Deputy Premier John Barilaro said the NSW government's Future of Coal Statement would be amended so that open cut coal mining at the Dartbrook site would not be supported, but he left the door open for an underground mine operation.

"It is clear in the Upper Hunter locals do not oppose the underground mine at Dartbrook, however an open cut mine is not in line with extensive community consultation," he said.

The news comes on a landmark day for Liverpool Plains farmers with the NSW government reaching a $100 million agreement with Chinese company Shenhua to withdraw its mining lease application and surrender its development consent for the Shenhua Watermark Coal project.

The agreement ends a 13 year battle against the proposal for local landholders and will see the acquisition of more than 6,000 hectares of high biodiversity land to be managed by Local Land Services including the protection of habitat for koalas and other endangered species.

NSW Treasurer Dominic Perrottet, who joined Mr Barilaro in the Liverpool Plains today to make the announcement, said the cancellation of the project will mean that no open cut coal mining can occur in the area.

"Coal will of course continue to be an important part of our economy and is essential to supporting jobs, and the NSW government continues to support coal exploration in areas where it makes sense," he said.

NSW Farmers Vice President and Liverpool Plains farmer Xavier Martin welcomed the news stating it was the wrong mine in the wrong place.

"This area has some of the best soils and water in Australia and as a nation, short term energy extraction gains should never compromise long term food and fibre production goals," he said.

On the same day, the NSW government announced that millions of dollars worth of coal mining royalties will be set aside each year to go back into mining communities such as those in the Upper Hunter.

The new Royalties for Rejuvenation fund will see $25 million put away annually, and is separate to the state government's Resources for Regions program which injects money back into mining-impacted towns.

Mr Barilaro said "mines have a lifespan and we need to ensure coal mining communities keep quality high-paying jobs in their towns for the next generation".

"Make no mistake, coal mining has a strong future in this state, but to ensure stability for the long haul we are setting aside funds so those coal mining communities, which produce such a valuable resource for our state, can plan what their future looks like," he said.

The fund has been met with skepticism by the Miners' Union however, who questioned how far $25 million will go given the $1.6 billion the government took from mining last year.

"It's not a treasure chest, it's spare change. It's a fraction of what they've just handed over to Shenhua for the Watermark mining lease debacle," CFMEU Northern Mining and NSW Energy District President Peter Jordan said.