"In many ways, this is the business that has led the charge on making things more efficient, despite a very difficult market," BHP Chief Executive Andrew Mackenzie said after the world's biggest diversified miner reported a record $6.4 billion (4.9 billion pounds) loss.

"This has been a tough market for us, but in the half-year [Nickel West] was free cash flow positive," Mackenzie said. "For now, we've made the decision to keep it and run it well."

It was less two years ago that 2,000 workers were told to expect operations at the 44-year-old plant in western Australia to halt by 2019 after the high-cost, low-grade operation failed to find a buyer. In 2013, BHP booked a $1.25 billion after-tax impairment on the assets.

But following a surprise surge in nickel prices and new mine discoveries, BHP is allowing Nickel West to live and could even try again to find a buyer, sources familiar with previous attempts to sell the division said.

"BHP has been telling everyone that Nickel West is turning the corner and can stand on its own two feet, which sounds a lot like sales talk," said one source who inspected the division in 2014, the last time it was for sale. "I wouldn't be surprised if they try again to sell it."

Potential buyers including Glencore, First Quantum and China's Jinchuan Group walked away two years ago, put off by plummeting nickel prices and fearful of being left with $1 billion-plus in closure costs.

But a price recovery - nickel has jumped nearly 20 percent this year - and the discovery three years ago of the big Venus ore lode near the plant are improving Nickel West's survival odds.

Under BHP's former president of iron ore mines production, Eduard Haegel, Nickel West has also eliminated $440 million in annual costs and applied a minimum-spending approach to rebuilding the 100,000-tonnes-per-year Kalgoorlie smelter, which would extend its life for more than a decade.

"As the nickel price recovery continues, someone will want to buy it cheap," said Shaw and Partners analyst Peter O'Connor.

"BHP has already written it down, so it's not like they will be asking a lot for it," he added. "And an extension to operations pushes out the liability costs that would come with a shut down."

(Reporting by James Regan; Editing by Richard Pullin)

By James Regan