The announcement is likely to spark legal action against the government by listed company NuCoal and private miner Cascade Coal, which claim their investors are being punished unfairly.

On Monday night Cascade, which has previously valued its exploration licences at $500 million, said the decision was grossly unjust and would cause ''irreparable damage to the reputation of NSW and raise significant questions of sovereign risk''.

A NuCoal spokesman said there had been ''zero consultation'' between the government and the company over the matter and it would ''pursue all legal avenues to obtain compensation''. It has previously suggested it would seek at least $500 million if its licence was cancelled.

But residents affected by the proposed mines, including Bylong Valley Protection Alliance secretary Craig Shaw, said the decision was a ''victory for the people of NSW''.

''Hats off to O'Farrell and his government for making this move,'' Mr Shaw said. ''It was really the only logical move that was possible after the ICAC findings. But, as they say, it ain't over 'til the fat lady sings and we were holding our breath just waiting to see.''

On Monday, Mr O'Farrell said the move drew ''a line under this sorry saga of Labor politics and corruption in NSW''.

After sensational public inquiries last year, the Independent Commission Against Corruption found Mr Macdonald and his political ally, former Labor MP Eddie Obeid, acted corruptly by agreeing in 2008 to create a mining tenement over the Obeid family's farm at Mount Penny in the Bylong Valley.

The decision delivered the Obeids $30 million with the promise of at least $30 million more.

ICAC also found Mr Macdonald acted corruptly in 2008 in granting a licence at Doyles Creek to a company, Doyles Creek Mining, then chaired by former union official John Maitland. In December, ICAC advised the government that the licences - and another at Glendon Brook that formed part of the inquiry - were so ''tainted by corruption'' they should be cancelled.

It recommended the government legislate to give itself the power to confiscate profits made by those with knowledge of the corruption and compensate ''any innocent person'' affected by the cancellation.

In a statement after cabinet met on Monday night, Mr O'Farrell said the government would introduce legislation to cancel the licences but ''no compensation'' would be given.

Five of the investors in Cascade - coal mogul Travers Duncan, businessman John Kinghorn, lawyers John McGuigan and John Atkinson, and investment banker Richard Poole - were found by ICAC to have acted corruptly by concealing the Obeids' involvement in the mining tenement.

The government has not indicated whether it will also pass special laws to claw back profits from those who benefited from corrupt conduct. Such laws would go further than existing legislation to seize proceeds of crime because they would not require proof of illegality.

Mr O'Farrell said the bill would require the companies that now own the licences - NuCoal, which acquired Doyles Creek in 2010, and Cascade Coal in the case of Mount Penny and Glendon Brook - to hand over all exploration data and be responsible for rehabilitating the sites.

''There is no intention to immediately re-release the affected areas but any future process for issuing licences will be consistent with the NSW government's implementation of the ICAC's recommendations on probity,'' the government statement said.

''The legislation will indemnify the taxpayer from any possible claims relating to the issuing or cancellation of the licences.''

A US investment fund, Ventry Industries, which holds 2.43 per cent of NuCoal, has said NSW would breach a section of the US-Australia free trade agreement dealing with confiscation of property without just compensation and due process. Managing director Rob Roy has threatened to lobby Congress and the US government over the matter.

Cascade argued ICAC's reasoning for recommending the cancellation of Mount Penny and Glendon Brook was flawed and warned of long and costly litigation.