* H1 underlying earnings at $1.56 bln beat consensus
* Interim dividend beats forecasts
* CEO sees volatile, challenging conditions ahead
* Share price eases (Adds more CEO comments, share price)
By Sonali Paul and Barbara Lewis
MELBOURNE/LONDON Aug 3 (Reuters) - Global miner Rio Tinto reported a 47 percent slump in first-half profit to its weakest in 12 years on Wednesday, still beating forecasts and a strong balance sheet allowed it to pay a higher dividend than expected.
It said commodity markets remained a challenge, even as the mining sector stages a recovery from the hammering inflicted by a plunge in prices for raw materials caused by a drop in Chinese demand.
The watchword is caution across the industry as markets are oversupplied and asset sales to reduce debt take longer than some investors would like.
Rio's new Chief Executive Jean-Sebastien Jacques said he was focused on shoring up the company by cutting costs further and did not expect help from commodities markets that were given a provisional lift in the second quarter by easy credit in China.
"So we are confident, but absolutely not complacent. Looking forward, we expect market conditions to remain challenging and volatile," Jacques told reporters.
"We can't assume a quick recovery of China, that will not happen. The fact of the matter is that China is slowing down," he later said to analysts.
The world's biggest commodity market, China, provides up to half of Rio's revenue, Jacques said, although the percentage varies from year to year.
Underlying earnings for the six months to June fell to $1.56 billion from $2.92 billion a year earlier, beating analysts' forecasts around $1.46 billion, according to an externally compiled consensus.
Gains in the aluminium business were better than expected, while iron ore and copper missed forecasts, analysts said.
"It's a decent result in difficult times," said Paul Gait, an analyst at Bernstein in London.
Rio's share price was down 0.8 percent by 1445 GMT, while the sector eased 0.3 percent.
Relative to the rest of the industry, the world's no.2 iron ore miner is strongly placed as it has cut debt faster than its peers, allowing it to dig new iron ore, copper and bauxite mines.
Net debt decreased to $12.9 billion from $13.8 billion in December and Bernstein said the ratio of net debt to EBITDA, closely watched as an indicator of financial health, had fallen to 1.1.
Rio Tinto's balance sheet enabled it to announce a half-year dividend of 45 cents a share, in contrast to rivals Anglo American and Brazil's Vale, which have suspended dividends.
The payout beat analysts' forecast of 41 cents.
Some analysts have said Rio Tinto should use its balance sheet to buy distressed assets rather than build new mines, but Jacques said the assets Rio Tinto wants are not for sale and prices others had paid for stakes in copper mines had been high.
As one of the more bullish sectors, world copper supplies could begin to face a deficit in two to three years, and in 10 years' time there would definitely be a shortfall, Jacques said.
"We've been very clear - it's about build and smart buy, and the word smart you can put in capital letters," he told reporters.
Rio remains on track to cut costs by $2 billion over the two years to December 2017.
Rio Tinto says it has learnt the lessons of the past when mining firms typically overspent during periods of high commodity prices, leading to overproduction and then a slump in markets.
Jacques said capital expenditure would remain far lower than in the boom at less than $4 billion this year and $5 billion next year.
"In this kind of cyclical and capital-intensive business, we must have a strong balance sheet," he said. (Additional reporting by James Regan in Sydney and Mamidipudi Soumithri in Bengaluru; Editing by Richard Pullin and Susan Thomas)