* Ore exports may continue as long as smelter plans in place
* Govt hopes to finalize processing policy next month
* No deadline set for smelter construction
By Yayat Supriatna and Fergus Jensen
JAKARTA, April 23 Major miners in Indonesia, such as Freeport and Newmont, will get extra time to build smelters or sign pacts with smelters under construction, as they move to comply with a ban on exports of unprocessed minerals set for 2014, the industry minister said on Tuesday.
Mineral processing is politically sensitive in Southeast Asia's largest economy, which is looking to garner greater benefits from its resources by developing processing industries, particularly where foreign firms are involved.
The comment spotlights division in the government over Indonesia's rules on smelters, after remarks by the deputy mining minister last week that building smelters was not viable in some cases.
"We can give them extra time, facilities or incentives, but they have to start building a smelter or work with another company to build one," Mohamad S. Hidayat told reporters.
"They have to follow our rules and regulations. No exception," he added, referring to international mining giants Freeport-McMoRan Copper & Gold Inc and Newmont Mining Corp.
Indonesia is pushing foreign miners, including Freeport's local unit Freeport Indonesia, to add more value within the country, as well as trying to secure higher royalty payments and sales of controlling shares.
Many of Indonesia's older generation of mining permits were issued under the authoritarian rule of former president Suharto, but are widely seen as favouring the companies.
Last year Indonesia asked all miners to submit plans to build refineries or smelters ahead of the January 2014 ban on raw mineral exports.
Mining industry groups have warned that enforcing the smelter rules could cost Indonesia up to $10 billion a year in lost exports.
But the minister did not set a deadline for the completion of smelter projects, suggesting this was still open to negotiation.
"One thing is for sure, contract holders must build their smelters soon," he added. "If, at the end of 2014, the smelters are not ready, we can talk about them later."
Freeport, which runs the world's second-biggest copper mine, Grasberg, in west Papua province, now processes just under a third of its ore in Indonesia at PT Smelting, its partly-owned copper refinery in East Java.
However, PT Smelting has no plans to expand, as a drop of 14 percent in benchmark copper prices this year points to the likelihood of slim profits.
The issue of smelters has been a sticking point in the renegotiations over older mining contracts, with companies saying they should be exempted from rules that overlap the terms, particularly on maximum concession size, divestment and processing.
Arizona-based Freeport has repeatedly said it is reluctant to build smelters in Indonesia, and the contract talks have delayed its decision to invest billions of dollars to develop underground mining and extend the life of Grasberg, which also has the world's largest gold reserves.
Smelters due to start construction before the 2014 deadline include PT Indosmelt, PT Nusantara Smelting and PT Global Investindo, which, together with the existing PT Smelting will make up total copper concentrate capacity of 3.4 million tonnes, according to industry ministry data obtained by Reuters.
But Hidayat said the government expected the companies to make a start on complying with the rules about building smelter facilities, at the very least.
"If they don't do anything now and in 2014 they ask the government to relax a policy, the government will ignore them. However, if they start building a smelter now, even if it's not finished by 2014, the government could consider relaxing policies for them."
Hidayat said the government was preparing a "road map of mineral downstream industry development" that he hopes will be finished next month, to be used to allocate supervision of development efforts among its departments.
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