* 2017 daily ore output estimate cut by a third -memo
* $1 bln/yr underground expansion investments shelved -memo
* 'Painful but necessary' for company survival -memo (Recasts, updates on smelting operations)
By Fergus Jensen
JAKARTA, March 1 (Reuters) - Freeport-McMoRan's Indonesian unit sees "no returning to business as usual", an internal company memo said, as the miner cut output and laid off workers at its giant Grasberg copper mine in a battle with Jakarta over mining rights that has paralysed its operations.
Freeport's Indonesian unit has shelved plans to invest $1 billion a year in long-term underground expansion at the world's second-biggest copper mine, the company said in a memo to all staff on Feb. 28, citing a stoppage to Grasberg exports since mid-January resulting from changes to Indonesian mining rules.
Copper ore output from the Grasberg mine in Papua will be cut to 95,000 tonnes a day in 2017 from 140,000 tonnes previously estimated, it said in the document reviewed by Reuters.
"This is not the direction we want to go, as these investments are needed to build our future business and would provide continued economic growth in Papua and thousands of job opportunities for decades, beyond the completion of the Grasberg open pit," it said.
Copper concentrate production at Grasberg has been stopped since Feb. 11, and ore output is currently limited to stockpiling for future processing. A transition from open pit to underground mining at Grasberg may now be postponed to beyond late 2018.
Freeport, the world's biggest publicly listed copper producer, warned last week it could take the Indonesian government to arbitration and seek damages over the dispute.
The company's chief executive, Richard Adkerson, said on Monday that regulations Indonesia issued on Jan. 12 requiring Freeport to forfeit its long-term mining rights before resuming exports, were "in effect a form of expropriation".
Asked about the memo, a Freeport Indonesia spokesman said Grasberg's "operation and production is reduced to adjust to Smelting Gresik capacity".
Operations at Freeport's sole domestic buyer of copper concentrate, PT Smelting in Gresik, East Java, resumed briefly on Wednesday after a six-week halt that has limited Grasberg's output options. Operations stopped again due to a technical glitch.
FUNDAMENTAL SHIFT
In the memo, Freeport said that over the past month it has revised its operating plans, slowed its underground expansion and announced "drastic reductions" to manpower levels in efforts to cut costs.
"These are painful but necessary measures the company needs to survive while it works with the government to achieve a mutually acceptable solution to resume exporting copper concentrate," it said.