Julia Guarniz, a street vendor in the Peruvian highland village of 
Choropampa, watches blankly as a seven-vehicle convoy thunders past. "They scare 
me," she says, pointing at the "hazardous materials" signs on the sides of the 
juggernauts. "When I see them, I worry that it might happen again."

Similar convoys carry toxic material through the village several times a day on the degraded highway that runs 600km from Yanacocha, the world's most productive gold mine, to the port of Callao in Lima.

Five years ago this week, one truck spilled 150kg of liquid mercury over more than 20km of the road. Attracted to what looked like "a liquid mirror", the residents of Choropampa collected the mercury and took it home, unknowingly exposing themselves to the highly toxic substance.

What has happened since depends on who is telling the story. Newmont, the world's biggest gold miner and Yanacocha's owner, says it has faced up to its responsibility, pumped millions of dollars into clean-up and compensation, and put in place fail-safe safety standards.

The villagers do not deny the pay-outs, but say they are still suffering from Newmont's negligence. Thousands complain of neurological and skin conditions, and they say the medical insurance they have been given does not cover the cost of their prescriptions. That insurance runs out this year.

Hatred for the mine runs deep. It is difficult to find a resident who will acknowledge having received compensation.

The facts may be settled in Denver, Colorado, Newmont's home town, where 1,100 Choropampa villagers are pursuing the miner through the courts.

Ken Crowder, a lawyer representing the victims, says the first cases may be heard this year, potentially providing the basis for a group settlement.

What is indisputable is that, for many, Choropampa remains a symbol of a perceived environmental and social myopia among international mining companies operating in Peru and their failure to secure a "social licence" from local communities.

This was powerfully illustrated last September, when a proposed expansion of Yanacocha met such fierce opposition that the project was abandoned. Local residents claimed that mining Cerro Quilish, a mountain overlooking the town of Cajamarca, would have contaminated their drinking water. Newmont says it has scientific studies to disputes this.

But that misses the totemic importance of the battle, fuelled by a feeling among some locals that the company has not given enough to the community.

"Quilish became an icon," says Emilio Horna, mayor of Cajamarca. "Newmont didn't explain enough what they wanted to do."

Guy Landsdown, Yanacocha's operations manager, says the miner "has got a lot of work to do on the social front". Newmont has joined several local "dialogue roundtables". In Minas Conga, a new project, it has managed to develop good community relations.

Even Yanacocha's opponents concede it has improved environmental standards. Last year it spent $50m (€41m, £28m) on a reverse osmosis plant to clean discharged water, $20m on dams to prevent sediment seeping into rivers, and $6.5m on other environmental programmes.

The company has also created about 4,500 jobs in Cajamarca, one of Peru's poorest regions. It estimates that another 24,000 local jobs depend on the mine. The investment is welcomed by many: Ama Cajamarca, a group funded by the local chamber of commerce, attracted 10,000 locals to a recent demonstration in support of Yanacocha.

But it has also spawned deep resentment. This is due in part to the phenomenal growth of Yanacocha, from producing 81,000oz of gold in 1993 to 3.017m oz last year. The town of Cajamarca has swelled from a population of 40,000 in 1990 to 240,000. House prices are soaring, traffic is heavy and there are significant problems with delinquency and prostitution.

Yanacocha's story is far from unique. In February, Manhattan Minerals of Canada ditched plans for a $400m polymetallic mine at Tambogrande in the north, saying it could not find a senior partner because of protests against the project. Industry insiders say Tambogrande was poorly handled by an inexperienced company, but the most recent confrontation came at a project widely seen as a paradigm of best practice: BHP Billiton's Tintaya copper mine.

The Anglo-Australian group won praise in December 2003 from both industry and such activist groups as Oxfam by signing an agreement with 37 local organisations, committing itself to give 3 per cent of its annual operating profits to the local community.

But last week BHP was forced to suspend operations at Tintaya, Peru's third biggest copper mine, after protesters raided the site, demanding the company spend more on improving local roads. A government-led negotiating team is now trying to mediate.

In Cajamarca, all sides agree that the tension can be resolved. Marco Arana, a Catholic priest and one of the leaders of the protests against Cerro Quilish, says the mercury spill need not leave an indelible mark on Yanacocha's record.

"We could turn Choropampa into a model of environmental care, with a proper clean-up and good healthcare," he says. "But if Newmont doesn't change, I fear there may be violence here."