UPDATE 2-Australia's Fortescue says iron ore production costs hit record low, shares jump

shares jump@

* Fortescue's iron ore output costs below analyst expectations

* Company maintains full-year cost guidance

* Reports 4-pct drop in quarterly iron ore shipments

* Fortescue shares climb around 3 pct (Adds comment, detail)

MELBOURNE Jan 30 (Reuters) - Shares in Australia's Fortescue Metals Group Ltd jumped on Tuesday after the iron ore miner reported its costs came in at record lows in the last quarter, beating analyst expectations.

Shares in Fortescue, which kept its full-year guidance for costs intact, had climbed 3 percent by 1210 GMT in a market where miners broadly declined after the U.S. dollar clawed back from three-year lows overnight.

"The (company's) cost performance was solid considering the strength of the Australian dollar and oil prices," RBC mining analyst Paul Hissey said in a report.

Fortescue, the world's fourth-largest iron ore producer, said on Tuesday that it cost $12.08 to churn out a wet metric tonne (WMT) of the commodity in the Oct-Dec quarter. That was down 3.7 percent from the same period the year before and compared to RBC's expectations of $13.24.

Fortescue maintained its cost target forecast for the financial year that started in July of between $11 and $12 a tonne.

Fortescue said its iron ore was selling at a greater discount than expected as it reported a 4-percent decline in second-quarter shipments of the steelmaking ingredient, in line with analyst estimates.

Shipments fell to 40.5 million tonnes in the three months ended Dec. 31 versus 42.2 million tonnes in the same period a year ago. UBS had forecast a figure around 40.5 million tonnes.

That came in the wake of China switching to higher grade, less polluting iron ore as it battles severe winter smog.

"We continue to view downside risks to price realization recovery ... and maintain an Underperform rating on FMG," RBC said.

The discount to which Fortescue sells its product against the benchmark 62 percent grade index <.IO62-CNO=MB> has been steadily deepening, hitting 23 percent in the first quarter of this year.

It said on Tuesday that the discount would widen to 34 percent in the second quarter of fiscal 2018, but maintained its guidance range of 25-30 percent discount for the year on expectations that demand for its product would recover when China's pollution curbs ease as winter fades.

"The market view (is) that post Chinese New Year and the end of winter production restrictions there will be a reduction in price spreads between iron ore grades," Fortescue said. The Lunar New Year festival kicks off in mid-February.

The Australian government earlier this month said it expected a 20 percent drop in iron ore prices this year, hurt by rising global supply and cooling demand from China. However, most private forecasts expect the price to remain largely flat.

"(Fortescue's) December quarter price realization was not as good as expected but more importantly not as bad as feared," Peter O'Connor of Shaw and Partners said in a report. (Additional reporting by Aditya Soni in Bengaluru; Editing by Chris Reese, Rosalba O'Brien and Joseph Radford)