdemand for plate and coil used in transportation.  The aerospace market isexpected to be a significant source of future volume growth as Alcan is wellpositioned as the lead supplier of aluminum plate for Airbus' new super jumboaircraft, the A380.  

The Automotive Structures businessunit had third-party sales and operating revenues of $164 million in 2004. This unit was reorganized in 2004 to focus on automotive structures and safetysystems.  Two new plants for the manufacture of safety components are under constructionin North America, one beginning production at the end of 2004 and the other inearly 2005. These plants will complement the unit's already strong Europeanmarket position in safety systems for new model cars.

The Cable unit is a fullyintegrated manufacturer of aluminum cable, rod and strip products in North America and supplies many sectors of the electrical industry including utilities,distributors and original equipment manufacturers. The unit had third-partysales and operating revenues of $557 million in 2004, an increase of more than20% compared to 2003, reflecting generally improving market conditions, strongdemand for utility cable, an improved product mix and increased production dueto higher plant utilization rates.

The Composites unitsupplies a wide range of products for customers in the display and graphicarts, architecture, transportation and industrial markets.  Sales and operatingrevenues were $553 million in 2004, up 43% from 2003, reflecting increaseddemand for foam and balsa products and full year revenues from Gator-Cor andBaltek.  In 2003, Alcan acquired Baltek, the world's leading supplier ofbalsa-based structural core materials, and Gator-Cor, one of the largestmanufacturers of foam-based display boards in the U.S.  

The Extruded Productsunit, a leading supplier of extruded products for rail, bus, marine, automotiveand engineering applications, had third-party sales and operating revenues of$748 million in 2004. Through the acquisition of Pechiney, the unit hasincreased its capacity to produce soft alloy extrusions mainly for the transportationand general engineering markets in Europe.  Strong demand for these productshelped to offset slower demand for large profile extrusions for railapplications. During 2004, large profile extrusion operations in Switzerland and Germany were restructured in order to improve their competitive position.

 

18
** **
Alcan InternationalNetwork (AIN), formerly a part of Pechiney's trading activities, was movedunder the management of EP in 2004. AIN is engaged in marketing and commercialagency services for both EP and non-EP entities.  In 2004, AIN had operatingrevenues of $603 million. The unit's profitability is driven by its salesefficiency and market expertise in metals and specialty aluminas. 

Alcan Service Centres(ASC) supply mainly small and mid-sized industrial companies with specialistservices and fabricated products such as sheet, plate, composite materials andextrusions. ASC had third-party sales and operating revenues of  $432 millionin 2004, 63% higher than in 2003. The increase mainly reflected growth in theGerman distribution market. While demand from the transport, building andmoulding markets has improved, demand from the industrial and semi-conductormarkets has weakened. 

In 2004, the SpecialtySheet business unit, comprised of the Neuf-Brisach rolling mill in France, had third-party sales and operating revenues of $790 million. Sales benefited fromstrong demand for can stock and heat exchangers, as well as from favourableexchange rate movements. Effective January 2005, the unit also includes theSingen rolling mill in Germany.

The Ventures business unit is a newentity in EP and is made up of generally smaller businesses offering productslike capacitor foil, refrigerator panels, rail and bus engineering, andcomposite structures for transportation. The Ventures unit had third-partysales and operating revenues of $166 million in 2004.  

**Packaging**Through the acquisitionand successful integration of algroup, VAW Flexible Packaging (FlexPac) andPechiney, Alcan has become a global leader in specialty packaging for the food,pharmaceutical and medical, beauty and personal care, and tobacco marketsthroughout the Americas, Europe and Asia. The Packaging group offers customersa broad range of packaging solutions using a multi-material offering thatincludes plastics, engineered films, aluminum, paper and paperboard, as well asother materials.   Acquisitions have enabled the group to realize significantsynergy benefits, including capitalizing on profitable growth opportunitiescreated by enhanced product ranges, new geographic markets and new customerrelationships. 

***Sales and BGP****-****Packaging***

**2004**

2003

2002

Third-party sales and operating  revenues (US$M)

**6,119**

2,864

2,250

BGP (US$M)

**657**

354

288

**BGP rose sharply in 2004 with the addition of former  Pechiney businesses.**

Third-party sales andoperating revenues were $6.1 billion in 2004, more than double the previousyear's level, mainly reflecting the addition of the Pechiney packagingbusiness.  BGP for 2004 was $303 million higher than in 2003 in large part dueto the contribution of former Pechiney businesses as well as operationalimprovements, synergies and favourable foreign currency impacts.  The increasesin BGP and sales and operating revenues in 2003, as compared to 2002, mainlyreflected the impact of the FlexPac acquisition in April 2003.  

Strong volume growth wasachieved in 2004 across most markets while simultaneously integrating thenewly-acquired businesses. Substantial operating cost reductions, resultingboth from ongoing productivity programs and from the carry-over impact of prioryear restructuring activities, more than offset massive increases in resin pricesin the second half of the year. The full pass-through of these costs into the marketplacewas not possible due to normal repricing time lags.  The pressure on marginsfrom rising raw material costs is expected to continue through much of 2005.

Synergy programs increased2004 results by $70 million as compared to 2003, arising from both the FlexPacand the Pechiney acquisitions. As of year-end 2004, the FlexPac synergyrun-rate was nearly $50 million, well in excess of the original target of $40million. Pechiney synergies are also exceeding expectations, particularly inpurchasing.

Capital spending in 2004was focused on synergy and growth projects identified during the mergerintegration process in the first half of the year. Major projects launched in2004 included facilities for tobacco cartons and beverage labels and newpharmaceutical specialty foil capacity.  In January 2005, the Company announcedit would invest in two new plants for food and tobacco packaging in Russia. Cash outlays for these projects will mainly occur in 2005. Other capital projectswere directly in support of the industrial optimization and consolidationprojects that were part of the synergy programs.

During the year, anoperating working capital initiative was launched in order to implement bestpractice benchmarking across the group. This resulted in a significantreduction in the number of days of sales in operating working capital, asignificant contributor to the group's cash from operations. 

19
******
***Packaging Revenues byMarket****-****2004***

*Food*

*61%*

*Pharmaceutical*

*13%*

*Beauty*

*18%*

*Tobacco*

*8%*

*Total*

*100%*

***Packaging Revenues byRegion****-****2004***

*Europe*

*57%*

*North America*

*37%*

*South America*

*2%*

*Asia*

*4%*

*Total*

*100%*

***Packaging Revenues by Typeof Input****-****2004***

*Plastic*

*59%*

*Aluminum*

*26%*

*Paperboard*

*7%*

*Paper*

*4%*

*Glass*

*3%*

*Steel*

*1%*

*Total*

*100%*

***Packaging Business Sectors***The Packaging group iscomposed of six business sectors: Food Europe, Food Americas, Food Asia, GlobalPharmaceuticals, Global Beauty and Global Tobacco. 

The Food Europe flexiblepackaging market was soft in 2004.  Intense competition, exacerbated by ongoingconsolidation of the customer base, increased tender activity and pricepressure on food manufacturers from the major retail chains. Raw materialprices were sharply higher during the year and proved difficult to fully passthrough to the marketplace despite significant efforts. Food Europe launchedseveral major restructuring and consolidation projects in order to acceleratesynergy benefits and optimize production. Despite lower sales as compared to2003, results improved in 2004 due to realized synergies and improved costproductivity. 

Food****Americas posted strong gains in 2004. Market conditions were positive across most productsand several major operating initiatives were successfully realized, includingthe commercialization of a revolutionary puncture-resistant clear film forwrapping meat. Integration programs to focus food plants and optimize beveragelabel production have progressed rapidly. Key account positions and technologyleadership have been strengthened by the Pechiney acquisition. Pass-through ofraw material price increases is facilitated by existing contractual agreements.

Food Asia's sales grew by 13%, drivenmainly by growing demand from China and a welcome recovery in Indonesia. Profit performance was, however, heavily squeezed by steep raw material price increases. The pass through of higher raw material costs is difficult due to pricecompetition resulting from overcapacity in most Asian markets.

Global Pharmaceutical's performance was drivenprimarily by strong volume and productivity improvements in global flexibles.Profit growth in the other businesses, particularly in North America, has beenrestrained by significantly increased raw material and healthcare costs. Theplastics business was restructured in 2004 with the closure of onemanufacturing site in order to better focus the businesses on its mostprofitable specialty pharmaceutical products and markets.

Global Beauty represents asignificant new segment for Alcan. The business commands a premier worldwidesupply position with the major cosmetics manufacturers across Europe and NorthAmerica and includes low-cost manufacturing sites in Indonesia, China, Brazil and Mexico.  In 2004, the business benefited from important restructuring undertakenin the previous year. Significant positions have been developed in the make-up,skincare and fragrance markets.

Global Tobacco's salesgrew by 7.5% in Europe and 9% in North America in 2004, despite an essentiallyflat worldwide market and a strong consumption decline in the developed world.Carton growth continues to be driven by substitution of soft packs anddevelopment of multinational customers. Construction of a new tobacco cartonproduction facility in St. Petersburg, Russia, will commence early in 2005.

 

20
** **
**Rolled Products**As discussed in theintroduction to the Operating Segment Review of the MD&A, on January 6,2005, Alcan completed the spin-off of substantially all of its rolled products businessesinto a new, independent company named Novelis Inc.  During 2004, the rolledproducts businesses were managed under two separate operating segments within Alcan, Rolled Products Americas and Asia and Rolled Products Europe.

Following the spin-off,Alcan will continue to own five rolled product facilities, which will be underthe management of the Engineered Products group.  Effective for 2005, Alcanwill no longer separately report results for its remaining rolled productsoperations.  

**Rolled Products Americas and Asia (RPAA)**

***Sales and OperatingRevenues****-****RPAA***

**2004**

2003

2002

Third-party  sales and operating revenues (US$M)

**4,388**

3,528

3,396

Sales and operatingrevenues were up 24% in 2004 compared to 2003. Approximately one half of theincrease was the result of higher LME aluminum prices being passed on tocustomers. LME 3-month aluminum prices were up on average 21% compared to ayear ago, reflecting improved aluminum industry fundamentals. The balance ofthe increase in sales and operating revenues largely reflected record shipments,which were up 10% compared to the prior year.  The sales increase in 2003 wasdriven mainly by higher LME prices being passed on to customers. 

***BGP and Shipments****-****RPAA***

**2004**

2003

2002

BGP (US$M)

**398**

344

365

Shipments * (kt)

**1,774**

1,612

1,613

** Includes shipments of rolled products and  conversion of customer-owned metal.*

 
RPAA posted record BGP in2004, a 16% improvement over 2003, driven by record shipments in response tostrengthening market conditions in Asia and North America and market shareimprovements in South America.  The recovery in market price spreads betweenrecycled metal and primary aluminum also added to earnings, but these benefitswere partially offset by the adverse impact of metal price lags, negativeexchange effects due to a weakening U.S dollar as well as higher costs. 

BGP for RPAA in 2003declined by 6% compared to the 2002 performance. While shipments were atall-time highs in Asia and South America, the positive impact was offset byreduced volume in North America.  Benefits from aggressive cost reductionefforts in all regions helped counterbalance higher recycled metal and energycosts, a less favourable product mix and metal price lags, as well as theadverse impact of the strengthening Canadian dollar.  BGP in Asia and South America increased by 86% and 23%, respectively, compared to 2002.

In North America,shipments for 2004 were 7% better than the prior year due to higher volumes inall major end-use markets.  Can stock volumes were up 5% in 2004 compared to ayear ago in an essentially flat market. Automotive sheet sales were a record in2004 as sales of light trucks in the North American market remained strong,despite a 3% decline in overall automobile sales.  Industrial sheet productrevenues improved both in terms of shipments and pricing mainly due to thestronger economy. Foil volumes also increased from 2003 levels with industrialand transportation foil achieving record annual shipments.

South American economiesstrengthened somewhat in 2004.  As the only local can sheet producer, RPAA waswell positioned to grow can sheet sales by 18%, exceeding the improvement inthe overall can market. Overall, shipments reached record levels and were 14%higher than in 2003.

Taking full advantage ofcan sheet qualifications achieved in 2002 and continued improvements inoperating performance in 2004, the Company's rolled products joint venture inKorea capitalized on strong demand, most notably in China, which led to recordproduction and sales volumes.  Total shipments for the year were 15% higherthan the prior year. 

**Rolled Products Europe (RPE)**

***Sales and OperatingRevenues - RPE***

**2004**

2003

2002

Third-party  sales and operating revenues (US$M)

**3,217**

2,458

2,238

In 2004, RPE had sales andoperating revenues of $3.2 billion, representing an increase of 31% compared tothe prior year, and shipments of 982 kt, an improvement of 21% over 2003.  Theimpact of higher LME prices passed on to customers accounted for most of theimprovement in sales and operating revenues, while higher shipments from theacquisition of four Pechiney rolling plants and foreign currency translationeffects accounted for the remaining improvement. 

 

21
** **
In 2003, higher realizedprices, as a result of the stronger euro and a change in business mix, morethan offset the decline in RPE's shipments, leading to higher revenues as comparedto 2002.

***BGP and Shipments****-****RPE***

**2004**

2003

2002

BGP (US$M)

**250**

224

168

Shipments * (kt)

**982**

813

836

** Includes shipments of rolled products and  conversion of customer-owned metal.*

 
During 2004, marketconditions were generally difficult in Europe. The euro continued to strengthenversus the U.S. dollar, slowing down overseas exports. Unemployment remained athigh levels, having a negative impact on domestic spending. This wasparticularly felt in the building and construction, foil and packaging markets,which showed little, if any, growth.

The impact of the weakeconomic environment was less pronounced in the automotive sheet market as itmainly caters to the higher-end car segments.  Demand growth for aluminumautomotive sheet, albeit lower than in previous years, remained a solid 10% in2004.

The market for beveragecan grew by 6% driven by line conversions in Western Europe, with a switch fromsteel to aluminum, and the strong growth for these products in the EasternEuropean countries, in particular in Russia. The market for lithographic sheetcontinued its strong growth observed in previous years, especially in Asia, growing by 7% in 2004.

**RISKS AND UNCERTAINTIES**

For further details, referto note 28, Commitments and Contingencies, note 29, Currency Gains and Lossesand note 30, Financial Instruments and Commodity Contracts, of the consolidatedfinancial statements.

**Risk Management**As a multinationalcompany, which is to a large degree engaged in a commodity-related business,Alcan's financial performance is heavily influenced by fluctuations in theprice of aluminum and exchange rates. In order to reduce a portion of theassociated risks, the Company uses a variety of financial instruments andcommodity contracts. Clearly defined policies and management controls governall risk management activities. Transactions in financial instruments for whichthere is no underlying exposure to the Company are prohibited, except for asmall metal trading portfolio not exceeding 24,000 tonnes, which is marked tomarket.  

The decision whether andwhen to commence a hedge, along with the duration of the hedge, can vary fromperiod to period depending on market conditions and the relative costs ofvarious hedging instruments. The duration of a hedge is always linked to thetiming of the underlying exposure, with the connection between the two beingconstantly monitored to ensure effectiveness.

***Sensitivities***

The following tableprovides the estimated annualized after-tax impact of currency and LME pricemovements on net income from continuing operations. Sensitivities are post theNovelis spin-off.
   Increase in	rate / priceUS$M US$ per share
Economic impact of changes in  period-average exchange rates

      Canadian dollar

+ US$0.10

$ (110)

$ (0.30)

      European  currencies

+ US$0.10

$   (56)

$ (0.15)

      Australian  dollar

+ US$0.10

$   (40)

$ (0.11)

Balance sheet translation  impact of changes in period-end exchange rates

      Canadian dollar

+ US$0.10

$ (170)

$ (0.46)

      Australian  dollar

+ US$0.10

$   (20)

$ (0.05)

Economic impact of  changes in period-average LME prices*

      Aluminum

+ US$100/t

$  170

$ 0.46

**Realized  prices generally lag LME price changes by one month. Changes in local and  regional premium may also impact aluminum price realizations.  Sensitivities  are updated as required to reflect changes in the Company's commercial  arrangements and portfolio of operations.  Not included are sensitivities to  energy and raw material prices, which may have significant impacts.*
*** ***

22
** **
***Foreign Currency Exchange***Exchange rate movements,particularly between the Canadian dollar and the U.S. dollar, have an impact onAlcan's costs and therefore its net results. Because the Company hassignificant operating costs denominated in Canadian dollars while itsfunctional currency is the U.S. dollar for most Canadian operations, itbenefits from a weakening in the Canadian dollar but, conversely, isdisadvantaged if it strengthens. 

The Company's deferredincome tax liabilities and net monetary liabilities for operations in Canada andAustralia are translated into U.S. dollars at current rates. The resultant exchange gains orlosses are included in income and fluctuate from quarter to quarter dependingon the changes in exchange rates. A decrease in the Canadian and Australian dollars results ina favourable effect, whereas an increase results in an unfavourable impact. 

***Aluminum Prices***Depending on marketconditions and logistical considerations, Alcan may sell primary aluminum tothird parties and may purchase primary aluminum and secondary aluminum,including scrap, on the open market to meet the requirements of its fabricatingbusinesses. In addition, depending on pricing arrangements with fabricatedproducts customers, Alcan may hedge some of its purchased metal supply insupport of those sales.  Through the use of forward purchase and sale contractsand options, Alcan seeks to limit the impact of lower metal prices. 

**Critical AccountingPolicies and Estimates**The Company's significantaccounting policies are presented in note 3, Summary of Significant AccountingPolicies, of the consolidated financial statements.  The critical accountingpolicies and estimates described below are those that are both most importantto the portrayal of the Company's financial condition and results and requiremanagement's most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain.  They have been reviewed and approved by our Audit Committee, inconsultation with management, as part of their review and approval of oursignificant accounting policies and estimates.  We believe that our estimatesfor determining the valuation of our assets and liabilities are appropriate. However, given the uncertainties involved, it is possible that they will besignificantly revised in the future, which could have material adverse effectson the Company's reported earnings.

***Post-Retirement Benefits***Net periodic cost of post-retirementbenefits includes the actuarially computed cost of benefits earned during thecurrent service period, the interest cost on accrued obligations, the expectedreturn on plan assets based on fair market value and the straight-lineamortization of net actuarial gains and losses and adjustments due to planamendments.  All net actuarial gains and losses are amortized over the expectedaverage remaining service life of the employees.  The costs and obligations ofpension and other post-retirement benefits are calculated based on assumptionsdetermined by management, with the assistance of independent actuarial firmsand consultants.  These assumptions include the long-term rate of return onpension assets, discount rates for pension and other post-retirement benefitsobligations, expected service period, salary increases, retirement ages ofemployees and healthcare cost trend rates.  These assumptions bear the risk ofchange as they require significant judgment and they have inherentuncertainties that management may not be able to control. The two mostsignificant assumptions used to calculate the obligations in respect of the netemployee benefit plans are the discount rates for pension and otherpost-retirement benefits, and the expected return on assets.  The discount ratefor pension and other post-retirement benefits is the interest rate used todetermine the present value of benefits.  It is based on the yield on long-termhigh-quality corporate fixed income investments at the end of each fiscalyear.  The weighted-average discount rate was 5.3% as at December 31, 2004,compared to 5.6% for 2003 and 5.8% for 2002. An increase in the discount rateof 0.5%, assuming inflation remains unchanged, will result in a decrease of$650 million in the pension and other post-retirement obligations and in adecrease of $56 million in the net periodic benefit cost.  A decrease in thediscount rate by 0.5%, assuming inflation remains unchanged, will result in anincrease of $ 698 million in the pension and other post-retirement obligationsand in an increase of $ 51 million in the net periodic benefit cost. The calculation of the estimate of the expected returnon assets is described in note 32, Post-Retirement Benefits, of theconsolidated financial statements.  The weighted-average expected return onassets was 7.0% for 2004, 7.1% for 2003 and 7.1% for 2002.  The expected returnon assets is a long-term assumption whose accuracy can only be measured over along period based on past experience.  Over the 15-year period ended December31, 2004, the average actual return on assets exceeded the expected return by0.9% per year. A variation in the expected return on assets by 0.5% will resultin a variation of approximately $41 million in the net periodic benefit cost.

***Environmental Liabilities***Environmental expensesthat are not legal asset retirement obligations are accrued on an undiscountedbasis when it is probable that a liability for past events exists. Indetermining whether a liability exists, the Company is required to makejudgments as to the probability of a future event occurring.  The Company's judgmentsregarding the probability are subject to the risk of change, as it must makeassumptions about events that may or may not occur in the distant future. Changes could occur due to such factors as the extent of contamination, atechnical change and changes in remedial requirements or nature.  If the Company'sjudgments differ from those of legal or regulatory authorities, the provisionsfor environmental expense could increase or decrease significantly in futureperiods. The Company consults withits external legal counsel on all material environmental matters.  In order toestimate the likelihood of a future event occurring, the Company and its legalcounsel exercise their professional judgment based on case facts andexperience.

 

23
** **
***Property, Plant and Equipment***Due to changing economicand other circumstances, the Company regularly reviews the carrying amount ofits property, plant and equipment (PP&E) for impairment.  Accountingstandards require that an impairment loss be recognized when the carryingamount of a long-lived asset held for use is not recoverable and exceeds itsfair value.  The fair value of an asset is the amount at which that asset canbe bought or sold in a current transaction between willing parties, that is,other than a forced or liquidated sale.  Where market prices are not readilyavailable, the estimate of fair value is based on the best informationavailable, including prices for similar assets and the results of using othervaluation techniques.  For the most part, the Company uses an expected presentvalue technique to measure the fair value of long term assets. In estimatingfuture cash flows, the Company uses its internal plans, which incorporatesmanagement's judgments as to the remaining service potential of long-lived assets. These internal plans reflect management's best estimates; however they aresubject to the risk of change as they have inherent uncertainties thatmanagement may not be able to control.  The amount of impairment to berecognized is calculated by subtracting the fair value of the asset from thecarrying amount of the asset. As discussed in the notes to the consolidatedfinancial statements, the Company reviewed specific PP&E for impairment in2004 due to situations where circumstances indicated that the carrying value ofspecific assets could not be recovered.  The Company made assumptions about theundiscounted sum of the expected future cash flows from these assets anddetermined that they were less than their carrying amount, resulting in therecognition of an impairment in accordance with GAAP. Actual results coulddiffer significantly from those estimates. The Company cannot predict whether an event that triggers animpairment of PP&E will occur or when it will occur, nor can it estimatewhat effect it will have on the carrying values of these assets.  However, theeffect could be material.

***Goodwill***As reported in note 4, Accounting Changes, of the consolidated financialstatements, effective January 2002, goodwill is no longer amortized but istested annually for impairment at the reporting unit level.  Impairmentis determined by comparing the fair value of the reporting unit to its carryingvalue.  The estimate of fair value of a reporting unit and the assets andliabilities within a reporting unit are based on a net present value approach,which includes making assumptions and estimates in a number of areas, includingfuture cash flows, cash flow periods, terminal values and discount rates. Inestimating future cash flows, the Company uses its internal plans.  These plansreflect management's best estimates; however, they are subject to change asthey have inherent uncertainties that management may not be able to control. Inestimating the fair value of a reporting unit, different ranges are used forfuture cash flow periods as well as for terminal growth rates, depending on thebusiness group. The Bauxite and Alumina business group, for the most part,bases future cash flow periods on the total operating life of the businessunit, and assumes no terminal value, while the remaining business groups use,for the most part, a range of 5 to 15 years for future cash flow periods andbase terminal values on growth rates ranging from -2% to +2%.  A discount rateof 7.4%, which is the Company's estimated weighted-average cost of capital, isused.  A variance in the estimated weighted-average cost of capital could havea significant impact on the amount of the goodwill impairment charge recorded,and actual results could differ significantly from those estimates.  Uponadoption of this standard, an impairment of $748 million (including $8 millionrelated to assets held for sale) was identified in the goodwill balance as atJanuary 1, 2002, and was charged as a cumulative effect of an accounting changein the consolidated statement of income in 2002. In 2004 an impairment chargeof $154 million was identified (2003: $28 million).

***Income Taxes***The provision for incometaxes is calculated based on the expected tax treatment of transactionsrecorded in the Company's consolidated financial statements. In determining a provision for income taxes, the Companyinterprets tax legislation in a variety of jurisdictions and makes assumptionsabout the expected timing of the reversal of future tax assets andliabilities.   Income tax assets and liabilities, both current and deferred,are measured according to enacted income tax legislation that is expected toapply when the asset is realized or the liability settled.  The Companyregularly reviews the recognized and unrecognized deferred income tax assets todetermine whether a valuation allowance is required or needs to be adjusted. Informing a conclusion about whether it is appropriate to recognize a tax asset,the Company must use judgment in assessing the potential for futurerecoverability, while at the same time considering past experience.  TheCompany's conclusion of whether it is more likely than not that deferred assetswill be realized includes making assessments of expectations of future taxable income. Allavailable evidence is considered in determining the amount of a valuation allowance.  If the Company'sinterpretations differ from those of tax authorities or judgments with respectto tax losses change, the income tax provision could increase or decrease, potentiallysignificantly, in future periods.

***Business Combinations***The Company accounts forbusiness acquisitions using the purchase method.  Under this method, the costof a purchase is allocated to the estimated fair values of the net assetsacquired.   When the Company completes an acquisition towards the end of itsfiscal year or the acquired enterprise is very large, the Company makestentative estimates of the fair values of the net assets acquired as it isstill in the process of gathering all the relevant data.  Accordingly, thefinal fair values of the net assets acquired could differ materially from thetentative amounts. Changes from the tentative amounts could have a significantimpact on the Company's net income, including depreciation and amortization,and income taxes.  In the case of the Pechiney acquisition completed onDecember 15, 2003, the significant elements for which the fair values differedfrom the tentative amounts included property, plant and equipment, goodwill,and deferred charges and other assets.  The Company completed the finalvaluation of Pechiney's net assets in the fourth quarter of 2004.

** **

 

24
** **
**Reconciliation of Canadian to U.S. GAAP**

A reconciliation ofAlcan's Consolidated Statement of Income and Consolidated Balance Sheet betweenU.S. GAAP and Canadian GAAP is contained in note 35 of the financial statements.  The impact of materialdifferences is discussed below.

GAAP

**2004**

2003

2002

*(US$ per common share)*

**Cdn**

**U.S.**

Cdn

U.S.

Cdn

U.S.

Income from continuing operations per share	— basic

**0.66**

**0.67**

0.95

0.79

1.14

1.29

Net income (Loss) per share — basic

**0.68**

**0.69**

0.46

0.18

1.07

(1.10)

In 2004, net income per common shareunder Canadian GAAP was $0.68 compared to $0.69 under U.S. GAAP.  In 2003, netincome per common share under Canadian GAAP was $0.46 compared to $0.18 underU.S. GAAP.  The principal reasons for the difference were the cumulative effectof an accounting change for asset retirement obligations, acquired in-processresearch and development and derivatives.  In 2002, net income (loss) percommon share under Canadian GAAP was $1.07 compared to ($1.10) under U.S.GAAP.  The principal reasons for the difference were derivatives and the cumulative effect ofan accounting change for impairment of goodwill. Thedifferences in net income had no material impact on the discussion of resultsof operations for the periods presented.

***Joint Ventures***The major ongoing difference betweenU.S. GAAP and Canadian GAAP deals with the accounting for joint ventures. Under U.S. GAAP, joint ventures, other than those over which Alcan has anundivided interest in the assets, are accounted for using the equity methodwhile under Canadian GAAP, joint ventures are accounted for using theproportionate consolidation method.  This different accounting treatmentaffects only the display and classification of financial statement items andhas no impact on net income or shareholders' equity.  This difference had nomaterial impact on the discussion of the results of operations.  The majorimpact of the difference in accounting treatment on the balance sheet was toincrease (decrease) operating working capital in continuing operations atDecember 31, 2004, by $30 million compared to $7 million at December 31, 2003,and ($93) million at December 31, 2002, under Canadian GAAP compared to U.S.GAAP.  Under Canadian GAAP, net property, plant and equipment at December 31,2004, was $1,179 million higher than under U.S. GAAP compared to  $831 millionat December 31, 2003, and $687 million at December 31, 2002. Under CanadianGAAP, goodwill was higher by $837 million at December 31, 2004, compared to$174 million at December 31, 2003, and $168 million at December 31, 2002. Under Canadian GAAP, deferred charges and other assets (which includeinvestments accounted for under the equity method) were $1,618 million lower atDecember 31, 2004, compared to $664 million at December 31, 2003, and $504million at December 31, 2002, as compared to U.S. GAAP.

Debt as a percentage of investedcapital as at December 31, 2004, December 31, 2003, and December 31, 2002, wasessentially the same under Canadian and U.S. GAAP.  For 2004, interest expense underCanadian GAAP was higher than under U.S. GAAP by $11 million compared to $6 million for2003 and $3 million for 2002.  

***Accounting for Derivatives***Beginning in 2004, Canadian GAAP isaligned with U.S. GAAP with respect to the criteria to be met for hedgeaccounting.  For certain derivatives as at December 31, 2003, that do notqualify for hedge accounting in 2004 under Canadian GAAP but qualified forhedge accounting prior to 2004 under Canadian GAAP but not under U.S. GAAP,there will be an impact on the Company's Canadian GAAP income for atransitional period ending with the maturities of the derivatives.  Under U.S.GAAP, these derivatives had been marked-to-market prior to December 31, 2003.

In addition, Canadian GAAP does notpermit the recognition of embedded derivatives.  

The impact of the different accountingtreatments for derivatives was to increase (decrease) net income under CanadianGAAP by $1 million, $21 million and ($40) million for the years ended December2004, 2003 and 2002, respectively.  This difference had no material impact onthe discussion of results for the periods presented.

In addition, because Canadian GAAPdoes not have the concept of Other Comprehensive Income, certain amountsrelated to cash flow hedges classified in shareholders' equity on the balancesheet under U.S. GAAP were reclassified to various asset and liability accountsunder Canadian GAAP.

***Minimum Pension Liability***Canadian GAAP does not require therecognition of a minimum pension liability if the accumulated benefitobligation exceeds the market value of plan assets.   This difference had noimpact on net income but did result in shareholders' equity under Canadian GAAPbeing higher by $548 million at December 31, 2004, compared to $350 million at December 31, 2003, and$319 millionat December 31, 2002.  At December 31, 2004, total assets were lower by $253 million compared to $224million at December31, 2003, and $143 million at December 31, 2002. As at December 31, 2004, total pension liabilitieswere lower by $1,036 million compared to $730 million at December 31, 2003, and $610 million at December 31, 2002, under Canadian GAAP.

* *

 

25
** **
***Acquired In-Process Research and Development***In-process research and developmentacquired from Pechiney amounted to $50 million.  Under Canadian GAAP, the amount is amortized over15 years.  Under U.S. GAAP, it was expensed in 2003. 

***Asset Retirement Obligations***U.S. GAAP net income for 2003,included an after-tax charge of $39 million for the cumulative effect of an accounting change which, underCanadian GAAP was treated as an adjustment to retained earnings.

***Impairment of Goodwill***U.S. GAAP net income for 2002,included a charge of $748 million for the cumulative effect of an accountingchange which, under Canadian GAAP was treated as an adjustment to retainedearnings.

**Cautionary Statement**

Statements made in this report whichdescribe the Company's or management's objectives, projections, estimates,expectations or predictions of the future may be forward-lookingstatements within the meaning of securities laws, which can be identifiedby the use of forward-looking terminology such as believes, expects, may, will, should, estimates, anticipates or the negative thereof or othervariations thereon.  The Company cautions that, by their nature, forward-lookingstatements involve risk and uncertainty and that the Company's actual actionsor results could differ materially from those expressed or implied in suchforward-looking statements or could affect the extent to which a particularprojection is realized.  Important factors which could cause such differencesinclude global supply and demand conditions for aluminum and other products,aluminum ingot prices and changes in raw materials' costs and availability,changes in the relative value of various currencies, cyclical demand andpricing within the principal markets for the Company's products, changes ingovernment regulations, particularly those affecting environmental, health orsafety compliance, economic developments, relationships with and financial and operatingconditions of customers and suppliers, the effects of integrating acquiredbusinesses and the ability to attain expected benefits, the Company's ability to dispose of assets at theanticipated prices and other factors within the countries in which the Companyoperates or sells its products and other factors relating to the Company'songoing operations including, but not limited to, litigation, labournegotiations and fiscal regimes.  The aluminum market overview contained inthis report is based on research that includes information from sourcesbelieved to be reliable, but Alcan does not make any representation that it isaccurate in every detail. The aluminum market overview represents the Company'sviews as of March 16, 2005.

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