UPDATE 2-Australia state commission blocks South32 coal mine extension

(Adds South 32 comment)

MELBOURNE Feb 5 (Reuters) - An Australian planning body on Friday blocked global miner South32 Ltd’s planned coal mine extension in New South Wales state, citing concerns over its potential irreversible impact to Sydney’s water resources.

The decision by the New South Wales Independent Planning Commission halts South32’s plans to extend the life of its underground Dendrobium metallurgical coal mine to 2048.

In its ruling, the commission found “the risks of adverse impacts on the environment are high, and that those impacts are not appropriately manageable and are likely to be irreversible.”

“We knew there were risks, as there are nowadays in any coal mine application,” said Peter O’Connor, a mining analyst at investment firm Shaw and Partners. “Is this a company breaker? No. Is it disappointing? Yes.”

Shares of the diversified miner fell 3.3% in early trade, far underperforming its mining peers.

South32, which may appeal the decision, said it was looking into the commission’s findings and would continue to engage with the state government and agencies on the project.

It expects the project will contribute to 500 jobs, A$714 million in royalties, taxes and rates, and deliver a net benefit of A$2.8 billion to the state’s economy over its mine life.

Met coal demand is likely to face a material longer-term headwind as China’s steel consumption declines, a function of relatively mature infrastructure and the peak of urbanisation having passed, Morningstar analyst Mathew Hodge said.

As such, the impact on South 32, which has relatively high-cost coal production, would not be material, he added. (Reporting by Nikhil Kurian Nainan in Bengaluru and Melanie Burton in Melbourne; Editing by Tom Hogue & Shri Navaratnam)