* Indonesia plans to buy Rio 40 pct interest in Grasberg
* Freeport, Indonesia agreed in August to divestment plan
* Indonesia to also buy Indocopper Investama Grasberg stake (Adds new comments from minister)
JAKARTA, Dec 5 (Reuters) - Indonesia plans to acquire Rio Tinto's 40 percent participating stake in the Grasberg copper mine operated by the local division of Freeport-McMoRan Inc, part of government plans to control more of the country's resources.
Under a joint venture formed in 1996, Rio has a 40 percent interest in Freeport's Grasberg contract, entitling it to 40 percent of production above specific levels until 2021 and 40 percent of all production after 2022.
Phoenix, Arizona-based Freeport said in August it would divest 51 percent of PT Freeport Indonesia to the Indonesian government, to meet local ownership rules.
Indonesia plans to complete the acquisition of Rio's interest in the mine in 2018, as part of a purchase of a 51 percent stake in Freeport Indonesia by the Ministry of State-Owned Enterprises (SOE) and other government units, Energy and Mineral Resources Minister Ignasius Jonan said on Tuesday.
Indonesia's proposal could see the sale of Rio's interest in Grasberg make up the lion's share of that deal, provided all parties can agree the structure and price, Jonan said.
"The government will buy Rio Tinto's 40 percent participating interest in PT-FI," Jonan said. If this is fully converted to shares, Freeport agrees if Rio Tinto is willing to sell to the government of Indonesia," he added.
According to Jonan, the drafting of an agreement has begun and the state-owned enterprise ministry and other government bodies aim to complete the acquisition in 2018, along with new fiscal terms in a special mining permit to replace Freeport's Grasberg contract.
Under the proposal, Indonesia's existing 9.36 percent stake in Freeport Indonesia would be diluted down to around 5 percent, Jonan said.
A further 9.36 percent stake in Freeport Indonesia held by PT Indocopper Investama, currently wholly-owned by Freeport McMoRan, would also be bought by the government, he said, and also diluted to around 5 percent.
Rio's interest converted to an equity stake, combined with the diluted Indocopper stake and the existing government stake, added up to "around 51 percent," Jonan said.
"According to the state-owned enterprise ministry, they are willing in principle," he said referring to the two mining companies.
A Melbourne-based spokesman for Rio declined to comment. A spokesman for Freeport Indonesia also declined to comment. Budi Gunadi Sadikin, chief executive of PT Inalum, Indonesia's state owned mining holding company tipped to acquire the stakes, declined to comment.
A review of two decades of annual reports shows Rio's capital expenditures on Grasberg, the world's second-biggest copper mine, reached nearly $2 billion, while its net profit adds up to just $1.7 billion.
Rio has previously said it was holding talks with Indonesia on a potential exit from the venture, amid concerns about the impact of Indonesian rule changes on the Grasberg contract.
"There is no doubt that Grasberg is a world-class resource. However, there's a difference between a world-class resource and a world-class business," Rio Tinto Chief Executive Jean-Sebastien Jacques said in April.
Outside Indonesia, Rio has been expanding its exposure to copper mining against a favorable outlook for the metal.
It is spending around $1 billion a year on an underground expansion to its Oyu Tolgoi mine in Mongolia and also owns the Bingham Canyon copper mine in the United States.
In Chile, Rio is a 30 percent owner of the Escondida mine, the world's largest copper mine. BHP is the majority owner.
Rio Tinto is also a partner with BHP in the proposed Resolution copper mine in Arizona, which if developed has the potential to be the biggest source of copper in the U.S.
An official at the SOE ministry said in late November that there was "no clear structure yet" for a Freeport deal.
Jonan said the government "will maintain the valuation that we believe is correct," referring to a price of between $6 billion and $7 billion for Freeport's Indonesian unit.
"We're looking for ways so that this purchase can go ahead and the price is fair."
Benchmark copper prices on the London Metal Exchange dropped 2.2 percent on Tuesday to $6,674.50 per tonne. On Oct. 16, prices surged past the $7,000 per tonne mark to their highest in three years. (Reporting by Wilda Asmarini; Additional reporting by Cindy Silviana in JAKARTA and Jim Regan in SYDNEY; Writing by Fergus Jensen; Editing by Christian Schmollinger and Jane Merriman)