BHP Billiton may cut production at one of its biggest metallurgical coal mines in Australia, after the Anglo-Australian miner said on Wednesday it had terminated a mining service contract to cut costs amid a sharp drop in coal prices.

BHP and its partner Mitsubishi Development Pty Ltd, a unit of Japan's Mitsubishi Corp, said they had scrapped a contract with mining services provider Downer EDI Ltd for pre-strip work at the Goonyella Riverside mine in Queensland.

Downer EDI said the remaining two years on the contract were worth about A$360 million ($338 million). The termination, effective September 9, would result in 427 contractors leaving the site.

The Goonyella Riverside mine produced 12.4 million tonnes of metallurgical coal in the year to June 2013. Output in the current financial year would be unaffected by the contract termination, BHP said.

"Any potential production impact for 2015 will be reported in quarterly production reports at the time," BHP spokeswoman Emily Perry said.

The world's top coal exporter to steel mills flagged further cuts were likely as it continues to review all its coal operations to ensure they do not make losses, with thermal and coking coal prices having slumped to near five-year lows.

"The coal industry is undergoing a difficult transition and to be globally competitive we have to reset the cost base of the business," BHP's coal president, Dean Dalla Valle, said in a statement. "This will continue to play out over the near term."

Downer EDI said it would seek compensation from BHP, which declined to comment on how much would be paid. ($1 = 1.0662 Australian Dollars) (Reporting by Sonali Paul; Editing by Muralikumar Anantharaman)

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