Australia's Gloucester Coal Friday agreed to a merger with China's Yanzhou in a deal valued at some Aus$2.2 billion (US$2.3 billion), a tie-up which will create a major Australia listed coal firm.

China is Australia's largest two-way trade partner and the proposal comes as rapidly industrialising Asia is seeking to shore up a steady and reliably-priced supply of coal, a material vital for steelmaking.

"Gloucester Coal has entered into a merger proposal deed with Yanzhou Coal Mining Company Limited and its wholly owned Australian subsidiary, Yancoal Australia Limited, following an approach from Yanzhou," Gloucester Coal said.

Yanzhou Coal Mining, China's third-largest listed coal miner by output, said the merger reflected the company's ambition to grow its Australian business.

"This merger will increase the capacity and productivity of the company, enlarge the operation scale, improve profit margins and achieve potential synergies of the combined assets," the Chinese firm said in a statement.

Under the proposal, Gloucester's assets, including coal mines in Queensland and New South Wales, will be combined with Yancoal's Australian assets, which also include coal mines and an interest in an export terminal.

Any deal, which comes amid consolidation in Australia's mid-tier coal sector, will require approval by shareholders, Australia's Foreign Investment Review board (FIRB) and is subject to due diligence by both parties.

State-owned Yanzhou had approached Gloucester, which has a market capitalisation of some Aus$1.44 billion, after taking over Australian coal miner Felix Resources in 2009 in a deal worth US$3.2 billion.

Yanzhou had also reportedly been interested in Whitehaven Coal before that company announced a merger with fellow Australian miner Aston Resources, to form an independent coal company worth Aus$5.10 billion.

Under the Gloucester deal, Yanzhou proposes owning 77 percent of the merged company, with the remaining 23 percent held by Gloucester shareholders.

Gloucester shareholders will receive Aus$700 million in cash in a special dividend equal to about Aus$3.20 for each share, meaning the total deal is valued at about Aus$2.2 billion, according to Dow Jones Newswires.

The merger proposal is conditional on the merged company obtaining a listing on the Australian Securities Exchange (ASX) but already has the approval of Gloucester's major shareholder Noble Group, Gloucester said.

Gloucester said Noble intends to vote its 64.5 percent stake in favour of the merger proposal, subject to the deal's approval by Noble's board of directors and in the absence of a better proposal.

If successful, the reverse takeover will help Yanzhou fulfil a commitment it made to Australian regulators when it acquired Felix Resources in 2009 to float at least 30 percent of its Australian assets by December 2012.

Australia's coal industry is dominated by major global players BHP Billiton, Rio Tinto and Xstrata, but smaller firms are being targeted as competition for resources is stoked by rapid industrialisation in China and India.

US-based Peabody Energy, the world's largest private coal miner, snapped up Australia's Macarthur Coal in November in a deal worth almost Aus$5 billion.

Coal is among Australia's top three exports, contributing Aus$43.9 billion to the mining-driven economy last financial year.

Gloucester shares, which last traded at Aus$7.03 before being placed in a trading halt, rose on the news and closed Friday at Aus$8.55.