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The Philippine Government has ordered an Australian mining company to suspend operations and compensate local villagers after waste water was suspected of killing fish.

Islanders accuse Lafayette Mining of discharging water containing dangerous levels of cyanide into creeks near the mine.

The modest-sized gold, silver, copper and zinc mine is only the second foreign-financed mining project to reach production stage in the Philippines in a decade.

"We have already directed the company to implement certain measures," government spokesman Reynulfo Juan said in reference to Lafayette, the owners of the open pit mine on Rapu-Rapu island south-east of Manila.

"They will have to suspend milling operations until measures are in place and are validated by independent experts that we will commission.

"They are still discharging waste water that should not be discharged," he told AFP.

Lafayette country manager Rod Watt denied the contamination claims, but said the company was under investigation over the matter.

Mr Watt insists the company made a "normal discharge" of water from the mine's tailings pond on October 31 after processing it to remove the cyanide, the main chemical used to extract gold from the crushed ore.

Mr Juan said government inspectors on November 5 found the level of cyanide in the Ungay and Hollow Stone creeks to be at least twice the government standard, though the readings had since dropped.

Villagers had complained that they collected two sacks of dead marine species from the immediate shoreline shortly after the discharge, the official said.

"We told the company to compensate the affected fishermen," Mr Juan said.

Mr Watt said Lafayette had yet to receive a formal government order over the 1.4 billion peso ($A34.8 million) mine which began production in July.

In 1996, a leak from the tailings dam of a copper mine operated by a Canadian company spilled 1.6 million cubic meters of mine waste into the Makulapnit and Boac rivers in the central island of Marinduque.

The accident led to hefty fines and a major revision of the country's mining law that led to a stricter regulatory framework.

Philippine President Gloria Arroyo is pinning her hopes on massive foreign investments in the resources sector to bail out millions of Filipinos from desperate poverty.

http://www.abc.net.au/news/newsitems/200511/s1501512.htm