Papua New Guinea will take over full ownership of the Ok Tedi mine, after the government of Peter O'Neill pushed through laws in parliament.
The laws passed on Wednesday also quash a 12-year-old law giving BHP Billiton immunity from prosecution for environmental damage stemming from the gold and copper mine's construction in the 1990s.
The laws cancel the PNG Sustainable Development Fund's (PNGSDP) shares in the mine, and issue new ones granting the state 100 per cent ownership of the mine in PNG's Western province.
The PNGSDP was set up by BHP Billiton to manage the proceeds of the mine on behalf of the people of Western province when the mining giant withdrew from PNG.
"Mr Speaker, it is the state's view that it is in the best interests of the people of Western province and PNG that the state have 100 per cent of the shareholdings in (Ok Tedi)," Mr O'Neill told parliament on Wednesday.
"The state commenced discussions with BHP Billiton with a view to acquiring PNGSDP's shares in OTML and changing PNGSDP's program rules.
"However, BHP Billiton has withdrawn from all discussions and the negotiation has broken down."
The laws passed on a vote of 62 to none.
Tensions between the government and the PNGSDP had been mounting for months.
On Tuesday, former prime minister and PNGSDP chairman Mekere Morauta launched a pre-emptive salvo at Mr O'Neill, saying his attempts to take over the mine amounted to theft.
"Stealing an asset worth approximately ($A860 million) to the people of Western, plus their annual share ($A193 million) of the Ok Tedi Mine dividends, is not acceptable legally or morally.
"It is unconstitutional as well.
"I also fear this is the first step - I hope he does not want to get his hands on PNGSDP itself and the $US1.4 billion ($A1.50 billion) in the long-term fund," Sir Mekere said.
In his speech to parliament, Mr O'Neill said shareholders will be compensated.
"Mr Speaker, the state is not taking these shares," he said.
"The state will be providing some compensation to PNGSDP. The proposed bill will provide that the prime minister, on the advice of (cabinet), will determine an amount of compensation; and to whom any compensation shall be paid."
In his speech removing BHP Billiton's immunity from prosecution for environmental damage sustained in the `90s, Mr O'Neill raised the recent BP oil disaster on the Gulf of Mexico.
"BP accepted responsibility for the disaster which has destroyed the environment and marine ecosystem and affected human lives in the US," he said.
"Why not BHP? What is so special for them to be granted total immunity for what they have done?"
He also took a swipe at Sir Mekere for passing laws in 2001 granting the mining giant immunity.
"Mr Speaker, no one can sit in this house and excuse BHP for the destruction it had caused," Mr O'Neill said.
"But that is what the government under Sir Mekere Morauta did in 2001.
"They came up with a deal that would grant total immunity to BHP from prosecution for environmental damage or compensation, in exchange for a program company set up outside of PNG, and still controlled by BHP."
BHP has repeatedly denied it controls the PNGSDP. Comment is being sought.