The miner has put US$10 million into Arq, which says its technology produces a "purified hydrocarbon" from coal waste through crushing and milling it down to 3 microns before a separation process to strip out contaminants.

The end product can then be used in a blended fuel oil.

The process could help Peabody clear heaps and slurry ponds, but this will not be properly tested until next year when Arq's first plant is commissioned in the United States.

Peabody CCO Charles Meintjes said the Arq could cut his company's environmental impact.

"We believe our partnership with Arq represents a rare opportunity to add value to our product, reduce our environmental footprint and expand the market for our product at the same time," he said.

"While the process is at early stages, we look forward to next steps to prove out the operations and assess our sites for the applicability of this exciting technology."

Arq CEO Julian McIntyre said Peabody backed his private company's business plan.

"Our goal at Arq is to produce the lowest cost hydrocarbon products on the planet," he said.

"We can only do this by building a coalition of industry partners, who share our perspective that technology will be the catalyst in unlocking value in a changing energy landscape."

Coal fines can't be directly added to oil products because of they are half made up of ash-forming contaminants.

Arq said in a white paper it looked at the clay and precious metal mining sectors and also the food processing industry for clues to making the hydrocarbon without having to heat the fines to over 400 degrees, as had been tried in the past.