UPDATE 4-Indonesia to pay $3.85 billion for majority stake in Freeport's Grasberg copper mine

Grasberg copper mine@

* Indonesia to gain 51.38 pct stake in Freeport's local unit

* Freeport now closer to ending years of negotiating (Adds details from conference call)

JAKARTA, July 12 (Reuters) - Indonesia struck an agreement on Thursday with Freeport-McMoRan Inc and Rio Tinto to buy a controlling stake in the world's second-biggest copper mine via a series of transactions valued at $3.85 billion.

The deal should cap more than six years of wrangling over the rights for the Grasberg mine, located in the country's eastern province of Papua, as Jakarta seeks to gain greater control over its mineral wealth.

"It's a new day for Freeport, and a new day for our working with the government," Freeport Chief Executive Officer Richard Adkerson said on a conference call with investors after a signing ceremony in Jakarta.

Under the agreement, Indonesian state-owned miner PT Inalum plans to acquire the Indonesian unit of Rio Tinto, which holds a 40 percent participating interest in Grasberg, for $3.5 billion.

That interest would then be transferred to Freeport's local unit, PT Freeport Indonesia, and converted into a 40 percent equity holding in the unit via a rights issuance that would then be given to Inalum.

A subsequent purchase of the share of Grasberg held by Freeport unit PT Indocopper Investama, valued at $350 million, would give Indonesia a total holding of 51.38 percent in Freeport Indonesia.

Freeport, which will hold about 49 percent of Grasberg when the agreement is set, is selling this stake at a discount in order to get the deal done, Adkerson said. Jefferies mining analyst Christopher LaFemina valued the stake that Freeport will sell at $800 million.

Freeport has also agreed to build a smelter in Indonesia within five years of the deal being signed, Adkerson said.

It was not immediately clear if the agreement would be binding. While Freeport and Rio both said the agreement was non-binding, Jakarta said it was a binding deal.

The transactions will be completed later this month, said State-Owned Enterprises Minister Rini Soemarno.

The two sides had agreed in principle last August to let Freeport keep operating the mine possibly until 2041 while ceding control over its local division. Thursday's agreement hammers out the specifics.

Aside from increasing government revenues, Jakarta hopes the agreement will serve as "a commitment to a conducive investment climate" in Indonesia, Finance Minister Sri Mulyani Indrawati said at the ceremony.

Shares of Phoenix, Arizona-based Freeport rose 2 percent to $17.67 in Thursday trading.

ROYALTIES

For 2018, Grasberg is expected to produce 1.2 billion pounds of copper and 2.4 million ounces of gold, an increase of 20 percent and 60 percent, respectively, from 2017.

Indonesian President Joko Widodo praised the agreement as "a leap forward."

"We have to have a larger amount of income from tax, royalties, dividends ... so, the value of our mining sector can benefit everybody," Widodo said at the ceremony.

Sealing a deal to get a majority stake for Indonesia in Grasberg is a priority for Widodo, who is widely expected to seek a second term in office at presidential elections next year.

The deal is also critical for the massive investment needed to develop underground mines at Grasberg as the current open-pit operation is phased out later this year.

Still, planned agreements on how Freeport will manage mine operations with Inalum as the majority shareholder also need to be resolved.

"All parties have committed to work towards agreeing and signing binding agreements before the end of the second half of 2018," Rio Tinto said in a statement.

Rio said "there is no certainty that a transaction will be completed."

Efforts to finalise a deal have been complicated by concerns over the environmental impact of the project, in particular its handling of mine waste or tailings.

Environment Minister Siti Nurbaya must still issue a recommendation to Freeport Indonesia before the miner can secure the rights to Grasberg up to 2041. (Additional reporting by Gayatri Suroyo and Maikel Jefriando in JAKARTA, Susan Taylor in TORONTO and Ernest Scheyder in HOUSTON Writing by Fergus Jensen and Ed Davies Editing by Richard Pullin, Christian Schmollinger and Frances Kerry)