By Sonali Paul
MELBOURNE (Reuters) - BHP Billiton, the world's biggest miner, plans to pour $80 billion into expansions over the next five years rather than chase ambitious takeovers, after nearly doubling first-half profits to a record on booming demand for iron ore and copper.
The Anglo-Australian company, flush with cash, also said it would more than double its share buyback to $10 billion, to be completed this year.
"The biggest surprise is the commitment to spend $80 billion over the next five years," said James Bruce, portfolio manager at Perpetual Investments, one of BHP's top 10 Australian shareholders.
"We think this demonstrates the challenges that the industry is having satisfying rising demand, while replacing declining production from mature operations," he said.
Spurred by strong demand from China and India, BHP and its main competitors Rio Tinto and Xstrata plan to spend more than $110 billion on expansion projects over the next five years. In 2011, the companies will target more iron ore and coal capacity in Western Australia and more copper capacity in Mongolia, Chile and Peru.
BHP Chief Executive Marius Kloppers, speaking after the miner announced net profit for the July-December period of $10.7 billion, said the firm's acquisition sights were on very large assets. But because there were not many available, the preference was to spend on expansions, he said.
Deals were getting too hard to pull off, Kloppers added, referring to three big deals BHP had to ditch over the past three years, including its $39 billion bid for top global fertilizer maker Potash Corp last year.
"In addition, where we currently stand in the commodity price cycle probably has increased price expectations for those assets," Kloppers told analysts.
"Hence, our focus and some of my peers with other companies ... is to emphasize that as one looks at a buy versus build equation, the clear opportunity for us is to continue to invest money in our organic portfolio."
While Kloppers played down the prospects of any near term acquisitions, investors doubted deals were off BHP's agenda.
"They're on the backburner only to the extent that at the moment with today's inflated commodity prices they would probably have difficulty finding anything which would create value for them. I'm sure they'd be looking," said Peter Chilton, an analyst at Constellation Capital Management.
BHP forecast a strong outlook for commodities markets due to tight supplies, but like Rio Tinto last week, it warned that prices could be volatile.
Kloppers said industry analysts had long overestimated supplies and he predicted that over the next one to two years supplies would remain tight, with few new large expansions or projects coming on line.
He also confirmed he had harbored concerns about Chinese and competitor espionage of his business, citing it as a reason behind his push for market pricing of key commodities.
The Sydney Morning Herald newspaper, citing diplomatic cables obtained from Wikileaks, said Kloppers once offered to trade intelligence with Washington on China after telling a U.S. diplomat about the extent of Chinese surveillance of his firm.
It said Kloppers confessed his concerns to the Australia-based envoy in 2009, at a time when he was pushing Chinese customers to switch from closed-door annual price negotiations to more market-based pricing.
"One of the reasons we have pushed so hard for market-clearing prices is so that these sorts of things are not a concern," Kloppers told reporters when asked to confirm if he was concerned about espionage from China and mining rivals.
BIG BUYBACK
The $10 billion buyback follows Rio Tinto's plan to return $5 billion to shareholders over the next two years, which some investors considered too little.
BHP is already in the midst of conducting a $4.2 billion buyback of its UK shares.
Investors had high hopes for a big share buyback as the miner is nearly debt free, its cashflow is booming and its failure to complete major takeovers limit its expansion options.
In the two weeks leading up to the result, BHP's shares rallied 9 percent to a 33-month high on expectations of a buyback. Its shares slipped 1.6 percent to A$46.59 in a flat broader market, partly as its dividend increase was disappointing to retail investors.
BHP stepped up its interim dividend by 10 percent to 46 cents a share, below broker forecasts of around 49 cents.
"We would have liked to see more dividend, because we think that is of value to people who are continuing shareholders in the business," said Ross Barker, managing director of Australian Foundation Investment Co, one of BHP's top five shareholders in Australia.
BHP's attributable profit before exceptional items soared to $10.7 billion for July-December from $5.7 billion a year ago, beating an average forecast of $10.3 billion from 14 analysts.
First-half earnings from iron ore nearly tripled, while earnings from base metals, including copper, jumped 45 percent.
BHP's $80 billion expansion plan over the next five years includes expanding its Olympic Dam copper and uranium mine in Australia, with a decision expected in 2012 and the Jansen potash project in Canada.
Petroleum earnings, which set BHP apart from its mining peers, rose 23 percent.
BHP said sharp cost increases cut its earnings by $521 million.
Kloppers said while materials cost increases were offset by price increases on BHP's key products, labor shortages were starting to bite, particularly in engineering jobs in Western Australia where billions of dollars of iron ore and oil and gas projects are competing for manpower.
(Editing by Balazs Koranyi, Anshuman Daga and Dean Yates)