The proposed Brandy Hill Quarry expansion at Seaham "will adversely affect habitat critical to the survival of the species", said the report which coincides with an Australian Koala Foundation warning that habitat destruction has left koalas "functionally extinct", with only 80,000 koalas likely to remain in Australia.

Expansion of the Hanson-owned Brandy Hill Quarry from 700,000 tonnes to 1.5 million tonnes of material per year and the destruction of 45.8 hectares of koala habitat "is likely to be significant to the national population... given the disjunct populations across the nation", a report by environmental consultants Biosis Pty Ltd for the department said.

"Most populations in NSW now survive in fragmented and isolated habitat and many of the areas in which koalas are most abundant are subject to intense development pressures such as agriculture and urban expansion," the report said.

But Hanson said it was "confident" the expansion project "would not result in significant impacts to these species" because "predicted impacts" would be offset by the company retaining koala habitat at a location outside the Hunter region.

Seaham residents are considering a legal challenge to the expansion after a judge in 2018 blocked Daracon's Martins Creek Quarry expansion, in part because a 2007 Environment Protection Authority decision allowing a much higher cap on quarried material was ruled invalid.

Residents including Margarete and Neil Ritchie and Chantal and Luke Redman said an EPA decision in 2011 to increase the Brandy Hill Quarry cap from 400,000 to 700,000 tonnes of material per year was also open to challenge.

"In the Martins Creek decision the judge found the EPA had no authority to increase the licence limit without community consultation and the same applies with Brandy Hill," said Mrs Ritchie.

"Hanson has applied to increase its limit from 700,000 to 1.5 million tonnes of material a year but we're saying we need to look at the 700,000 tonne limit, based on the Martins Creek decision."

Land and Environment Court Acting Justice Simon Molesworth in October accepted Dungog Shire Council's case the EPA has an obligation under the law to consult with communities before making environmental licence changes likely to cause "any significant increase in the environmental impact" of licence activities.

The EPA's failure to invite and consider public submissions in 2007 when it significantly increased the Martins Creek Quarry's environmental licence production limit meant it was invalid and of no effect, Justice Molesworth said.

Martins Creek Quarry owner Daracon has appealed the decision and continues its attempts to increase quarry production.

Mr Ritchie said there was "no consultation at all, absolutely nothing" before the EPA increased the Brandy Hill Quarry licence limit to 700,000 tonnes in 2011 before major Hunter roadworks and Williamtown airport upgrades.

"We noticed it. The two quarries were sending out maximum trucks and the cumulative effect really hit the fan. That was after Brandy Hill was approved for 700,000 tonnes, and then they applied for a 1.5 million tonne limit," Mr Ritchie said.

An Office of Environment and Heritage document shows the EPA approved the Brandy Hill licence increase in October, 2011 only two months after Hanson lodged an application.

The document showed the EPA approved a production increase from 400,000 to 700,000 tonnes per year, without consulting the community, after noting legal advice to Hanson that the 1983 development consent by Port Stephens Council did not limit extraction volumes. A Port Stephens Council advisory panel confirmed the consent did not limit the volumes.

Chantal and Luke Redman bought their acreage at Seaham in 2014.

Noise and dust from the quarry were significant issues for the Redmans and others in the area, and the koala assessment report was a significant concern, Mrs Redman said.

"When you look at the number of koalas left in Australia and the issue that's affecting them most it is the loss of habitat," she said.

"The report says the loss of this 45 hectares will have a significant impact on the national population. We need to protect the koalas on our doorstep to protect this iconic native species.

"The more I looked at it the more upset I was about the impact of this proposal on animals who are now seriously under threat because of the habitat we're destroying."

Hanson is preparing responses to final submissions. The matter will be referred to the Independent Planning Commission at a later date.