The approval ends speculation the $3.54 billion takeover might be blocked by the Foreign Investment Review Board.

To gain approval, the Chinese company has committed to a series of undertakings, which also apply to Yancoal and its Austar longwall mine in New South Wales.

The major undertaking will be for Yancoal to float on the ASX by the end of 2012 and for Yanzhou to have less than 70% ownership at that time.

Yancoal will also market coal produced at all of its Australian mines “on arms-length terms with reference to international benchmarks and in line with market practices”, according to the statement released by Assistant Treasurer Nick Sherry.

“As several of the mines operated by Felix are owned by joint ventures with third-party companies, following the listing and holding reduction in Yancoal Australia, Yanzhou's economic ownership of the underlying mining assets must stand at no more than 50 per cent.”

Yancoal also undertook to host most of its board meetings in Australia, and for its chief executive officer and chief financial officer to reside in the country as well.

With national coal exports to China reaching unprecedented levels this year, Yancoal will also be managed in Australia with a predominately Australian management and sales team.

"With these undertakings provided by Yanzhou, I consider that this acquisition is consistent with Australia's national interest," Sherry said.

"The Australian Securities Exchange listing of all of Yanzhou's Australian assets – including the Austar mine – is a significant development."

"It represents the first time a Chinese state-owned enterprise operating in Australia will list on our stock exchange. As such, it demonstrates the strength of the developing bilateral economic and investment partnership between Australia and China."

Sherry said Yanzhou will continue operating Felix’s operations, including the development of the upcoming Moolarben mine.

The senator added the Chinese investment will mean jobs for Australians, especially in regional areas.

"Finally, Yanzhou's undertakings support the continuing market-based operation and further development of Australia's natural resources."

Yanzhou will also be required to report to the FIRB on its compliance with its undertakings under the conditional approval.

Outside of its company-making Moolarben project, Felix is expecting annual sales of 7.5 million tonnes of coal from its portfolio of mines in New South Wales and Queensland.

Moolarben is expected to produce 6Mt of thermal coal for 2010, with 4.5Mt destined for export and 1.5Mt for the domestic market.

Full ramp-up will have Moolarben exporting up to 13Mt of product coal for export and domestic markets, with 8.8Mt per annum from open cut mining and 4.0-4.2Mtpa from longwall mining.

With FIRB approval out of the way, Felix must now go to its shareholders on December 8 to vote on the proposal.

Yanzhou must gain two-thirds of its sharholders approval at a meeting on October 30, as well as Chinese regulatory consents.

Yanzhou launched its takeover offer in mid-August at $18 a share, including special dividends.

Shares in Felix closed down 5c to $16.75 on Friday, and by mid-morning trade today had gained 3.94% to $17.41.