Kvanefjeld, owned by Australian mining firm Greenland Minerals and located near the southern town of Narsaq, contains a large deposit of rare earth metals but also radioactive uranium which locals fear could harm the island's fragile environment if extracted.

Greenland's government, which came to power in April after campaigning against the development of Kvanefjeld, says it will ban the exploration of deposits with a uranium concentration higher than 100 parts per million (ppm), which is considered very low-grade by the World Nuclear Association.

"What we know is that the background radiation in and around Narsaq is quite high, which means that the project will collide with the upcoming zero tolerance policy on uranium mining," minister for mineral resources Naaja Nathanielsen told Reuters in an interview in the capital Nuuk.

Kvanefjeld was granted preliminary approval last year and was on track to gain final approval under the previous government.

Mining companies have been pushing for rights to exploit rare earth deposits in Greenland, which the US Geological Survey says has the world's biggest undeveloped deposits of the metals used in everything from electric vehicle batteries to missiles.

A public hearing on the project ended this week.

Greenland Minerals, in which Chinese partner Shenghe Resources has about a 10 per cent stake, participated in community meetings in February, but did not attend meetings in August and September citing the political nature of the meetings.

Chief executive John Mair, whose company has spent more than $US100 million ($A137 million) preparing the project, told Reuters on Friday he believes his company still holds the "valid right to pursue an exploitation licence for the project in compliance with Greenland laws".

Locals worry that a potential lawsuit against Greenland will hurt its ability to attract investments in a nascent mining sector which they think is key to growing their economy.

Mair said it was too early to look at legal action "but as a public company, we must protect shareholder interests in the event a practical solution is not found".

Nathanielsen said the government in 2013 put a clause in its contract with the company that states it "has no claim to an exploration licence and that a refusal can be given for political reasons".

"We cannot issue guarantees against a lawsuit but we believe that we stand quite well in a potential court case," she said.

The new bill, which will also include the option of banning the exploration of other radioactive minerals such as thorium, will be passed in the northern hemisphere autumn with backing of the Naleraq party, a coalition partner, Nathanielsen said.

Australian Associated Press