Environmentalists have urged caution in assessing the expansion of the Dendrobium coal mine.
With the Environmental Impact Statement (EIS) for the expansion on public exhibition, anti-coal group Lock The Gate said there was already too much water being lost from the drinking water catchment - diverted from surface flows into mine workings.
Lock the Gate's Nic Clyde said the EIS admitted further water would be lost from the expansion.
"The mine has already notoriously inflicted far greater environmental damage to the catchment than anticipated when it was approved in 2001," he said.
"The longwalls they're proposing now are setback 1km from the dam walls of two major storages, Avon and Cordeaux reservoirs, but only 300m from the full supply level of Cordeaux."
Earlier this year WaterNSW, the top government agency responsible for water, said mining was producing worse than expected environmental consequences.
WaterNSW called for more restrictions on mining in catchment Special Areas, saying surface water losses at Dendrobium could exceed 1.2 billion litres a year.
In its EIS, South32 said it would pay WaterNSW for the "agreed volume of surface water diverted from the catchment".
"The longwall layout for the project adopts mine constraints to minimise impacts, including setbacks from the Avon and Cordeaux Dam walls, dam full supply levels, named watercourses (i.e. Cordeaux River, Avon River and Donalds Castle Creek)," it said.
"South32 would also avoid the direct undermining of mapped 'key stream features' (significant pools and waterfalls/steps) identified during site investigations."