* Mining expansion is pillar of economic reform scheme

* Ma'aden capturing shares of global aluminium, DAP markets

* Alumina exports, more downstream facilities planned

* But low aluminium prices hurting profits

* Austerity policies mean cost advantage will erode

By Katie Paul

RAS AL-KHAIR, Saudi Arabia, June 2 (Reuters) - At a sprawling desert complex on Saudi Arabia's northeastern Gulf coast, refineries, smelters and casting machines transform dull pink rocks into silver aluminium bars, a symbol of the kingdom's attempt to diversify its economy.

After only two years in operation, the $10.8 billion aluminium project at Ras al-Khair, an industrial city 200 kilometres (125 miles) north of the oil hub of Dammam, is already the world's largest integrated aluminium facility.

And in coming years, the success of Saudi Arabia's efforts to build an economy that does not rely on oil and state subsidies will depend partly on what state-controlled Saudi Arabian Mining Co (Ma'aden) , which runs the complex, can achieve with it.

Aluminium is the company's single-largest cash generator, at 4.8 billion riyals ($1.3 billion) in revenue last year, and mining is a pillar of Saudi Arabia's shift away from oil. Saudi hopes are pinned on vast untapped reserves of bauxite, used to make aluminium, as well as phosphate, gold, copper and uranium.

"Ras al-Khair city overall is really equipped to expand in so many industries, but I think the aluminium will be a major part of our future strategy," said Abdul Aziz al-Harbi, president of Ma'aden Aluminium, a joint venture between Ma'aden and U.S. aluminium giant Alcoa .

Mining in Saudi Arabia was neglected for decades, apart from some small-scale gold extraction. But in April, Deputy Crown Prince Mohammed bin Salman made big promises for the sector as part of a broad economic reform plan.

He said mining would generate an annual 97 billion riyals and create 90,000 jobs within five years.

Saudi Arabia's commitment was underlined when the kingdom made the new chief of its energy ministry, Khalid al-Falih, chairman of Ma'aden, fuelling a rally in the company's stock.

The firm runs a bauxite mine at al-Ba'itha in the central province of Qassim and makes semi-finished products such as ingots, billets and giant coils of beverage can sheet.

Exports of alumina, an intermediate substance in the production of aluminium, and more downstream industrial facilities are planned, said Harbi.


Ras al-Khair's stark rows of interlaced pipes and cleanly paved roads are a result of vast sums spent on the city since its inception in 2008. Ma'aden's former chief told a conference last year that total spending had topped $34.6 billion.

In addition to the aluminium project, Ma'aden has a diammonia phosphate (DAP) plant at Ras al-Khair. The two products together now account for 85 percent of Ma'aden's revenues, which totalled 11.0 billion riyals last year.

The facility has a port, a 2,400-megawatt power and desalination plant, and a dedicated rail line linking it directly to bauxite and phosphate mines.

Although Ma'aden Aluminium started off importing raw materials, it now uses the railway to maintain a Saudi supply chain, sourcing bauxite exclusively from Qassim.

It boasts modern environmental technologies: its own man-made wetlands for wastewater recycling, and the only used can reclamation facility in the Middle East. Recycling bins, all but non-existent elsewhere in Saudi Arabia, are in every hallway.

Executives say that by linking minerals to top-notch processing facilities at a single location, they can keep production costs low and boost local manufacturing businesses.

"Our target is to be the lowest-cost producer in the world, which we are already approaching now," said Harbi.

Ma'aden has captured 8 percent of the world's $15 billion DAP market and 1 percent of the $90 billion aluminium market, according to a report by Deutsche Bank.

But the company faces fundamental pressures. Heavy aluminium production in China has left global prices for its products near multi-year lows. Ma'aden's net profit tumbled 35 percent from a year earlier to $45 million in the first quarter.

Also, Ma'aden's cost advantage may be eroded by rises of energy and gas feedstock prices in Saudi Arabia, which cut subsidies in December to cope with a nearly $100 billion state budget deficit caused by low oil prices.

The company's fourth-quarter earnings presentation said that because its projects were new, it would be exempt from higher gas prices for the time being: until 2020 for aluminium, and at different phosphate units until 2017 and 2023.

But like the rest of Saudi industry, Ma'aden will eventually have to compete in world markets with less government support.

"They will certainly still be competitive," said Aleksander Stojanovski, analyst at Deutsche Bank.

"But the notion that they will indefinitely enjoy 30-plus percent margins when the rest of the industry operates differently is also unlikely."

(Editing by Andrew Torchia and Alexander Smith) ((Katie.Paul@thomsonreuters.com;))