BHP H2 profit up 30 pct, sees strong China demand

SYDNEY (Reuters) - Mining giant BHP Billiton, bidding around $127 billion for rival Rio Tinto in what would be the world's second-biggest takeover, posted a 30 percent rise in half-year profit and boosted its dividend, saying it was in good shape to weather a downturn in the commodities cycle. The higher profit comes as analysts and investors fret over sagging prices for commodities and concern that China's need for many of the minerals BHP mines may have peaked -- a suggestion BHP Chief Executive Marius Kloppers rejected. "Our dividend increase underpins the confidence we've got for the long term outlook for our industry," Kloppers told reporters. Commodity prices fell 10 percent in July, the biggest monthly decline since March 1980, according to the Reuters/Jefferies CRB Index .CRB, after their best first half in 35 years. "Only time will tell to what extent the Chinese economy has decoupled from the rest of the world," Kloppers said. BHP's London shares gained 1.2 percent to 15.47 pounds by 1105 GMT, outperforming a 0.6 percent rise in the FTSE 100 .FTSE, but lagging slightly the UK mining index The world's biggest miner said cost controls and its emphasis on high-margin growth projects in iron ore, copper and other industrial necessities had propelled its bottom line to a record profit of $15.4 billion for the full year to end-June, but also warned of weaker global economic growth in the short term. "The outlook still looks good even though there may be some impact over the next six months from the weakness in the Western economies. BHP doesn't appear to be too worried because of the ongoing demand coming from China's industrialisation," said Matthew Kidman, chief of investment at Wilson Asset Management. Second-half profit rose to $9.37 billion, and BHP raised its final dividend by 52 percent to 41 U.S. cents per share. "It's good. It shows they're still positive about their business," said Peter Chilton, an analyst with Constellation Capital Management. Record earnings were posted in the company's base metals, oil, iron ore, manganese and energy coal divisions. "We've always said that we've got a diversified portfolio -- some products perform a little weaker, others perform a little stronger," Kloppers said. Australia & New Zealand Bank on Monday cut its 2008-2010 price forecasts for metals commodities by 10-25 percent. [nSP207583]. Kloppers said some in commodities markets failed to fully appreciate how long it took to dig new mines and bring more material to market and underestimated upward pressure on pricing. Higher operating costs linked to staffing, fuel and equipment replacement inflated costs across the group by 4.3 percent or $1.18 billion for the year, Kloppers said. "Strong global demand for resources continues to provide cost challenges for the whole industry. This is mainly due to rising prices for inputs such as diesel, (steel-making) coke and explosives, and shortages of skilled labour," he added. Runaway costs are emerging as an achilles heel for miners reaping big profits. Rising costs are also expected to cut into Rio Tinto's first-half earnings, due on Aug. 26. Rio operates in many of the same sectors and insists BHP's all-share offer is too low. "BHP's quoted cost growth of 4.3 percent is highly creditable in comparison with its peers," said analyst Simon Toyne at Numis Securities in London. He said while worries about the world economy are likely to keep a lid on share prices of miners, BHP's stock was cheap. "Both absolute and multiple-based valuation measures of BHP look cheaper than we have witnessed since 2001/2 and it remains our preferred stock in the sector." Kloppers urged investors to be patient on the Rio takeover, saying the deal was on schedule and "made more sense than ever." If the takeover is successful, it would be the world's second largest after mobile phone giant Vodafone's purchase of Mannesmann in 2000. --Editing by Ian Geoghegan and David Cowell