The small open cut project is aiming for 500,000 tonnes per annum of hard coking coal and could be up and running by mid-2011.

Northern estimated the offtake agreement could generate about $A700 million in sales revenue to the company over 10 years at current coal prices and at the initial planned production rate alone.

In an associated deal, Northern Energy will issue 16.32 million shares at $1.41each to steelmaker Xinyang to raise $23 million.

The placement will amount to about 12.7% of the company once it is complete.

Consequently, Xinyang will receive a position on Northern’s board.

But the Queensland company will still maintain whole ownership of its Maryborough project, including the Colton mine which was prioritised to help generate quick cash flow.

Northern will use the $23 million of new funds to further advance development of the Colton mine, with the mining lease expected to be received by October.

“China represents an increasingly important market for coking coal and this offtake agreement will underpin the market for Burrum hard coking coal which is to be produced from the Colton mine – the first development within the Maryborough exploration areas EPCs 923 and 1082,” Northern managing director Keith Barker said.

Barker also revealed there is potential for further mine expansion.

“The size of the resource identified to date has exceeded our original expectations and the ongoing evaluation work provides us with confidence that additional resources will be defined which will in turn enable us to ultimately increase production beyond the 500,000 tonnes per annum currently planned for Colton,” he said.

“Expansion of production will require additional mining lease areas and will be subject to a separate approval process to that applicable to Colton.”

Northern upgraded its inferred resources at its Marborough project in southeast Queensland to 57.4 million tonnes in late January, with all of it confirmed at depths of less than 100m.

Shares in the company closed up 8% to $1.68 yesterday.