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UPDATE 1-Indonesia closer to mining deal with Freeport, but hurdles remain

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JAKARTA, July 26 (Reuters) - Indonesia is closer to a deal with Freeport McMoRan Inc on its long-term future in the country, but key issues still need to be resolved before the U.S. miner gets a new operating permit for its huge copper mine, a mining ministry official said.

Shares of the world's biggest publicly traded copper miner jumped to a 16-month high on Tuesday after Freeport said there had been progress in the talks to resolve its costly permit dispute with Indonesia.

Indonesia has agreed to a special mining permit with Freeport that will grant the miner operating rights for its Grasberg mine in Papua province through 2021, Energy and Mineral Resources Ministry Secretary-General Teguh Pamuji said on Wednesday.

"(But) the special mining permit hasn't been signed yet," Pamuji told reporters.

Once that is finalized, Freeport would be allowed to apply for two 10-year extensions to the mining permit for Grasberg beyond 2021, he said.

The two sides have until October, when Freeport's Grasberg export permit expires, to reach an agreement on the special mining permit.

Pamuji, who heads a government team holding talks with Freeport, said there were still four areas the two sides hoped to resolve by then.

Freeport and the finance ministry must come to terms on the requirement for the company to divest a 51 percent stake in its Indonesian unit. The two sides must also discuss a fiscal stability agreement guaranteeing tax and royalty payments that Freeport wants before agreeing to give up its current contract.

The two parties also need to hash out how the operations will be extended past the 2021 expiry of the special permit and the construction of a smelter at the Grasberg site, the world's second-biggest copper mine.

"There is no option," Energy and Mineral Resources Minister Ignasius Jonan told Reuters in an interview on Tuesday in Houston, referring to the divestment and a requirement for Freeport to build the smelter. "If they don't, it's OK, but they cannot export."

Freeport Chief Executive Officer Richard Adkerson warned on Tuesday that the company is prepared to take the dispute to arbitration if negotiations fail, but said neither party wanted that outcome.

"There is a mutual sense of optimism," Adkerson told analysts on a conference call. (Reporting by Wilda Asmarini; Writing by Fergus Jensen; Editing by Richard Pullin and Christian Schmollinger)