BHP Billiton Ltd/Plc delivered a record second-half profit on Wednesday, driven by soaring prices for iron ore, allowing it to award a dividend hike on top of its hefty expansion plans.

The world's biggest miner nevertheless joined its peers in sounding a warning over costs and disappointed some investors by deciding against a share buyback after the results, which also produced Australia's largest-ever corporate annual profit of $21.7 billion and operating cashflow of $30.1 billion.

It's a very solid and commendable result, but it's not enough in terms of the surprise factor to catapult people to go and buy the stock on the back of it, said Tim Schroeders, portfolio manager at Pengana Capital.

Investors had been divided over whether to expect another buyback following BHP's recent $12.1 billion acquisition of U.S. shale gas producer Petrohawk Energy, its biggest successful deal since BHP took over Billiton Plc.

We weren't expecting any capital management initiatives just now ... but with their cash generation, low debt level and (the) commodities boom, we will focus on it in the next 12 months, said Rohan Walsh, investment manager at Karara Capital.

BHP said it prioritized operational growth, maintaining balance sheet strength and growing its dividend. Only then did its focus shift to returning surplus cash through buybacks.

We see buybacks really as the deployment of surplus capital after those other priorities have been completed, Chief Executive Marius Kloppers said.

The miner's London shares were up 1.9 percent to 1,926 pence at 9:20 a.m. EDT, marginally underperforming a 2.3 percent rise in the sector, after ending flat in Australian trade.

WEAK GROWTH

BHP, the last of the major miners to report results, was cautious in its near-term guidance for commodity prices, expecting weak growth in Europe and the United States.

However, the miner said recent turbulence had not significantly dented demand and said it continued to see a strong outlook longer term, underpinned by emerging market demand and barriers to the expansion of supply as miners are hit by funding constraints and labor and equipment shortages.

You want tires for three years out, 57 inch tires, and you think you have a project for which you haven't ordered them? Then they are not to be had at any price, Kloppers said.

The junior (producers) will once again not bring on the volume growth that is being fed into analyst forecasts.

The constraints squeezing these junior suppliers would likely prompt deals, but Kloppers said BHP would focus on base metals, oil and gas and potash -- sectors where any deals are less likely to face regulatory hurdles.

The balance sheet has capacity for sizeable acquisitions. Opportunity has always been the limiting factor, he said.

BHP echoed rival miners including Rio Tinto and Anglo American , who have warned on escalating operating and capital costs. BHP said rising costs for labor and equipment cut earnings by $1.2 billion in the year to June.

Its biggest hit came from the weakness of the U.S. dollar against the Australian dollar, which together with inflation took a $3.2 billion bite out of full-year operating profit, but BHP said it was congenitally opposed to currency hedging.

LONG TERM

The prices rises that we have seen on the revenue side lag between six and 12 months, and we were going to see them on the cost side in due course, Kloppers said.

Costs excluding inflation and currency movements rose 5 percent in the year to June, compared with zero growth the year before. Kloppers declined to give a forecast for 2012, though the number is expected to increase.

The company raised its dividend by 22 percent to 55 cents per share, which it said reflected its confidence in the long-term outlook.

Kloppers said the company would review its plan to spend $80 billion over five years on development projects following its takeover of Petrohawk, as it expects to allocate $5 billion a year on developing Petrohawk's shale gas resources.

It expects to spend around $20 billion in the 2012 financial year, despite falling short of plans this year.

Income from iron ore, its biggest division, jumped a forecast-beating 122 percent over the full year to $13.3 billion, while earnings for base metals soared 47 percent and petroleum earnings grew 38 percent, thanks to rising prices.

Production overall this year was hit by storms and heavy rain in Australia and the moratorium on new wells in the Gulf of Mexico, but the miner said it expected to return to its level of 6 percent compound annual growth once those effects fade.

Soaring commodity prices boosted attributable profit before exceptional items to $10.98 billion for the six months through June from $6.77 billion a year ago, shy of an average forecast of $11.7 billion, according to Thomson Reuters I/B/E/S.

Over the full year, attributable profit rose 74 percent.

(Editing by Ed Davies)

Australia