I've never made fondant before, but I don't see why it wouldn't work to cut the recipe in half. Other recipes work just fine cut down, and I can't think of any reason why fondant would be any different.
Yes you can. It looks like the recipe is almost the same as Michele Foster's Fondant found here in the recipes section. Her fondant turns out really good and I think the milk just makes it taste better. I know that Michele says that she will use water and omit the flavouring if she is just using it to cover a dummy cake so it doesn't make a difference if you use milk or water. Also you will notice that MFF is about double the size of this recipe so again it should be no problem to half this one again.
I think it is ok, just add the sugar little by little so you make sure it doesn't came out to dry.