* 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 4.5 pct (Adds CEO, shareholder comments, detail)
By Sonali Paul and Silvia Antonioli
MELBOURNE/LONDON, 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 a 2001 merger, 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 4.5 percent on Tuesday.
Chief Executive Andrew Mackenzie said the widely expected move to simplify BHP around the "four pillars" of iron ore, copper, coal and petroleum - with potash as a potential fifth pillar - would spur cashflow growth and boost returns.
These assets generated 96 percent of the group's underlying core profit in the 2014 financial year.
"A demerger is a logical next step for other high quality assets also in our portfolio that don't have a scale of those in our major business," Mackenzie said in a call with investors.
The spin-off company, dubbed NewCo for now, will bundle BHP's aluminium, manganese, Cerro Matoso nickel in Colombia, South African energy coal, some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine.
It will not include Nickel West in Australia, for which a separate sale process was continuing, Mackenzie said.
"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.
Christopher Moore, portfolio manager of Fidelity Global Industrials Fund, which owns shares in BHP Billiton, said he hoped more focused management and investment would make the hived-off assets perform better.
"Shareholders could benefit from a potential acquisition of all of them by a larger mining company, or part of them, to crystallize value," said Moore, who plans to hold on to the new company's shares.
BHP confirmed the spin-off as it reported an 8 percent rise in second-half underlying attributable profit to $5.69 billion due to higher output volume and cost cuts. The figure was just below a consensus analyst forecast of $5.94 billion, according to Thomson Reuters Starmine's SmartEstimate.
The company said it had cuts costs in the 2014 financial year by $2.9 billion and expected to achieve a further $3.5 billion over the next three years.
Some analysts and investors saw the fall in BHP shares on Tuesday as 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.
Some shareholders were hopeful that proceeds from the planned sale of Nickel West may bring a buyback forward.
BHP Billiton was formed in 2001 from the merger of London-based Billiton with Australia's BHP, fusing two of the world's top producers of iron ore, aluminium, coal, copper, nickel and oil.
The company is still listed in Australia and the UK. NewCo 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.
Some holders of BHP shares in London had hoped the company would offer options such as a cash payment or buyback for those who can't or don't want to hold stakes in foreign-listed firms.
But BHP said all shareholders would be treated equally.
This raised concern that some funds with no mandate to hold shares in companies outside the UK might sell NewCo shares immediately and put pressure on its share price.
"We haven't made a decision yet on what to do with the spun-off company. We will make it when we have more detail available, but some others may be forced to sell," said Dimitri Willems, a senior portfolio manager at Kempen Capital Management based in the Netherlands.
He said Kempen would look at the new company's longer-term outlook when deciding whether to keep its shares, and was positive about the spin-off overall.
Three analysts estimated the new company could be worth between $15 billion and $17 billion.
BHP said only that NewCo's businesses, which generated more than $1.4 billion in operating cash flow and had achieved an underlying core profit margin of 21 percent in the 2014 financial year, would carry "minimal debt" and it was 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. (Editing by Tom Pfeiffer)