* Cerro Matoso Q1 production up on new furnace * BHP seeking extension of Cerro Matoso concession * Colombia wants BHP to pay royalties on iron ore By Diana Delgado BOGOTA, April 19 (Reuters) - Nickel production in BHP Billiton Cerro Matoso mine in Colombia rose 72 percent in the first quarter from the year earlier thanks to the replacement of a furnace, the company said. Colombia's only nickel mine - with 21 million metric tons of proven reserves - produces about 4 percent of the world's nickel, and 10 percent of global ferro nickel. Ferro nickel is an iron ore-nickel combination mostly used in steel making. About 65 percent of nickel is used to manufacture stainless steels, and 20 percent in other steel and non-ferrous alloys, often for highly specialized industrial, aerospace and military applications, according to the International Nickel study group. "Nickel production was higher than all comparable periods, reflecting improved smelter and refinery performance at Nickel West Australia and strong operating performance at Cerro Matoso (Colombia) following the successful replacement of the Line 1 furnace in September 2011," BHP said on Wednesday. Cerro Matoso -- which bills itself as the world's second largest producer of ferro nickel -- produced 13,400 tons of nickel between January and March, up from 7,800 tons in the same period last year, the company said. In the 12-month period through March, nickel production totaled 36,100 tons, higher than the 32,600 tones in the same period last year. BHP, the world fourth-largest nickel producer, has concession rights on Cerro Matoso until 2012. Three years ago, the company asked the government to extend the contract, an official at the government's mining and planning unit UPME told Reuters. The government has not yet extended the concession because it is holding separate negotiations with BHP to pay royalties on iron ore associated with nickel in addition to the 12 percent it already pays, government officials confirmed. BHP did not return email seeking comment on the issue. Colombia's UPME says that it expects Cerro Matoso output at 51,100 tons in 2012. The mine produced 37,810 tons of nickel last year, 23.5 percent lower than the 49,443 tons produced in 2010 as one of the furnaces was off, the government said. Cerro Matoso has an estimated reserve life of 40 years. Located near the town of Montelibano in northern Colombia, the mine has a lateritic nickel ore deposit and a low-cost ferro nickel smelter. The smelter and refinery are integrated with an open-cut mine. Colombia has six nickel deposits with proven reserves totaling 37.8 million tons and 46.48 million tons in indicated reserves, the government said.