The buyout follows months of wrangling, two resubmissions and a series of failed Chinese moves for Australian miners, including Rio Tinto's refusal of a multibillion dollar investment from Chinalco.

But Assistant Treasurer Nick Sherry set strict conditions for the deal, which comes amid tense relations between Australia and China.

He said Yanzhou would operate its Australian mines through an Australia-based company to be listed on Sydney's stock exchange by the end of 2012, and would market the coal "at arms-length".

"The Australian Securities Exchange listing of all of Yanzhou's Australian assets ... is a significant development," he said in a statement.

"It represents the first time a Chinese state-owned enterprise operating in Australia will list on our stock exchange."

Yanzhou will also have to slash its ownership of Felix's four coal mines to 50 percent and cut its stake in the new firm to 70 percent by the time of the listing.

"This investment also means jobs for Australians, especially in regional areas," Sherry said.

Australia's Foreign Investment Review Board (FIRB) twice ordered Yanzhou to resubmit the takeover bid after it was approved by Felix in August, following 12 months of negotiations.

The deal seemed in doubt after the FIRB's chief told Chinese businessmen he preferred investments below 50 percent for new ventures and 15 percent for big producers, urging a less opaque and heavy-handed approach to acquisitions.

China Non-Ferrous Metal Mining later dropped its bid for Lynas, while Wuhan Iron and Steel's attempt to gain access to a mining project on a missile range was rejected on national security grounds.

In June, mining giant Rio walked away from a 19.5 billion US dollar cash injection from Chinalco, angering China's state media. Weeks later a top executive was detained in Shanghai and eventually charged with industrial espionage.

Chinese takeover moves have caused unease here with critics arguing Australian workers will lose out.

Ren Xianfang, an economist at IHS Global Insight in Beijing, said despite Australia's "encouraging" move, investment relations remained tense.

"Overall I think the Sino-Australian investment relationship is still pretty tense. I don't think a single deal can be a breakthrough in economic relations," she said.

Felix's shares in Sydney closed at 16.75 Australian dollars, down five cents, shortly before the announcement, but Yanzhou soared 4.0 percent on the Hong Kong stock exchange.

Felix produces about 4.8 million metric tons of coal a year, just a fraction of Australia's total of nearly 250 million.

China, which this week unveiled accelerating growth of 8.9 percent, is a huge consumer of Australian resources and the country's second biggest trade partner, with deals worth 74 billion Australian dollars last year.

China has previously scored similar successes in Australia, notably discount iron ore from Fortescue Metals in return for up to six billion US dollars in financing, and Baosteel's 15 percent stake in mining company Aquila.

-- Dow Jones Newswires contributed to this report --

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