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* Spin-off includes some nickel, coal
* Analyst sees 'better asset mix than we thought'
* Company to hold minimal net debt
* BHP Billiton half-year profit up 8 pct
* London-listed shares drop 4 pct
By Sonali Paul
MELBOURNE, Aug 19 (Reuters) - The world's biggest mining company, BHP Billiton , announced plans to spin off businesses worth an estimated $16 billion, most of them acquired in its 2001 merger with Billiton, to focus on its most profitable activities.
But it held off on a share buyback, disappointing investors who had hoped to receive around $5 billion. BHP's London-listed shares fell 4 percent.
Chief Executive Andrew Mackenzie, in the top job for just over a year, said the widely expected move to simplify BHP around the "four pillars" of iron ore, copper, coal and petroleum would spur cashflow growth and boost returns.
"By concentrating on what we do best, the development and operation of major basins, we can improve our productivity further, faster and with greater certainty," Mackenzie said in a statement.
The spin-off company, dubbed NewCo for now, will bundle BHP's aluminium, manganese, Cerro Matoso nickel in Colombia, South African energy coal and some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine.
"It's probably a better asset mix than we thought it would be beforehand. BHP has added Cerro Matoso, which is a better nickel asset than its Nickel West division, and Illawara Coal," said David Radclyffe, an analyst with CLSA in Sydney.
BHP confirmed the spin-off as it reported an 8 percent rise in second-half underlying attributable profit to $5.69 billion, just below a consensus analyst forecast of $5.94 billion, according to Thomson Reuters Starmine's SmartEstimate.
Analysts and investors said the fall in BHP shares on Tuesday was an over-reaction.
"Some people may be disappointed because nothing was announced on a special dividend or buyback," said Albert Minassian, an analyst with Investec in London.
"But if you already have big news about a spin-off there is no point announcing the two together. You keep something for the next time. The money is still there," he said.
BHP had been targeting net debt of around $25 billion before it would consider returning capital to shareholders. But on reaching that goal, it said it would only go ahead when it could return capital in a predictable and sustainable way.
"We are planning ahead prudently, but we will not be excessively conservative. We will continue to look at ways of shifting excess cash in a timely way to our shareholders," Mackenzie told reporters.
BHP said it had cuts costs in the 2014 financial year by $2.9 billion and flagged that it expected to achieve a further $3.5 billion in cost savings over the next three years.
The new company will be headquartered in Perth and listed in Australia, with a secondary listing in South Africa. Shareholders in BHP Billiton Ltd and BHP Billiton Plc would receive shares in the new company on a pro-rata basis.
BHP did not state the value of the new company, but three analysts estimated it could be worth between $15 billion and $17 billion.
BHP said only that NewCo's businesses had achieved a profit margin of 21 percent in the 2014 financial year and would carry "minimal debt", targeting an investment grade credit rating.
"It looks like quite an interesting company, and given the size and diversification it'll be pretty well received," said Brenton Saunders, a Sydney-based portfolio manager at BT Investment Management, which owns shares in BHP.
The company would be headed by BHP Billiton Chief Financial Officer Graham Kerr, while Brendan Harris, BHP Billiton's head of investor relations, would be chief financial officer.
BHP's Australian Nickel West operations were not included in the new company, and a separate sale process was continuing, Mackenzie said. The company was in talks with several potential buyers. (Additional reporting by Silvia Antonioli; editing by Richard Pullin and Tom Pfeiffer)