CORRECTED-UPDATE 2-Rio Tinto in talks for Grasberg copper stake sale

(Corrects to clarify that Rio Tinto has not confirmed $3.5 bln sale price)

* Sale to form part of Indonesia’s 51 pct holding in mine

* Rio says no agreement yet reached

* Rio divesting assets that don’t meet its return requirements

May 23 (Reuters) - Global miner Rio Tinto Ltd confirmed on Wednesday it was in discussions to sell its interest in the world’s second largest copper mine to Indonesia’s Inalum.

Rio Tinto confirmed that discussions between it, Indonesia’s state mining holding company Inalum and miner Freeport were ongoing, “including as to price,” noting reports of a potential $3.5 billion purchase price.

No agreement had been reached and that was “no certainty that binding agreements will be signed,” the miner said in a statement.

The long heralded potential sale comes as Rio Tinto divests assets that do not meet its internal return requirements and as it bolsters its balance sheet and pays down debt.

Grasberg is owned and operated by Freeport Indonesia (PTFI), a subsidiary of US-based Freeport-McMoRan Copper & Gold Inc. . Rio Tinto has a joint venture with Freeport for a 40 per cent share of production above specific levels until 2021, and 40 per cent of all production after 2021.

“It’s probably a sensible sale - raise a bit of capital, get rid of some governance issues,” said Rohan Walsh, investment manager at Karara Capital in Melbourne, an investor in Rio.

Inalum’s purchase of Rio’s interest will form part of an agreement for Indonesia to take a 51 percent stake in Grasberg, wresting back control of the mine, which needs significant investment to move into its next phase underground.

Inalum said earlier this month that Freeport’s divestment of a controlling interest was still planned for 2018, even though the price and some contract terms were still to be agreed.

The proposed $3.5 billion price tag for Rio’s share was “not significant” given its size and relatively healthy balance sheet, said mining analyst David Lennox of Fat Prophets in Sydney.

“I suspect they are looking at that asset and thinking, ‘We can do better with the capital, either reinvesting it into existing operations or improving the balance sheet’.”

Lennox said the capital was more likely to go towards improving its iron ore operations, rather than building a war chest for acquisitions.

Inalum, which is arranging funding for the deal, has said it already had a “committed” loan for the transaction.

Freeport could not be reached for comment.

Shares in Rio rose by 0.8 percent to A$85.27 in early Australian trade. ($1 = 1.3205 Australian dollars) (Reporting by Chris Thomas in Bengaluru and Melanie Burton in Melbourne. Additional reporting by Fergus Jensen in Jakarta; editing by Diane Craft and Richard Pullin)