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UPDATE 3-BHP Billiton cost cuts boost profit, pave way for buyback

* Underlying profit of $7.76 bln v $6.9 bln consensus

* On track to cut net debt to $25 bln, key for capital return

* Will consider big dividend hike in August

* Sees new iron ore supply outstripping demand growth

* Shares hit one-year high, outpace market

MELBOURNE, Feb 18 (Reuters) - Global miner BHP Billiton topped market forecasts with a 31 percent rise in first-half profit on Tuesday and hinted it may launch a share buyback in August, despite a cautious outlook on Chinese growth.

After achieving annualised cost savings of $4.9 billion, slashing capital spending and trimming debt, the world's biggest miner pointed to strong cash flows that would put it in a position to consider a big dividend hike and capital return to investors.

BHP and its rivals have been shelving projects, cutting costs and selling assets over the past 18 months to satisfy shareholders wanting a bigger share of spoils from the mining boom, with Rio Tinto surprising investors with a 15 percent dividend hike last week.

Analysts welcomed improvements in BHP's coal business and its previously struggling aluminium, manganese and nickel arm, and said the company should be able to fund a buyback at the end of the financial year, possibly ahead of Rio Tinto.

"Without a doubt, there is definitely a probability that they embark on additional capital management with the FY14 result," Deutsche Bank analyst Paul Young said.

BHP said it expected to generate strong free cash flow which would help it pare net debt to around $25 billion by June 2014, a level at which Chief Executive Andrew Mackenzie has said the company would be willing to look at a capital return for shareholders.

"If we deliver that level of indebtedness towards the end of this financial year, I'll come back to you at the full year with the authority of our board to talk about future capital management that may be possible," Mackenzie told reporters.

BHP shares rose 2.2 percent to a one-year high at A$38.88, outpacing a 0.2 percent rise in the broader market.

Mackenzie gave a cautious outlook, saying Chinese steel output had started slow this year at 730 million tonnes on an annualised basis and said new iron ore supply from the likes of BHP and Rio would outstrip demand growth in China and elsewhere.

"Towards the end of the calendar year, the very strong growth in supply is more than enough to create a bit of an excess and therefore to drive price lower," Mackenzie, who took over as CEO in May last year, told analysts.

However he said BHP had more room to strip out costs to insulate it from any market weakness, and highlighted that the company had been able to grow returns at a time of flat to slightly weaker commodity prices.

"We're just getting started and I think there's a lot more to come," he said, without specifying any cost-cutting target beyond $5.5 billion for the year to June 2015.

PROFIT BOOST

Underlying attributable profit rose to $7.76 billion for the six months to December, up from $5.94 billion a year earlier. Analysts had been expecting a profit of $6.925 billion on the same basis.

Analysts said the result beat forecasts partly due to cost cutting and a lower-than-expected tax rate.

Net debt fell to $27.1 billion, down $422 million from June 30, 2013.

While some analysts suggested BHP may need to sell more assets to bring down debt, Mackenzie said that was not the case.

"You can see from the strength of our cashflow that we don't need the money," he said, when asked whether the company expects any further major asset sales this year, after booking $2.2 billion worth of divestments in the first-half.

Profit from iron ore, its biggest business, rose 60 percent on the back of mine expansions, while petroleum earnings fell 16 percent, which analysts said was disappointing. Copper earnings rose just 0.4 percent.

Its coal business posted a profit of $510 million, up from break even a year earlier. Mackenzie declined to comment on speculation the company was considering exiting its thermal coal business or wanted to sell its South African coal mines.

BHP raised its interim dividend by 3.5 percent to $0.59 a share, slightly below consensus but in line with its normal practice of paying an interim dividend at the same level as the final dividend from the year before.