The New South Wales government bought back a majority of a controversial mining license issued for a huge Chinese-run coal mine to protect prime agricultural land in the Liverpool Plains.

"The Government has determined there should be no mining on the fertile black soils of the Liverpool Plains," said NSW Resources Minister Don Harwin told reporters.  "Exploration can continue on area that's away from the black fertile soil, but there's still a number of conditions that have to be met and work that has to be done before I will consider whether a mining license will be issued.

"Any future mining activity will now be restricted to the ridge lands."

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Shenhau Watermark purchased the license for AU$300 Million in 2008 for exploration rights over the prime farmland - which angered local farmers and agriculture advocates.  The price of buying back 51.4 percent of the license is AU$262 Million.

Shenhua is disappointed with the government's decision, but would continue with plans to mine the smaller area.

"The Watermark Coal Mine has been subject to unprecedented scrutiny which has demonstrated the project can be developed in an environmentally sustainable manner," said Shenhua Australia chairman Liu Xiang.

Former Gunnedah farmer and anti-mining activist Tim Duddy is encouraged by the decision.  "The day that Shenhua leave - and they will - is the day we will have won," he told the ABC.  "But this is a good step."