Feb. 7 (Bloomberg) -- BHP Billiton Ltd., the world's biggest mining company, will buy back $10 billion of shares after higher metal prices drove profit to a record.

The company's shares rose 5.9 percent in Australia, the biggest gain in more than four years. Net income jumped 41 percent to $6.2 billion in the first half ended Dec. 31, from $4.36 billion a year ago, the Melbourne-based company said in a statement. Sales rose 22 percent to $22 billion.

Record commodity prices last year enabled Chief Executive Officer Charles ``Chip'' Goodyear, who plans to retire in 2007, to deliver his seventh straight half-year record profit and reward shareholders. BHP has a $17.5 billion pipeline of projects and said China, whose economy grew 10.7 percent last year, will continue as the main demand driver for raw materials.

``The size of the capital management was beyond what the market was expecting and it indicates their confidence in the future outlook of the company,'' said Robert Patterson, who manages the equivalent of $3 billion at Argo Investments Ltd., in Adelaide, including BHP shares. Goodyear, 49, has ``been very successful for the company,'' he said.

Shares of BHP rose 54.5 pence, or 5.5 percent, to 1,040 pence at the close of trading in London. Earlier, they climbed 5.8 percent, the most since June 15. The stock gained A$1.56 to A$28.24 on the Australian Stock Exchange.

Future Acquisitions

Analysts had expected the company to buy back $3 billion in shares and to report profit of $6.3 billion, according to a Bloomberg survey. The buyback, which will start in Australia, represents 9.1 percent of shares in issue.

BHP and Rio Tinto Group, the world's third-largest mining company, have been under pressure from shareholders to return more cash after reporting record profits. Shares of London-based Rio fell last week after investors deemed a 30 percent increase in dividends insufficient. BHP increased its first-half dividend 14 percent to 20 cents.

The share buyback doesn't preclude BHP from making future acquisitions, said Rob Clifford, an analyst at ABN Amro Holding NV in Melbourne. Mergers and acquisitions aren't ``on hold,'' Goodyear told a conference. ``You will find us as aggressive as anyone, but it is important to know you can't rush this investment process.''

A five-year rally in metals spurred more than $157 billion of takeover and merger proposals last year in the mining industry. Chief Financial Officer Alex Vanselow said in an interview that BHP was ready to buy assets if the right opportunity came along.

The company will look both inside and outside for his replacement, the Houston-bred Goodyear said. Goodyear, who joined the company in 1999, said he normally stays at a company for eight to nine years and his departure will keep BHP ``fresh.''

Goodyear's Record

As CEO since 2003, Goodyear oversaw the A$9.2 billion ($7.1 billion) takeover of WMC Resources Ltd., the world's fifth- largest nickel producer and owner of the largest uranium deposit. Nickel prices have since surged to records, and uranium prices have more than doubled. He bought it at 2.6 times book value then, ahead of metal prices reaching records last year, according to data compiled by Bloomberg.

Including today's $10 billion, Goodyear has returned $17 billion to shareholders since August 2004, the company said.

``His biggest legacy has been the capital management,'' said Tim Barker, who helps manage and advise on $54 billion of assets at BT Financial Group in Sydney. Goodyear has also given individual managers more responsibility, increasing accountability, Barker said.

Marius Kloppers, president of BHP's nonferrous metals business, would be the ``front runner,'' to replace Goodyear, said ABN's Clifford.

Leaving Signs

Kloppers, who oversees businesses accounting for more than half the company's profit, has ``been involved with all aspects of the business from copper positioning, iron ore price talks and alumina pricing,'' said Clifford. ``That stands him in good stead for the position.''

The appointment of Kloppers to the board and to his present position in December 2005, and the appointment of Vanselow as chief financial officer last March, signaled that Goodyear was planning to leave, said Mark Pervan, head of research at Daiwa Securities SMBC, in Melbourne.

BHP, the world's largest producer of coal for the steel industry and third-biggest iron ore exporter, mines those products and more in Australia and controls Chile's Escondida copper mine, the world's largest. It also produces oil and gas.

``We continue to feel extremely good about what we see in the economic environment,'' said Goodyear. ``Our future growth has been well-managed in terms of the capital we spent on that. We continue to grow that capital spending.''

Cash Flow

China's economy expanded at more than twice the global average last year, fueled by investment in manufacturing and a boom in exports. BHP's first-half sales to China rose 36 percent to $4 billion from a year ago and helped drive a 63 percent gain in first-half operating cash flow. China is forecast to grow 9.7 percent this year, Goodyear said in slides lodged with the exchange.

``The capital management program is very encouraging,'' said Neil Boyd-Clark, who helps manage the equivalent of $3.5 billion at ABN Amro Asset Management in Sydney, including BHP shares. ``It highlights the strength of the cash flows.''

Higher commodity prices added $3.4 billion to earnings, helping to offset a cost increase of $900 million, BHP said. Goodyear said cost increases have started to slow. Costs rose 5.1 percent for the period, slower than sales expansion of 22 percent in the period. Earnings per share rose to $1.038 a share, up from 71.9 cents.

Pipes, Wires

The company's base metals unit, which includes copper, contributed $2.9 billion to its pretax profit, or 32 percent, making it the largest earner. Its petroleum unit, the second- largest contributor, added $1.6 billion, or 18 percent.

Cash prices for copper, used in pipes and wires, surged in 2006, averaging $7,386 a metric ton on the London Metal Exchange in the six months to December, 84 percent higher than a year ago. Prices for nickel, used to make stainless steel, more than doubled in the period.

Inventories for metals at the London Metal Exchange remain ``at historically low levels,'' and customers would have to buy more raw materials soon as they run down stocks, BHP said today. Prices will likely stay above averages, it said.

UBS AG and Barclays Capital predict copper prices will fall from an average $6,740 a ton last year as supplies increase. UBS AG expects copper prices to average $3 a pound in 2007, and Barclays forecasts an average of $6,025 a metric ton, or $2.73 a pound.

Rising Costs

BHP is struggling with rising costs at its expansion projects as it competes for labor, equipment and raw materials. It has announced higher costs for its Alumar alumina refinery in Brazil, the Atlantis South oil project in the Gulf of Mexico, and its Ravensthorpe nickel project in Australia.

``There have been fairly significant capital blowouts, but that's aligned with external pressures,'' said BT's Barker. ``They're trying to do a lot of things at the same time, and inevitably you may run out of capable project managers.''

The risk of owning BHP hasn't changed. The cost of insuring $10 million of the company's debt for five years using credit- default swaps was $11,500, according to ABN Amro Holding NV.

To contact the reporter on this story: Tan Hwee Ann in Melbourne at hatan@bloomberg.net; Xiao Yu in Sydney at yxiao@bloomberg.net.

Last Updated: February 7, 2007 12:29 EST