Wollongong Coal's bid to expand underneath the water catchment has been recommended for approval by the Department of Planning, Industry and Environment, which found the benefits outweighed the costs, and the project was in the public interest.
It has provoked a furious reaction from environmentalists, who say the company is a "basket case" that shouldn't be trusted with sensitive environmental concerns.
A letter to the Independent Planning Commission from department deputy secretary Marcus Ray said the "bord and pillar" mining method would address environmental and water concerns.
"Based on a detailed assessment, the department and relevant government agencies consider that [the] bord and pillar mining method has addressed key issues raised by the commission, particularly in relation to the uncertainty associated with subsidence and groundwater impacts," he said.
Concerns over the potential for significant water catchment drainage into the mine had earlier been raised by the Planning Assessment Commission.
Lock the Gate Alliance spokesman Nic Clyde said the planning process was "utterly broken".
"Wollongong Coal is likely insolvent, it has lost more than a billion dollars over the last seven years, its Wongawilli mine was shut down over safety fears, and yet the Planning Department wants to trust this basket case of a company with our precious drinking water," he said.
"It is madness that the Planning Department is entrusting this broken, financially distressed company to mine underneath the Special Area of our drinking water catchment."
A public hearing will be organised by the Independent Planning Commission within three months.
At time of publication Wollongong Coal had not informed its shareholders of this development via the Australian Securities Exchange, from which it plans to de-list.
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