The Victorian Government has struck a deal to keep open Australia's largest hardwood sawmill, at Heyfield in Victoria's east, but workers are warning up to 20 contractors could be out of work in weeks.

Key points: Government won't reveal how much it has agreed to pay for mill

Government won't reveal how much it has agreed to pay for mill Deal subject to due diligence checks to be completed over coming weeks

Deal subject to due diligence checks to be completed over coming weeks 250 staff were expected to lose their jobs if mill closed

The mill's operator, Australian Sustainable Hardwoods (ASH), had been locked in a dispute with the Government and state-owned logging company VicForests over the amount of timber supplied to the mill.

In March, the company announced the mill's closure, and last month said the shutdown would begin in August, prompting a series of workers' protests outside State Parliament.

But in a statement this morning, Agriculture Minister Jaala Pulford said the Government had reached an in-principle agreement with ASH shareholders to buy the mill, subject to due diligence checks.

"The Labor Government has reached agreement with the ASH shareholders to buy the Heyfield Timber Mill," the statement read.

"We've always said we would fight for every job. That doesn't mean industries won't change — but Victorian workers can know that this Labor Government is on their side.

"Importantly, [owner] the Hermal Group has confirmed there will be no job losses while contractual negotiations are finalised."

About 250 staff were expected to lose their jobs if the plant closed.

More than 250 jobs had been on the line at the mill. ( Facebook: Australian Sustainable Hardwoods )

Up to 20 contractors could lose work in coming weeks

Anthony Wilkes, a shift supervisor who has worked at the mill for 13 years, welcomed the announcement but said job losses were inevitable if timber supply was reduced.

"People need to be aware and [it needs to be] made quite clear there still will be job losses," he said.

Anthony Wilkes delivered messages from the Heyfield community to the Premier. ( Supplied )

Mr Wilkes said reduced shifts could see 15 to 20 contractors, who were currently employed by Gippsland-based recruitment agency GBS, out of work in the "next five or six weeks".

Mill workers were due to be briefed on the deal on Monday afternoon.

The region is still dealing with the loss of hundreds of jobs after the closure of the Hazelwood Power Station, and the Heyfield mill is the small town's biggest employer.

Clinton Tilley, a director at ASH, would not comment on how workers would be affected but said the company and the State Government "remained motivated" to keep jobs at the mill.

"Despite what's played out in the press there's always been goodwill at the table between the two parties," he added.

ASH has indicated it will seek to set up another operation near Burnie in Tasmania.

Government tight lipped on purchase price

The dispute centred on a move by the state logging agency, VicForests, to slash the mill's timber supply from 130,000 cubic metres to 80,000 cubic metres.

Last month, the company announced plans to make 50 positions redundant by August.

Ms Pulford said the mill's existing managers would remain in charge under the Government's plan, adding that due diligence checks would take about three weeks.

She would not reveal how much the mill would cost the Government should the sale go ahead.

"This is a very viable business. The transfer of ownership will set this mill up for a very solid future," Ms Pulford told ABC Gippsland.

"The Government said we would be the buyer of last resort. We're very confident the mill can have a good and strong future."

Heyfield workers have been staging protests to pressure the Government to act. ( ABC News: Stephanie Anderson )

Company had eyed move to Tasmania

The ASH mill at Heyfield is the largest hardwood sawmill in Australia.

In June, ASH rejected a purchase offer from the State Government, saying it did not recognise the value of the site and its equipment.

"No fair commercial offer has been forthcoming from the Andrews Government," ASH said in a statement at the time.

Later that month, the company entered negotiations with the Tasmanian Government about a possible move.

CFMEU forestry division spokeswoman Jane Calvert said news of the sale would come as a relief to workers, their families and the community.

"It is a bold move for a government to buy a sawmill and a huge decision for the Hermal Group to agree to sell their asset," she said.

"But no matter who owns the mill it still needs a long-term wood supply.

"We will now seek urgent talks with the Government in order to secure a future wood supply for our members across the industry in Victoria including our members at the Heyfield mill."

The future of the mill had been threatened by a lack of timber supply. ( ABC News: Stephanie Anderson )

The looming closure of the mill had become a major political issue, spilling into the federal arena.

Deputy Prime Minister Barnaby Joyce wrote to the Premier urging him to protect jobs by reviewing the status of the endangered Leadbeater's possum, which had put some logging areas off limits.

But Professor David Lindenmayer from the Australian National University criticised Mr Joyce's suggestion, saying any downgrade of the possum's classification would be "absolute insanity".