BHP Billiton , the world's biggest miner, bowed to investors with plans to hand back $10 billion and pour money into expansions rather than chase ambitious takeovers, after nearly doubling its first-half profit to a record.

The Anglo-Australian giant, flush with cash, said it plans to spend $80 billion on development and expansion projects over the next five years, playing down the near term chances of a major acquisition.

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 that this demonstrates the challenges that the industry is having satisfying rising demand, while replacing declining production from mature operations, he said.

BHP Chief Executive Marius Kloppers said the company's acquisitions sights remained focused on snaring long-life, low-cost, expandable assets.

But he said in light of the difficulties it faced on the three big deals it had to ditch over the past three years and the high price of potential targets, acquisitions may be too hard.

While I can't rule out anything... if you put those couple of things together, you have a clear takeaway of our priorities, particularly in the light of the emphasis of the capital investment program today, he told reporters on Wednesday.

BHP forecast a strong outlook for commodities markets, due to tight supplies, but like its rival Rio Tinto , it warned that prices could be volatile.

While we expect a slowdown in the growth rate of global commodity demand in calendar year 2011, the economic environment still underpins a robust near term outlook for our products, Kloppers said.

Kloppers said industry observers 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.


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, its shares rallied 9 percent to a 33-month high in expectations of a buyback, and as expected, its shares retreated once the buyback was announced.

BHP shares last traded down 1.8 percent at A$46.50, lagging a 0.3 percent fall in the broader market.

Despite the recent rally, BHP shares are trading on a cheap forward earnings multiple of 11.9, which has 13 out of 16 analysts rating it a buy or strong buy.

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.

Kloppers said the company was most likely to follow the pattern it has for previous buybacks, buying its UK shares on market and buying its Australian shares off-market, but said no decisions had been made yet.

It is already in the midst of conducting a $4.2 billion buyback of its UK shares.

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.

It looks to be a pretty robust set of numbers. I think it's ahead of market expectations and I think the $10 billion capital management initiative will be well received, said Neil Boyd-Clark, portfolio manager at Arnhem Investment Management, another BHP shareholder.

BHP stepped up its interim dividend by 10 percent to 46 cents a share, compared with broker forecasts of around 49 cents.

First-half earnings from iron ore nearly tripled, while earnings from base metals, including copper, jumped 45 percent.

Petroleum earnings, which set BHP apart from its mining peers, rose 23 percent.

BHP added that 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 Ed Davies and Balazs Koranyi)