A state government said on Wednesday it would buy back most of a Chinese mining company's coal exploration license for 262 million Australian dollars ($201 million) to help protect some of Australia's most fertile farmland.

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The New South Wales state government said it would buy back 51.4 percent of state-owned China Shenhua Energy's license covering the Liverpool Plains, 440 kilometers (275 miles) northwest of Sydney.

Shenhau Watermark Coal, an Australian subsidiary, paid the government AU$300 million in 2008 for exploration rights over the prime farmland, sparking outrage from local farmers and agriculture advocates.

Coal and iron ore are Australia's most lucrative exports and a commodity price boom at the time driven by Chinese industrial demand made coal seams beneath farmland in parts of Australia increasingly more valuable than any crop.

Resources Minister Don Harwin said Shenhau would be left to explore the mountain ridges that border the 12,400-square-kilometer (4,800-square-mile) flatland.

"We've acted today to make sure that there can be no mining on the fertile, black soil of the Liverpool Plains," Harwin told reporters.

Shenhau and successive state governments have always maintained that the plan was to restrict mining to the ridges. The company paid inflated prices to buy dozens of farms that would be impacted by dust, noise and traffic from the open-cut mining operations.

Farmers fear that the massive excavations threatened aquifers that provide ground water for agriculture throughout the region.

Shenhua said in a statement it had "expressed its disappointment" at 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," Shenhua Australia chairman Liu Xiang said.

Former local farmer and anti-mine campaigner Tim Duddy welcomed the license change as "a very, very big win."

Shenhua would now have to propose a new mining plan and would face stiff opposition, he said.

"The day that Shenhua leave — and they will — is the day we will have won. But this is a good step," Duddy told Australian Broadcasting Corp.