The majority of coal from the mine would be dedicated for fuel supply to the coal conversion plant that would produce methanol, chemicals or fuel products.
The agreement was signed on Wednesday in St Louis with the Inner Mongolia Jitong Railway Group Limited Company, the People's Government of Inner Mongolia Autonomous Region and the Administrative Office of Xilinguole Region.
The project is expected to have an annual capacity of at least 1.2 million tonnes of methanol or equivalent fuel and chemical production, and is being planned for the Xilinguole League.
In the coming months, the companies will begin a feasibility study to examine the potential for the project.
Peabody is also continuing discussions with major global chemical companies as project partners.
The major open cut mine would be located on coal resources that, subject to additional confirmatory drilling, could total up to 3 billion tonnes.
“China's coal conversion initiatives are providing the vital energy security that China needs by using abundant domestic energy resources to reduce dependence on increasingly expensive oil and natural gas," Peabody CEO Gregory Boyce said.
Inner Mongolia Jitong Railway Group board vice-chairman Su Nan said Eastern Inner Mongolia, with total coal reserves of 210Bt, one-fifth of the probable reserves in Inner Mongolia, was one of the large-scale bases in the 11th Five-Year Plan of China Coal Industry Development.
“Jitong Group has made a commitment to the construction and operation of the railway network of Eastern Inner Mongolia,” he said.
“To accelerate energy development and railway network construction in this region, we will put all our efforts into our partnership with Peabody to build an advanced, large-scale open cut mine and downstream coal-chemical project in China, and make full use of our railway resources while being aligned with the Chinese government policies."
Coal has been the fastest-growing fuel in the world for the past five years, and China is the largest and fastest-growing coal market in the world. China is also emerging as a leading producer of coal-based chemical feedstocks, which are used in the manufacturing of plastics, paints and construction materials, and increasingly as transportation fuel additives.
Inner Mongolia has a vast reserve base and is China's fastest-growing coal region, expected to increase annual production more than 40% over the next three years, with coal seams ranging from 25 to 175 metres in height near the potential mine, Peabody said.
Many of the region's deposits are suitable for large-scale surface mining projects.
China is the largest coal producing region in the world and uses coal to generate about 70% of its electricity.
In the past two years alone China has added the equivalent of half of US coal-fuelled generating capacity. Several major coal conversion projects are in development in Inner Mongolia, including a large coal-to-liquids facility.
Jitong Railway Group is a joint venture railway company established by the Ministry of Railway of the Chinese government, Inner Mongolian government and North United Power, which owns four rail lines across Inner Mongolia.
Inner Mongolia, with the capital of Hohhot, has an area of 1.2 million square kilometres, spanning nearly 12% of the country's land area. The facility would be developed near the city of Xilinhaote.
Peabody is the only non-Chinese participant in GreenGen, China's signature carbon initiative, and the company has an office in Beijing and growing coal trading activities.