The New South Wales Government is buying back a majority of the controversial Shenhua Watermark Coal exploration licence.

It says it is acting to protect the farming future of the Liverpool Plains, in the state's north-west.

Resources Minister Don Harwin said the agreement will see the Government reclaim 51.4 per cent of the Chinese-owned company's exploration licence, at a cost of $262 million.

"The Government has determined there should be no mining on the fertile black soils of the Liverpool Plains," Mr Harwin said.

"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 licence will be issued.

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

Member for Tamworth Kevin Anderson said the agreement struck the right balance between agricultural protection and economic growth.

Up to 600 new jobs will be created as well as millions of dollars in investment for the region, he said.

However for the last 11 years, farmers have been fighting the "coal war" against mining in the Plains — an area of prime agricultural land where annual production is worth more than $2 billion.

National co-ordinator for the Lock the Gate Alliance Phil Laird said anything less than the full cancellation of the project would not protect the farming systems.

"If we are going to hand over our best farming country to a coal mine that's owned by the Chinese Government, we've got to change our priorities," Mr Laird said.

"This coal mine is going to be 200 metres deep and its going to cut below the ridge line way below the level of the farm land and the aquifers.

"The impacts to those aquifers is unknown and the entire region depends on those aquifers for survival."

NSW Opposition Leader Luke Foley said the coal exploration licence "should be cancelled altogether".

"The Liverpool Plains is not a place for a coal mine and frankly the company's licence should be cancelled altogether and the entire proposal brought to an end," Mr Foley said.

"An exploration licence should not have been issued by the Labor government in 2008 and the exploration licence should not have been renewed by the coalition government in 2012 and it's about time that this proposal is brought to an end."

Mr Foley said the risks were too great to the water table and the famous fertile soils of the Liverpool Plains.

"We're talking about the food bowl of Australia. Many farmers I've been talking to say there's still a risk to the water table if mining is still to proceed on any part of that land for which the exploration licence has covered."

'Wrong mine, wrong place'

Former Gunnedah farmer Tim Duddy told the ABC the decision is a step in the right direction as it was always a case of "wrong mine in the wrong place".

Liverpool Plains farmer and activist Tim Duddy said this settlement is something to be commended. ( Supplied: Lachlan Orr )

"It's not the silver bullet but it's the start of one arriving," he said.

"This is about agriculture vs mining and it is an illustration that in some spaces they are not compatible."

Mr Duddy said the Government never should have taken the money from Shenhua in the first place.

"We always maintained that the water resources of the Liverpool Plains were something that were not run of the mill," he said.

"They were extraordinary and it is host to the largest underground water source in the entire Murray-Darling basin system."

Mr Duddy has in the past pushed for a Liverpool Plains Protection Act so the region is always protected for agriculture.

Many farmers sold their businesses while fighting against the mining and agricultural investment suffered due to the decade-long limbo.

Last year, the State Government announced a buyback of BHP's licence for the Caroona coal mine on the Liverpool Plains.

Shenhua has expressed its disappointment with the decision but acknowledged the Government's willingness to come to an agreement on the part-renewal of the licence.

"While we believe that Shenhua would have been able to responsibly expand its existing coal mine into the area, given its extensive coal resources, we have come to terms with the decision to not allow any mining on the black soil plains," a spokesman said.

A contour map of the area the Government will buy back from Shenhua Watermark Coal. ( Supplied: NSW Government )

Shenhua said it would continue to progress the mine in line with state and federal planning approvals given in 2015.

Former independent MP for New England Tony Windsor said Shenhua had indicated to him years ago that it would relinquish the black soils of the Liverpool Plains in return for coal exploration rights elsewhere.

While the compensation announced today is in the form of cash, rather than rights, Mr Windsor said he believed the company had long intended to reach such a deal with the NSW Government.

"I think this was a card that was always going to be played," Mr Windsor said.

Mr Windsor said today's decision did nothing to address environmental concerns about the impact of all types of mining on the area's groundwater system.

"What was announced today has got nothing to do with scientific information; it's just a financial deal between the two sides and trying to get a political fix," he said.

"People want a scientific fix and a long-term fix."

Mr Windsor said there had not been adequate scientific investigation into the risks of mining below a flood plain and he called on local MP and Acting Prime Minister Barnaby Joyce to "do the science".

"Water as we all know runs downhill. If something goes wrong with those groundwater systems, whether it be this mine or coal seam gas, the risks to the environment -the agricultural and irrigation sector and communities downstream - could be quite enormous."