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UPDATE 2-Freeport profit pops higher; miner makes progress in Indonesia

(Adds detail on Indonesian talks, spending plans in Indonesia, divestment talks)

TORONTO, Jan 25 (Reuters) - Freeport-McMoRan Inc, the world's second-largest copper miner by production, reported a bigger-than-expected jump in fourth-quarter profit on Thursday, lifted by stronger commodity prices and productivity gains.

The Arizona-based company, which formed a framework agreement with Indonesia's government last August to secure a long-term permit for its massive Grasberg copper and gold mine, also said talks were advancing.

"We are continuing to make significant progress in our ongoing negotiations with the Indonesian government to restore long-term stability for our Grasberg operations," Chief Executive Richard Adkerson said in a statement.

Indonesia introduced new rules to gain greater control over mineral resources in 2017, requiring miners to divest a majority stake in their operations, relinquish arbitration rights and pay new taxes and royalties.

Freeport, whose permit to operate Grasberg expires on June 30, is seeking an extension of its export license, which ends Feb. 16.

The final phase of Grasberg's open pit, which contains high-grade copper and gold ore, will be mined until operations transition underground in the first half of 2019, Freeport said.

The miner repeated a warning that without a deal, it will "significantly" reduce or defer spending and pursue dispute resolution procedures. Freeport estimates annual capital spending to develop underground operations at $900 million over the next five years.

Freeport said it is now in talks on potential divestment arrangements with joint venture partner Rio Tinto and with Indonesian state-owned enterprise Inalum, which will lead a consortium of investors for the divestment.

They aim to complete negotiations and required documentation in the first half of 2018, Freeport said.

Rio has a 40 percent interest in the Grasberg contract and is entitled to 40 percent of production after 2022. That could be converted to shares in Freeport's Indonesian unit, the country's mining minister said, making up the bulk of the government purchase.

Earlier this month, Indonesia's mining minister said he hoped to finalize contract talks by June, but there has been no agreement on the divestment valuation, timing or structure, key sticking points.

Freeport reported an adjusted profit of 51 cents a share in the fourth quarter, bettering analyst expectations of 45 cents.

Average prices in the fourth quarter rose to $3.21 per pound of copper, from $2.48 in the year-earlier period, while gold prices rose to $1,285 an ounce from $1,174.

For 2018, Freeport expects consolidated sales of 3.9 billion pounds of copper and 2.4 million ounces of gold, including 1 billion pounds of copper and 675,000 ounces of gold in the first quarter. (Reporting by Susan Taylor; Editing by David Gregorio, Lisa Von Ahn and Frances Kerry)