Under the terms of the agreement, Peabody would construct, manage and operate the mine, which would be one of the largest surface mines in China.
It will also conduct geologic, engineering and environmental reviews to select a final location for the facility, Peabody said.
The government of Xinjiang has committed to accelerate allocation of premier coal resources for the project.
The Xinjiang Region is China's largest administrative region with vast reserves of coal estimated to account for approximately 40% of China's reserves.
The government expects Xinjiang's coal output will increase from approximately 100 mt in 2010 to more than 1 bt, Peabody said.
A new rail link under construction is expected to be on line by 2013 and will further open the region to China's fast-growing energy markets.