Australian mining company South32 has agreed to pay a record sum after an investigation revealed one of its coal mines drained millions of litres of water from the Sydney water catchment without a licence.

Illawarra Coal Holdings Pty Ltd, a subsidiary of South32, reached an agreement with the Natural Resources Access Regulator (NRAR) after admitting to the breaches at the Dendrobium mine at Mount Kembla, on the New South Wales South Coast.

The agreement requires the miner to contribute almost $2.9 million towards improving local waterways in the Sydney water catchment as part of an enforceable undertaking.

The highest sum previously obtained by the watchdog was approximately $360,000.

NRAR said the mining operations resulted in the incidental take of surface water without a licence from 2018 to 2023.

NRAR chief regulatory officer Grant Barnes said the investigation found the mine caused the loss of up to five megalitres a day, the equivalent of two Olympic swimming pools.

"These alleged breaches are very serious and they do concern significant quantities of water, water which is lost from an ecologically sensitive area both to surface creeks and wetlands above the Dendrobium coal mine," he said.

As part of the enforceable undertaking the miner has agreed to pay $70,000 to cover the cost of the investigation as well as legal and monitoring costs.

The agreement also includes a requirement to improve surface water management through investment in new technologies and to report the results of the monitoring annually.

"We will be monitoring the company's compliance very closely, both with the enforceable undertaking and in terms of their general compliance they hold for their operations," Mr Barnes said.

History of water losses

In 2019 WaterNSW, the agency responsible for managing the state's dams and waterways, claimed mining-related impacts on the environment caused by the Dendrobium operation had "exceeded predictions".

In its submission to the Independent Expert Panel for Mining in the Catchment, it raised concerns about the "accumulation of multiple unexpected mining impacts" in the water catchment.

New rules for mines in the Metropolitan Special Areas introduced before the last state election will allow operators to obtain a licence for incidental surface water losses caused by their mines.

Georgina Woods, the head of research and Investigations at Lock the Gate, said the rules would "make legal what had been the illegal take of water by Dendrobium mine".

She said the mine had repeatedly breached its operating conditions, which raised questions about how mines were approved.

"This ongoing incident raises very fundamental questions about the planning system and how it controls the environmental impact of coal mining," Ms Woods said.

"Consent was granted to Dendrobium 20 years ago and it was granted on assumptions about the environmental impacts of the mine that weren't born out.

South32 vows to comply

A South32 spokesperson said the company had cooperated with NRAR’s requests and was committed to upholding the enforceable undertaking.

"Over the coming months we will work collaboratively with NRAR and other stakeholders to develop a suitable water-related community project," they said.

The miner also welcomed the surface water licensing regime announced by the NSW government earlier this year.

"Since 2014, South32 Illawarra Metallurgical Coal has paid $5.6m to account for the passive take of water resulting from underground activities at Dendrobium Mine," the spokesperson said.