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UPDATE 2-Norsk Hydro eyes Brazil progress as court lifts one of two embargoes

Terje Solsvik

* Alunorte production remains at 50% for now

* Hydro hopes second embargo will be lifted shortly

* Hydro's shares rise 5% (Adds share price)

OSLO, May 16 (Reuters) - A Brazilian federal court has lifted one of two production embargoes on a key plant owned by Norwegian metals maker Norsk Hydro, the company said on Thursday, raising hopes that full production can soon resume.

Shares in the company rose 5.4% in early trade on the news, and were up 4.3% at 33.42 Norwegian crowns by 0745 GMT.

The Alunorte alumina refinery, a key supplier to the aluminium industry, currently operates at half of its capacity following a spill in February 2018 that led regulators and courts to restrict output.

"The Federal Court in Belem, Brazil, lifted the production embargo on Alunorte under the civil lawsuit on Wednesday ... Alunorte is still subject to a production embargo imposed by the same court in a parallel criminal lawsuit," Hydro said in a statement.

"Alunorte is expecting an extension of the civil decision to the criminal case shortly ... (but) will continue to produce at 50% capacity until the production embargo under the criminal case is lifted," the company added.

The latest development means the final output restriction could be lifted in a matter of days, Credit Suisse wrote in a note to clients.

RESTART

A restart of Alunorte would allow Hydro to ramp up production at its nearby Albras aluminium smelter, and to immediately boost profits, which suffered during the outage, the company's chief executive said recently.

A technical assessment by a third-party consultancy last month backed the conclusion that the plant was safe, leading Hydro and the prosecutor to propose on April 12 that the court should lift its embargo.

The refinery is the world's largest, transforming bauxite from mines in Brazil into alumina, the material used for making aluminium at smelters owned by Hydro and others around the world.

Since the unlicensed emission during severe rains in February last year, Hydro has upgraded Alunorte's facilities to help convince authorities to allow it to resume full output.

In addition to the output restriction, Hydro is still awaiting a federal court ruling on whether it will be allowed to use a new bauxite residue disposal area, known as DRS2.

In the meantime, the company's existing waste facility is filling up.

"Alunorte estimates a remaining lifetime of 8-18 months in DRS1, depending on production volume. Further geotechnical studies will be conducted, aiming at verifying an extended lifetime of DRS1," Hydro said.

Alunorte has an annual production capacity of some 6.2 million tonnes of aluminium oxide, or alumina, while global output of the white, powdery substance is close to 100 million tonnes per year, Norsk Hydro said on its web site. (Additional reporting by Marta Frackowiak in Gdynya; Editing by Richard Pullin and Emelia Sithole-Matarise)