Earlier this month, Peru's new Cabinet Chief, Jorge del Castillo, presided over negotiations that brought to an end a month of turmoil that had brought the operations of Latin America's largest gold mine, Yanacocha, to a standstill.

It was relatively unusual to see President Alan Garcia's right-hand-man in the Northern mountain city of Cajamarca penning the 11-point accord that diffused the conflict between officials with Denver-based Newmont Mining Corp. that owns the mine and the local farming communities.

In the past, it has been a role taken by the Minister of Mines and Energy.

But Garcia's new administration, which took office on July 28, has a lot riding on the incident and reaching a positive outcome could have broad impact for the sector as well as future development efforts in the country including the construction sector.

Mining, particularly gold and copper, have fueled Peru's recent economic resurgence that has allowed a focus on infrastructure development. Continuing that progress hangs on the stability of that sector.

Moreover, during periods of economic uncertainty – such as the second half of Garcia's previous presidency when inflation topped 7,000 percent at one point – it was mining projects that kept construction companies in business.

The crisis began in early August when residents of the Combayo region invated the mine demanding jobs. One farmer was killed by security guards. The incident sharpened particularly concerns that the latest expansion effort, the Carachugo gold pit, will contaminate the local water supply.

Farmers from Combayo brought the mine's production to a halt with a weeklong roadblock at the mine's entrance and officials with Yanacocha retaliated by ceasing operations and stopping payments to local companies in its employ.

It was not the first time the mine has been a locus of controversy. In 2004, the company was forced to shelve exploration plans on the nearby Cerro Quilish mountain - which holds an estimated 3.7 million ounces of gold - after violent protests by farmers who said the project threatened water supplies there.

Castillo's presence and the tone of his public statements last week clearly demonstrated the government's effort to address both priorities.

"It is clear that there is no general opposition to the mining activities,” he said. "What people want is the right balance between gold production and environment."

Yanacocha agreed to construct water purification plants in the Combayo area and to let the government monitor the water in the region. In addition, the mining company will build a new highway connecting Otuzco and Combayo, reducing commuting time from three hours to 30 minutes.

But the successful outcome of this first test does not mean the Garcia administration is out of the woods.

The questions surrounding Yanacocah have spurred similar concerns in large mining operations in the Southern Region of the country. The regional president of Moquegua, Cristala Constantinides, has met with administration officials last week concerning the contamination of the Moquequa River by the mines run by Southern Peru.

These are regions that were strongly in favor of dark-horse presidential candidate Ollanta Humala during the recent elections. A major reason for that sentiment was the strong feeling that Garcia and the other candidates were too tied to foreign interests and not concerned with the plight of the poorest portion of Peru's population.

These are also regions that were devastated by the 20-year conflict between communist insurgents and the government – including Garcia's first tenure in office. Almost 70,000 people are estimated to have perished and the vast majority from the impoverished mountain areas.

Up to 45 percent of those deaths have been attributed to the Peruvian authorities and many continue to ask difficult questions concerning the role Garcia's first administration in the conflict.

While Garcia has consistently downplayed these accusations and denied his own involvement, it is clearly a sore spot his government would prefer to avoid. This is particularly true since the regions most affected by the military crackdown were the remote mountain areas where mining has flourished.

That has created a current situation where using military or police force an undesirable option to the administration as it deals with these situations.