* Sale to form part of Indonesia's 51 pct holding in mine
* Rio says no agreement yet reached
* Rio divesting assets that do not meet its return requirements (Adds comment from State Owned Enterprise Minister)
By Melanie Burton and Fergus Jensen
MELBOURNE/JAKARTA, 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 state mining holding company Inalum.
Discussions with Inalum and miner Freeport were ongoing, Rio Tinto said in a statement, "including as to price," noting reports of a potential $3.5 billion purchase price.
No agreement had been reached and there was "no certainty that binding agreements will be signed," it said.
Jakarta-based spokesmen for Inalum and Freeport declined to comment on the matter.
The long-heralded potential sale comes as Rio Tinto warns of resource nationalism, and seeks to divest assets that do not meet its internal return requirements.
Grasberg is owned and operated by Freeport Indonesia (PTFI), a subsidiary of U.S.-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 planned purchase of Rio's interest will form part of an agreement for Indonesia to take a 51 percent stake in Grasberg, giving it control of the mine, which needs significant investment to move into its next phase underground.
Rules introduced last month require that transaction to have taken place by 2019.
State Owned Enterprise Minister Rini Soemarno told reporters on Wednesday that Inalum was "still finalising a heads of agreement" with Rio Tinto.
"God willing, it will be reached in June," Soemarno added.
The mooted $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'."
Inalum, which is arranging funding for the deal, has said it already has a "committed" loan for the transaction, and is aiming at a deal next month, although several terms have yet to be agreed upon.
On Friday, Inalum CEO Budi Gunadi Sadikin said discussions on the acquisition were being held up by "several" environmental issues.
Freeport had "made breaches that need to be revised through the environmental audit," Sadikin said. "The biggest issue is the issue of tailings - that has to be improved."
Freeport shares fell more than 14 percent in late April after the miner revealed it was facing new environmental demands from Indonesia related to the management of mine waste, or tailings, from Grasberg.
($1 = 1.3205 Australian dollars)
Reporting by Chris Thomas in Bengaluru; Melanie Burton in Melbourne; Additional reporting by Cindy Silviana in Jakarta; Writing by Fergus Jensen; Editing by Diane Craft, Richard Pullin and Jane Merriman