ANALYSIS-Alcoa bets on aluminum rebound with Saudi project

* Joint venture for aluminum complex in Saudi Arabia * Says will be lowest-cost smelter in world * Alcoa stock rises over 9 percent By Steve James NEW YORK, Dec 21 (Reuters) - U.S. aluminum producer Alcoa Inc has made a big bet on the metal rebounding from the recession with an investment in a new Saudi Arabian complex after a year of drastic output and workforce cuts, analysts said on Monday. The weekend announcement, which would boost the company's potential global capacity by 15 percent, sent Alcoa's stock up more than 9 percent to its highest level since September 2008, when demand collapsed and metal prices plummeted. The London Metals Exchange aluminum price has surged in recent months, rising 16 percent in the third quarter to $1,890 per tonne and on Monday was around $2,260 as the world's manufacturers have begun to place orders again. Alcoa has forecast an 11 percent rise in global consumption in the second half of this year. State-run Saudi Arabian Mining Co (Maaden) and Alcoa said on Sunday they had agreed to build a $10.8 billion aluminum complex. "This is a key region for aluminum and the kind of region that Alcoa needs to be involved in," said Morgan Stanley analyst Mark Liinamaa. "Initially, $10.8 billion seems rather dear, but Alcoa's capital outlay will be rather modest." The joint venture will set up a 740,000 tonne-per-year smelter that would add to Alcoa's current production capacity of around 4.8 million tonnes of aluminum. "It will feed the Middle East demand for metal and they could potentially ship to India," Liinamaa told Reuters. The project, at Ras Azzour on the kingdom's Gulf coast close to Maaden's phosphate fertilizer plants, will also include a 1.8 million tonne-per-year refinery, a bauxite mine with an annual capacity of 4 million tonnes and a rolling mill with a capacity of up to 460,000 tonnes. The companies have yet to raise the financing for the complex, but an Alcoa spokesman said the U.S. company's contribution would amount to $900 million over four years. Brian Yu, an analyst with Citi Investment Research, said although the capital outlay was "a major undertaking for the company," the project makes sense given its low-cost position. Alcoa said the project will have the lowest cost in the world because all aspects of production are integrated and also because "local natural resources" will help lower energy costs. "We expected detractors will point to this announcement as the beginning of another major capex cycle, potentially leaving shareholders with little free cash flow in an improving aluminum price environment," Yu wrote in a research note. "Overall, we are somewhat positive because Alcoa needs to lower its average cost position and Maaden will most likely be built with or without Alcoa's participation." Earlier, Morgan Stanley's Liinamaa upgraded Alcoa's stock to "overweight" from "equal weight" and set a $22 stock price target. "We have increased our earnings estimates by 50 percent for 2010 and 20 percent in 2011 to factor in better profitability in alumina and downstream," he wrote. Alumina is refined from bauxite and then smelted into aluminum. Liinamaa said he had written the research note prior to the Saudi announcement. "Aluminum has already come back to some degree," he later told Reuters. "The question is does it correct again?" At midday, Alcoa's shares were up $1.24 or 8.5 percent to $15.82, down from their earlier high of $15.96. (Reporting by Steve James, editing by Leslie Gevirtz)