The Anglo-Australian giant, flush with cash, said it would more than double its share buyback to $10 billion, to be completed in 2011, 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 acquisition sights remained focused on snaring very large assets, but there are not many of them available and its preference for now was to spend on expansions.
In light of the difficulties it faced on the three big deals it had to ditch over the past three years, including its $39 billion bid for top global fertilizer maker Potash Corp
And in addition, where we currently stand in the commodity price cycle probably has increased price expectations for those assets, Kloppers told analysts.
And 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.
BHP forecast a strong outlook for commodities markets, due to tight supplies, but like its rival Rio Tinto
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.
He 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 confirmed he had been concerned about spying by the company's biggest customer, China, as revealed in diplomatic cables released by Wikileaks, but said with market-based prices now for iron ore, that should be less of a worry.
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.
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, the Jansen potash project in Canada and iron ore and coal expansions in Australia.
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 on 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.
BHP shares are trading on a 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.
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, below 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)