MELBOURNE (Reuters) - Global miner BHP Billiton (>> BHP Billiton Limited) (>> BHP Billiton plc) posted a 31 percent drop in half-year profit as prices for all its main products collapsed, but beat market forecasts and flagged further belt tightening to withstand the tough conditions.

The company again cut its targets for capital spending and said it would reap savings of $4 billion in the next two years, shoring up cash flows so it could stick to its policy of not cutting dividends.

"We are confident that we can maintain our progressive dividend policy and continue to selectively invest in projects that offer compelling returns," Chief Executive Andrew Mackenzie said in a statement.

The world's biggest miner could not match rival Rio Tinto's (>> Rio Tinto Limited) (>> Rio Tinto plc) recent $2 billion share buyback as its petroleum arm, the business that sets BHP apart from other miners, has been battered by a 50 percent fall in oil prices since June.

But investors still hailed better than expected results in iron ore, BHP's biggest earner, and the aluminium, manganese and nickel businesses that the company plans to hand to shareholders in a new company called South32.

"Quality operations are making a fist of the tough environment, and they're doing better than the market's expecting, so that's a great outcome," said Ric Ronge, a portfolio manager at Pengana Capital.

BHP's shares added 0.7 percent to $32.33, not far off a three-month high touched last week, in a weaker overall market.

Mackenzie made no promises about a capital return to shareholders anytime soon.

"I said very clearly our priorities for now are for preserving the progressive base dividend policy,... to retain our strong A credit rating and then to invest selectively in some of the high value projects we have," he said.

IRON ORE MARGIN STRONG

Underlying attributable profit fell to $5.35 billion for the six months to December from $7.76 billion a year earlier, ahead of analysts' forecasts for around $5.1 billion.

BHP raised its interim dividend 5 percent to $0.62, also slightly ahead of market forecasts.

Underlying earnings from iron ore slumped 35 percent, but thanks to sharp cost cutting BHP achieved a strong 57 percent earnings before interest, tax, depreciation and amortisation (EBITDA) margin on iron ore despite the price slump.

That was just below the 58 percent margin achieved by Rio Tinto in the same period.

Petroleum earnings fell 15 percent even as output increased. BHP called off the sale of its Fayetteville shale assets as it was unable to get what it considered a fair price.

Aluminium, manganese and nickel earnings rose nearly five-fold to $716 million, a promising sign for shareholders as BHP is set to hand them a new company, South32, by June.

South32 will house BHP's aluminium and manganese units, the Cerro Matoso nickel mine, Cannington silver mine and some coal mines in Australia and South Africa.

"If our shareholders approve the demerger, we do not plan to rebase or lower our dividend, which implies all other things being equal, a higher payout ratio," Mackenzie told reporters.

The miner is sticking to its plan to hold a shareholder vote on the demerger in May and complete the spin-off mid-year.

It cut costs by $1.75 billion in the first-half, taking total savings over the past nearly three years to around $10 billion.

It would target capital expenditure for this year of $12.6 billion, down 11 percent from guidance last November, and cut planned capital spending for the 2016 financial year even further to $10.8 billion.

(Reporting by Sonali Paul; Editing by Richard Pullin)

By Sonali Paul