February 20, 2018 / 6:26 AM / in 10 months

UPDATE 3-BHP boosts dividend as half-year profit jumps 25 pct, costs rise

* Share price falls as results miss forecasts, costs rise

* CEO says will meet activist investor Elliott Advisors (Adds bullets, share price)

By Melanie Burton

MELBOURNE Feb 20 (Reuters) - Global miner BHP reported a 25 percent rise in underlying half-year profit on Tuesday, and handed an extra $800 million to shareholders, but it fell short of analyst forecasts and rising costs also dragged down the shares.

All the major miners have recovered strongly as commodity prices have rebounded from the 2015-16 crash.

BHP's closest rival Rio Tinto , however, has the best balance sheet, analysts say, and it last week doled out a record dividend as it announced full-year results.

BHP is also battling with activist investor Elliott Advisors, which has made a series of demands that it says would increase shareholder returns.

BHP Chief Executive Andrew Mackenzie said the miner expected to boost free cash flow to around $7 billion in the second half, up from $5 billion in the first half if spot prices for its commodities stay at current levels.

"These are very strong foundations and position us well for the remainder of the 2018 financial year," he told a media call.

Underlying profit for the half year ended Dec. 31 rose to $4.05 billion from $3.24 billion a year ago, but was below market forecasts of about $4.3 billion, compiled by Thomson Reuters I/B/E/S.

BHP's share price fell more than 3 percent in early London trade.

The interim dividend of $0.55 per share, equivalent to a 72 percent payout ratio, was well up on $0.40 a share a year ago.

"The dividend is better than what we expected, so that was certainly a positive surprise," said Andy Forster, senior investment officer at Argo Investments, a top 20 shareholder in BHP's Australian shares.

"But definitely we see cost pressures starting to emerge in the business. Some of them are one-off in nature (but) more generally across the industry cost pressures are starting to re-emerge."

Costs rose at BHP's coal, petroleum and copper operations.

Chief Financial Officer Peter Beaven said the increases were mostly single events, partly reflecting maintenance at the Olympic dam copper mine and supply snags at Australian coal mines.

"All of those one-off features are now behind us," Mackenzie said. "Certainly as we look out to the medium term we expect further significant reduction in the unit costs, particularly for iron ore and coal."

SHALE SALE ON TRACK

BHP, facing calls from activist investor Elliott Advisors to make changes to its business, said the sale of its onshore U.S. shale assets, which it has on its books at $14 billion, was on track with initial bids expected in the June quarter.

"We have people who are interested in the whole lot and people who are interested in just parts of it ... We have strong interest at both ends of the spectrum," Mackenzie said.

Mackenzie, who plans to meet with Elliott and other investors later this week, said the miner was also open to changing its structure, with listings in both Britain and Australia, but the costs and risks of collapsing the dual-listed structure outweigh potential benefits.

BHP cut net debt by 23 percent to $15.4 billion during the period and said it was on track to reach its $10 billion to $15 billion target before year-end.

Revenue rose 16 percent during the half year to $21.78 billion, with copper revenues jumping nearly 52 percent, backed by stronger prices and higher production from the Escondida mine in Chile.

Revenue from iron ore mining, BHP's biggest division, rose 4.2 percent, while oil was up 8.5 percent.

Including a previously flagged $1.8 billion exceptional charge arising from a change in U.S. corporate taxes, net profit fell to $2.02 billion. (Additional reporting by Sonali Paul in Melbourne, Barbara Lewis in London and Rushil Dutta in Bengaluru; editing by Richard Pullin and Louise Heavens)

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