Top global miner BHP Billiton signaled caution over a sustained global recovery and held off from a share buyback after reporting its weakest first-half profit in four years. BHP's July-December profit nevertheless beat market forecasts and was 24 percent stronger than in the previous half, spurring the miner to raise its dividend slightly, pushing its shares up more than 3 percent.

The momentum's the important factor, said Tim Schroeders, a portfolio manager at Pengana Capital, which owns BHP shares.

There should be some more good news over the next few months with prices for iron ore and coal appearing as though they'll go up, which should further buoy profits going forward.

Fund managers said BHP was wise to hold on to its cash instead of launching a share buyback, which analysts had flagged might be possible, as the global outlook remained uncertain and it had $12 billion worth of expansion projects underway.

With such a large number of reinvestment opportunities, they're just going to play the conservative angle until they gain more confidence in the global economic recovery, said Adam Dixon, a portfolio manager at Ausbil Dexia.

BHP warned the pace of monetary tightening and the rate of loan growth for commodity-intensive sectors in China, its biggest customer, would be critical, and was wary about the speed and strength of recovery in developed economies.

We do not expect China to stop lending, BHP said. However, reduced credit liquidity in key segments of the commodity market may have a flow-on impact on prices.

At the same time, CEO Marius Kloppers highlighted China's roaring demand for iron ore, which has driven up spot prices <.IO62-CNI=SI> to more than double the benchmark price.

So that would indicate there is extremely strong demand on the back of China's iron ore imports, surprising everybody to the upside in the last six months, he told reporters.

BUYBACK POSSIBLE

Analysts expect a sharp turnaround in BHP's second-half profit, which could result in contract price hikes of about 30 percent for iron ore and more than 50 percent for coking coal.

The company highlighted its low gearing of 15 percent with net debt of $7.9 billion, flagging that it may be in a position to launch a share buyback in the future.

Our strong balance sheet continues to give us significant flexibility to progressively grow production capacity, return to shareholders and opportunistically consider acquisitions.

Growth projects cover iron ore, alumina, thermal coal, oil and gas, with potash and uranium expansions in the pipeline.

Kloppers played down speculation about potential takeovers, saying the main focus was its proposed $116 billion iron ore production joint venture with Rio Tinto , set to save the two companies more than $10 billion.

We continue to view this as the most value-adding acquisition that can be done in the mining industry, he said.

Rio and BHP face a big hurdle winning approval from regulators in Europe and China as steelmakers oppose allowing the world's No.2 and No.3 iron ore miners to link their production. Their combined annual output of more than 350 million metric tons would overtake Brazil's Vale .

BHP's July-December underlying profit before one-offs fell 7 percent to $5.70 billion, beating analysts' forecasts of $5.1 billion as coal and aluminum earnings were better than expected.

BHP's shares rose as much as 3.5 percent after the result but drifted off to close up 0.1 percent at A$39.88.

Hit by weaker iron ore contract prices set last year after demand slumped, earnings from iron ore, its biggest business, were cut in half to $2.09 billion. Base metals earnings were back in the black at $2.5 billion.

Rival Xstrata , the world's biggest thermal coal exporter, said on Monday its full-year profit slid 41 percent, but it resumed paying dividends, reflecting its confidence in recovering commodities demand.

Rio Tinto posts its half-year results on Thursday.

(Editing by Ian Geoghegan and Mark Bendeich)

China