By Nicole Mordant

Feb 13 (Reuters) - Cliffs Natural Resources Inc, which is facing against an activist investor who wants to break up the mining company, reported much better-than-expected earnings helped by a drop in costs and higher iron ore prices.

Shares in the iron ore and metallurgical coal producer surged 7 percent in after-hours trading to $23.42 Thursday.

Cliffs has recently been targeted by hedge fund Casablanca Capital, following several quarters of weak earnings and share performance. Its stock is down 40 percent in the past year.

Casablanca argues that the company's international assets are weighing on its cash-generating U.S. business and should be spun off. The New York-based fund wants to install a new chief executive at Cliffs as well as a majority of hand-picked directors.

But on Thursday, the Cleveland-based company said its net income rose to $31 million, or 20 cents a share, in the three months to end-December. A year ago, it reported a loss of $1.6 billion, or $11.36 a share, when it wrote down $1 billion related to its 2011 acquisition of Consolidated Thompson Iron Mines Ltd.

Excluding various one-off items, Cliffs earnings were $218 million, or $1.22 per share, up from $89 million, or 63 cents a share, in the same period a year ago.

That was well ahead of analysts' expectations of 77 cents a share, on average, according to Thomson Reuters I/B/E/S.

Chief Executive Gary Halverson said the results were achieved through a "company-wide focus to improve our cost profile and financial position".

Halverson, who until now has been chief operating officer, was appointed CEO of Cliffs on Thursday, a position that had been vacant since last November.

A spokesman for Casablanca said, "Halverson has never run a public company, and in our view does not have the relevant experience to fundamentally reshape and refocus the company."

Weakness in the steel market has hit relatively high-cost iron ore suppliers like Cliffs hard. In recent quarters, the company's earnings have also been weighed down by higher-than-expected costs at its Bloom Lake mine in Canada.

After months of uncertainty, Cliffs earlier this week it has decided to indefinitely suspend a planned expansion at Bloom Lake, and idle Wabush, another Canadian mine, slashing capital spending and cutting some 500 jobs.

Looking ahead, Halverson said increasing shareholder value must drive the company's capital allocation plans.

"The first step in this process is significantly cutting our capital spending and idling and or exploring alternatives for underperforming assets in our portfolio," he said.

Cliffs expects accelerating economic growth in the United States and continued growth in China in 2014 to support steel production and thus demand for the steelmaking raw materials that the company supplies.

Cliffs' revenue was marginally lower at $1.52 billion for the quarter from $1.54 billion a year earlier as lower prices and sales for coal were partially offset by a 10 percent increase in global seaborne iron ore pricing.

Cleveland-based Cliffs said its earnings included a previously disclosed $183 million pretax charge related to the closure of the Wabush mine.

The company also recorded a non-cash goodwill impairment charge of $81 million related to suspension of its chromite project in Northern Ontario.