South32's plans to extend longwall mining at Dendrobium mine has won the support of the state government.
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The Planning, Industry and Environment Department released its findings on Monday, which recommended the project to mine 21 longwall panels under the water catchment.
This is not the final hurdle; South32 still needs to gain the approval of the Independent Planning Commission before it can begin mining at Kembla Heights.
South32 is looking to expand mining into two new areas, located adjacent to Avon and Cordeaux dams, which it said would allow for the extraction of an additional 78 million tonnes and extend the mine's life until 2048.
Without project approval, South32 has said the mine would close in just four years' time.
In its assessment report, the Planning Department said it felt South32 had done enough to strike a balance between mining and protecting the environment.
"The department has carefully weighed the environmental impacts of the project against the significance of the project's identified coking coal resource and the socio-economic benefits associated with continued operation of the Dendrobium Mine for a further 25 years," the report stated.
"On balance, the department believes that the project's benefits significantly outweigh its residual costs, and that it is in the public interest and is approvable, subject to stringent conditions."
These conditions included monitoring of waterways, repairing any damage caused and not exceeding the subsidence impacts as stated in South32's environmental impact statement.
South32 has also offered to pay $103 million to compensate for the loss of water caused by "the fractured surface post-mining".
However, despite recommending the expansion, the assessment report admitted the impact of subsidence "would be significant" in some areas.
"Anticipated subsidence impacts include fracturing of streambeds and diversion of surface water underground; losses from the reservoirs due to increased permeability in the solid rock mass separating them from longwall voids; and impacts on surface water quality, including an increase mobilisation of metals such as iron," it stated.
A South32 spokesman welcomed the department's report.
"We have committed to offset any surface water losses from the Dendrobium mine extension project to ensure the project would be a positive contributor to the metropolitan water supply," the spokesman said.
"We also acknowledge the report from the Independent Advisory Panel for Underground Mining and accept all of its recommendations."
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