UPDATE 3-BHP copper, iron ore output strong; warns on Escondida

(Updates shares, adds analyst comment)

By James Regan

SYDNEY, July 23 (Reuters) - BHP Billiton (BLT.L), the world's biggest miner, reported strong quarterly output gains on Wednesday led by copper and iron ore, but warned of a looming decline from Chile's Escondida, the world's biggest copper mine.

Like close rival Rio Tinto (RIO.AX)(RIO.L), BHP has been running its mines and refineries around the world hard amid strong demand in China and across much of Asia for raw materials and analysts expect the hefty gains to add to BHP's profit.

"They are producing more oil, copper and iron ore at a time when prices for these commodities have never been higher, which has to translate into much higher profits," said DJ Carmichael & Co analyst James Wilson.

London Metal Exchange-traded three-month forward aluminium MAL3 hit an all-time high of $3,380 a tonne this month, while three-month copper MCU3 reached a record $8,940 a tonne. BHP and Rio have also secured a near-doubling in contract iron ore prices.

BHP's (BHP.AX) fourth-quarter copper output rose 14 percent versus the comparable year ago period, while iron ore rose 15 percent, though coal used in steel making dropped 18 percent.

Those rates were broadly in line with Rio, the target of an all-share hostile takeover offer by BHP worth around $140 billion, which saw its own output of iron ore rise about 13 percent and mined copper production climb 15 percent.

"BHP has reported a sound performance across each of its divisions... following which we are likely to upgrade our FY08 EPS by 1-2 percent," said analyst Simon Toyne at Numis Securities in London.

BHP's earnings per share before exceptional items is expected to rise 18 percent to $2.76 for the fiscal year to end June while Rio is expected to report a 68 percent increase in EPS to $9.68 for its calendar financial year, according to Reuters Estimates.

WARNS ON ESCONDIDA

BHP shares shed 0.8 percent in Australia to close at A$38.68, but rebounded in London to gain 1.4 percent to 1,640 pence by 1045 GMT, outperforming a 0.2 percent increase in the UK mining index .FTNMX1770.

BHP's share of copper output from Escondida, which produces nearly 10 percent of the world's copper, climbed 4 percent to 178,200 tonnes in the last quarter, while cathode production rose 7 percent to 40,300 tonnes, BHP said.

But BHP warned that Escondida's total output would drop 10-15 percent in the 2009 financial year and stay that way in subsequent years due to lower ore grades, a well-known problem that appears to be more significant than initially thought.

"Maybe that's a slightly bigger decline than some people would have expected," said Peter Chilton, an analyst with Constellation Capital Management, adding that capital costs continue to be an issue.

BHP also said it had found a rich copper deposit near Escondida measuring 1 billion tonnes of ore containing between 0.6-1.0 percent copper.

Overall, annual production rose in 13 commodities despite rising costs across its operations, with a sharp 54 percent jump in fourth-quarter oil and condensate output from a year earlier.

Production of coals used in power generation was in line with the last quarter of the previous year.

"This was achieved in an environment in which supply disruptions and input costs pressures are placing challenges on the industry response to continued strong global demand for commodities," BHP said.

BHP Chief Executive Marius Kloppers has argued combining BHP and Rio would lead to billions of dollars in cost savings at mine sites, ports and refineries.

Rio Chief Executive Tom Albanese has countered that the offer of 3.4 BHP shares for each Rio share is too cheap given Rio's assets and growth potential. (For a table of key production numbers from Australia's miners click on: [nSYD260191]). (Additional reporting by Sonali Paul and Geraldine Chua and Eric Onstad in London; Editing by Jonathan Leff)