* New coal agreement increases royalties paid by PazdelRio
* Latest renegotiation to better terms for state
* Expects coal production to hit 2.5 mln tonnes in 2019
By Jack Kimball
BOGOTA, Jan 10 (Reuters) - Colombia's government on Thursday extended a contract to the metallurgical coal operations of Brazil's Votorantim local unit for two decades and raised royalties.
Colombia authorized Minas PazdelRio S.A, a local unit of Brazil's Votorantim, to continue mining metallurgical coal until 2039 from a previous date of 2019, and increased the royalties the company would pay, the National Mining Agency said.
Under the new deal, PazdelRio will pay 15 percent for production of 2.5 million tonnes or less, up from 10 percent previously, and 19 percent for volumes above that.
The company currently produces around 200,000 tonnes of coal annually from Boyaca province in the center of Colombia, which should grow to 2.5 million tonnes in 2019, according to the agency and PazdelRio.
The Colombia-based firm also said it would also work with the government in a public-private partnership to develop the long-delayed Carare railway project that looks to link central producers with the main rail line to the coast.
The government had said it would not support bills in Congress to raise royalties for the mining industry, but renegotiating contracts allows Bogota to raise royalties on a case-by-case basis.
At the end of 2012, Colombia agreed with Cerro Matoso, a unit of BHP Billiton, to update certain parts of its contract and increased royalties paid to the government.
Colombia has attracted record foreign investment in recent years as a U.S.-backed offensive against Marxist rebels and drug gangs made doing business in the oil and mineral-rich mountains much safer and easier.
The country is the world's fourth-largest exporter of thermal coal, but its metallurgical coal sector is fairly small given infrastructure restraints and lack of investment.