"This agreement is a significant step towards the sale of our interest in Grasberg and provides further evidence of our commitment to strengthening the portfolio by selling non-core assets and driving higher returns across the business," Rio CEO J-S Jacques said.
"We will continue to shape the portfolio, maintain a strong balance sheet and allocate capital to the highest value opportunities in order to ensure that Rio Tinto continues to deliver sector leading returns to shareholders."
Grasberg is 90.64%-owned by Freeport-McMoRan, with the Indonesian government holding the balance.
Inalum separately reached agreement with Freeport that will see Freeport receive $350 million cash.
Inalum will hold 51.2% of Grasberg, with Freeport holding the balance.
"This step marks another significant milestone toward establishing a new long-term partnership with the Republic of Indonesia to provide long-term stability for PT Freeport Indonesia's operations," Freeport CEO Richard C Adkerson said.
"We look forward to a mutually positive and beneficial partnership with Inalum that will continue to provide substantial benefits to the people of Papua; the Republic of Indonesia; and to local employees, suppliers and contractors while generating attractive returns for our shareholders."
Grasberg produced 468,000 tonnes of copper in 2017 and is the second-largest copper mine in the world.