Feb. 4 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, reported first-half profit dropped 57 percent, more than analysts expected, on costs to close mines and plants after metal prices slumped.

Net income fell to $2.6 billion in the six months ended Dec. 31, the lowest since 2004, Melbourne-based BHP said today in a statement. That compares with the average estimate of $4.4 billion of six analysts surveyed by Bloomberg News. BHP booked $3.5 billion in one-time charges, including $2.7 billion for the mine closures.

Chief Executive Officer Marius Kloppers said today slower demand for steel will have a “pronounced impact” and a weak outlook for the global economy will affect earnings this half. BHP, which booked a $386 million charge for its failed takeover bid for Rio Tinto Group, has joined Xstrata Plc and Rio in closing mines and cutting jobs as the worldwide recession curbs demand.

“It all smacks of quite a serious downturn,” said Peter Chilton, who manages the equivalent of $356 million at Constellation Capital Management Ltd. in Sydney, including BHP shares. “Earnings are going to be far more subdued.”

The stock gained 109 pence, or 9.4 percent, to 1,269 pence in London. The Bloomberg Europe Metals & Mining Index, which includes BHP and 12 other companies, rose 12 percent.

Sales increased 17 percent to $29.8 billion in the half, while profit, excluding one-time items, rose 2.2 percent to $6.1 billion. BHP will pay a first-half dividend of 41 cents, up 41 percent from a year earlier. Cashflow from operations rose 74 percent to $13 billion.

‘Incredible’ Cashflow

“The cashflow was incredible and that balance sheet is really important,” Peter Arden, an analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co., said today.

BHP abandoned its hostile $66 billion takeover bid for Rio Tinto last year, citing Rio’s high level of debt and declining commodity prices. Buying Rio would have increased BHP’s net debt to $78 billion when the combined company would have had a market value of $84 billion, Kloppers said in November.

BHP’s low level of debt and strong cashflow will allow it to make acquisitions, Arden said. The company would like to increase its stake in Escondida, the world’s biggest copper mine, if Rio was forced to sell its holding to reduce debt, he said.

“They want to use the balance sheet and if something like Escondida came up, that would be one that BHP would love to have a lot more of,” he said.

Required Actions

BHP lowered its planned spending by 13 percent to $9.8 billion in the next financial year. The company has held off making major capital spending cuts, while rivals including Rio plan to cut investments by more than half to $5 billion as prices for raw materials plummet. BHP may also make further reductions to output if demand slows, Kloppers said today.

“We will continue to take actions that are required,” Kloppers told reporters on a conference call today. “It is difficult to predict when this particular business cycle will turn up.”

Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, last month posted a $13.9 billion fourth-quarter net loss after the plunge in prices.

China, the world’s biggest consumer of metals, can’t be relied on to support commodity demand, Kloppers said.

Slowest Pace

Economic growth in China is already at the slowest pace in seven years, and may worsen to 6.3 percent this quarter, according to the median estimate of nine economists surveyed by Bloomberg News. That compares to the 6.8 percent growth rate in the December quarter. China may expand at 8 percent this year, BHP said last month.

The Reuters/Jefferies CRB Index of 19 raw materials has plunged 54 percent from its July 3 record, the peak of the six- year mining boom that delivered record profits. The measure has dropped 5.5 percent this year.

BHP’s stainless steel unit had a loss of $752 million, compared with a $799 million profit a year earlier. The base metals unit, which includes uranium, posted a loss of $111 million, compared with earnings of $3.4 billion a year earlier.

The company was forced to close the $2.2 billion Ravensthorpe nickel mine in Western Australia and part of the Yabulu nickel refinery in Queensland last month because of the decline in prices. The mine, opened in May, and wasn’t one of BHP’s “finest” investment decisions, Kloppers said today.

‘Didn’t Foresee’

“We, like most people, did not foresee the speed or the dramatic nature of the downturn that has occurred,” he said.

Even so, the iron ore unit, BHP’s biggest earner, more than doubled profit to $4.1 billion on record prices. Output of ore increased 10 percent to a record 59.2 million metric tons.

Chinese steelmakers are likely to win their first cut in contract prices in seven years because of the fall in demand. Prices may fall 30 percent, according to a Bloomberg News survey of 11 analysts last month.

The stronger dollar against BHP’s main operating currencies increased underlying earnings by $1.5 billion, the company said.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Jesse Riseborough in Melbourne at jriseborough@bloomberg.net.

Last Updated: February 4, 2009 12:45 EST