Striking workers at Freeport Indonesia will return to work on Saturday after agreeing to a pay deal to end a three-month dispute that has paralyzed output at the world's second-biggest copper mine, a union official said on Wednesday.

Freeport McMoRan Copper & Gold Inc and the union are expected to sign a deal within days, which will include a pay rise of 37 percent over two years to end Indonesia's longest-running industrial dispute, the union has said.

The firm has asked us to mobilize workers back to work on December 17 and we have agreed as part of the pay deal, union field coordinator Hengki Binur told Reuters.

The deal was meant to be signed on Tuesday but has been delayed, showing the timetable for the return of workers could also be pushed back. The level of benefits for workers and whether strikers should be penalized are seen as potential sticking points that could delay an agreement.

We want one other condition -- we want a guarantee from Freeport and its units that the workers who have joined the strike will not get any problem when they return to work, said Binur.

Freeport's CEO Richard Adkerson has been in Jakarta in recent weeks to help negotiate a deal with the union. The company, which has said it is losing 2 million pounds of copper and 3,000 ounces of gold in daily production, declined to comment on the pay talks.

The strike action has helped support copper prices, which have been pushed lower on worries about weak global demand, so a resumption in output could be bearish for prices. Benchmark copper in London fell 0.9 percent on Wednesday.

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Map of Freeport mine: http://link.reuters.com/kup55s

Interview with CEO (TV): http://link.reuters.com/muw94s

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The strike in Papua has been running since mid-Sept, and the firm declared force majeure on its exports from Grasberg in October, freeing it from contractual obligations.

Even after workers return, it is likely to take some days to ramp up production, and longer to resume shipments since the firm needs to repair a sabotaged pipeline that takes metal concentrate from the mine to its port.

The firm's operations have been crippled by attacks on pipelines, employees and blockades by workers and spear-wielding local tribesman that have cut off its food and fuel supplies in a remote region with few roads.

Binur said that the road blockades imposed since October will also be lifted once the pay agreement is made.

The union initially pushed for a pay rise to as much as $200 an hour, versus current pay of $2-$3 an hour. It steadily dropped its demands in recent weeks to around $7.50 an hour, a level still deemed excessive by Adkerson.

The pay agreement is closer to the 35 percent rise offered by the company in recent weeks.

Freeport Indonesia has 23,000 workers at its Grasberg operations. Many are Christian and have been worried they would not be able to afford to celebrate Christmas due to the strike, since they are not getting paid, leading to a greater push for a deal in the past week.

The strike has been the highest profile stoppage among several worker pay protests in Indonesia -- signs of growing unrest over rising costs and a sense that the country's economic success is not being shared by all.

(Additional reporting by Samuel Wanda; Writing by Neil Chatterjee; Editing by Neil Fullick)

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