The Peruvian government has declared a state of emergency at the site of a mine owned by a Vancouver company, saying its toxic chemicals are putting the capital's water supply at risk.

A 60-day state of emergency was put in place in the San Mateo district, 90 kilometres east of Lima, where Gold Hawk Resources runs the Coricancha metals mine.

Government officials said the mine's storage dump is unstable and at risk of collapse, which could release arsenic and other toxic chemicals into the Rimac River, Lima's main water source.

Gold Hawk, which acquired the mine more than two years ago, issued a statement Friday saying Peruvian officials have asked the company to relocate its processing plant and dump area away from the Tamboraque hillside.

CEO Kevin Drover told CBC News the company knows the area is unstable and has already taken action.

"There has been no leakage whatsoever; there has been no impact to the environment. The only impacts have been to our company because we brought ourselves to our knees," Drover said.

Crushing and milling operations at the mine were suspended in May because of ground displacement around the dumping area, which the company attributed to overwatering by local farmers.

Both company and government experts say farmers overwatering their crops have made the hillsides around the mine soggy, cracking its cement foundation and increasing the risk of landslides.

Oxfam representative critical of mining practices

Farmers say, however, that there has been a local decree in place for the past three months that forbids them to irrigate, according to a representative of Oxfam America in Peru.

"So they lost crops in order to not add more to the overall risk of the mine while the mine continued to add to the tailing dump," Fran Boern told CBC News.

There is a legacy of toxic waste dumping by gold mining companies in the region, which has led to numerous human rights complaints.

Three years ago, the Peruvian government was warned by an international human rights commission to clean up toxic mining waste in the area, and the Coricancha mine was chosen as a place to store all of it.

The mine's current storage dump, also known as a tailings area, was scheduled to be replaced by a nearby waste facility this summer. Gold Hawk announced last month, however, that it will "seek a long-term tailings handling solution" at another site, Chinchan, which is currently in the engineering stage.

Boern said he is skeptical of such a move.

"Goldhawk indeed has started to move to a new place but it doesn't have an Environmental Impact Assessment and the possibility is still open that after that, they will have to move it to yet another place."

With files from the Canadian, Associated Press