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UPDATE 2-Freeport says Indonesia mine talks progress, profit falls short

(Adds CEO statement, background on Grasberg and Indonesian permit issues, stock gains, analyst comment)

TORONTO, July 25 (Reuters) - Freeport-McMoRan Inc said on Tuesday that it was encouraged by recent progress in talks with Indonesia to resolve a lengthy permit dispute for its massive Grasberg mine, but will pursue arbitration if a long-term deal cannot be reached.

Arizona-based Freeport, the world's biggest publicly listed copper miner, reported second-quarter profit and production that fell short of expectations, reflecting an ongoing strike at Grasberg.

As tight global copper supplies helped lift the price of copper to five-month highs, Freeport shares surged more than 8 percent in early trade, mirroring gains by other producers of the metal.

Investors were looking past "yet another rough quarter and yet another guide down," to focus on sturdy copper prices and Freeport's positive comments on Indonesian talks, said Clarksons Platou Securities analyst Jeremy Sussman.

Freeport resumed copper concentrate exports in April from Grasberg, the world's second-largest copper mine, after a 15-week outage related to the licensing row.

A temporary license allowing concentrate exports expires on Oct. 10 and a permanent solution is yet to be found.

"We are encouraged by recent progress in our active negotiations with the Indonesian government to resolve issues involving our contractual rights," Chief Executive Richard Adkerson said in a statement.

Without a permit, Freeport said it will pursue arbitration and "significantly" reduce or defer spending on a major underground mine development plan at Grasberg. Some $700 million of the forecast 2017 capital expenditure of $1.6 billion is earmarked for the mine.

Revised rules in Indonesia require miners to divest a 51 percent stake, relinquish arbitration rights and pay new taxes and royalties. Freeport says it requires the fiscal and legal protection in its current contract.

Freeport cut about 10 percent of its Grasberg workforce of 32,000 earlier this year to reduce costs. Last week, some 5,000 unionized workers extended their strike for a fourth month to the end of August.

To mitigate that impact, Freeport used existing mine and mill stockpiles for second-quarter production and sold concentrate from inventories.

Freeport's adjusted profit of 17 cents a share trailed the consensus of 20 cents, according to Thomson Reuters I/B/E/S, while revenue of $3.7 billion topped the view of $3.3 billion.

Freeport again cut its 2017 sales forecast to 3.7 billion pounds of copper, from 3.9 billion pounds, and 1.6 million ounces of gold, from 1.9 million ounces.

In April it cut annual guidance from 4.1 billion pounds of copper and 2.2 million ounces of gold. (Reporting by Susan Taylor; Editing by W Simon and Meredith Mazzilli)