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Demonstrators march against violence in Juliaca, southern Peru, on June 25, 2010. Canada's Bear Creek Mining Corp. said it will use "all available avenues" to insist on its right to open a silver mine in the mountains of southeastern Peru, after authorities suspended its concession.AFP / Getty Images

There was a sharp selloff in Peru-focused mining stocks on Monday after the government cancelled one of Bear Creek Mining Corp.'s silver projects in the mineral-rich South American country.

Investors panicked after Peru said the recently approved Santa Ana project was no longer in the public's "best interest" in the aftermath of anti-mining protests that recently turned deadly.

The news hammered Bear Creek shares, which dropped 27 per cent to $3.75 on the TSX Venture Exchange - the lowest level in almost a year. That's after having already lost about 50 per cent this spring when the protests began. Bear Creek shares were at an all-time high of $12 in March.

Vancouver-based Bear Creak said it is launching legal action against Peru, arguing that nothing has changed with the project since it passed all the requirements necessary to operate in the country.

"[We]firmly believe that the decree is not legal, is unconstitutional, is in violation of Peru's foreign investment laws and constitutes expropriation," Bear Creek chief executive officer Andrew Swarthout said during a conference call with analysts on Monday.

Investors were clearly shocked at the move made by outgoing Peruvian President Alan Garcia, who will be replaced next month by left-wing nationalist and former army rebel Ollanta Humala.

"We also did not anticipate anything dramatic out of the outgoing government," Raymond James analyst Brad Humphrey said in a note. "Unfortunately … this was not the case."

Other Peru-focused miners whose stocks were dragged down include Duran Ventures Inc. and Sulliden Gold Corp. Ltd., which fell 15 and 14 per cent respectively, as well as Candente Copper Corp, down 9 per cent; Fortuna Silver Mines Inc., down 6 per cent; and Trevali Mining Corp., down 3 per cent.

"Investors are going to be concerned about the broader implications of broader development in Peru," BMO Nesbitt Burns analyst Andrew Kaip said.

Bear Creek was also in damage control on Monday as it tried to reassure investors that its larger, flagship Corani project in Peru was not in jeopardy.

"I think that we can separate the two issues," Mr. Swarthout said, adding that Corani, set to begin production in 2014, is in a jurisdiction where mining is less contentious.

Santa Ana has been a lightning rod for protesters targeting the environmental impacts of mining and energy projects in Peru. The mine was slated to produce about 47 million ounces of silver over an 11-year mine life starting in 2012, and represents about 20 per cent of Bear Creek's reserves.

Peru has a long history of mines being stalled or shut as a result of protests. Still, companies remain in the country, the world's largest producer of silver and second-largest in copper, which demonstrates the risk miners will take to find new reserves to grow production. Miners, working to meet rising demand for commodities from places such as China, are also driven by a growing scarcity of reserves as deposits in more stable countries run dry.

"This is a bit extreme," Mr. Swarthout said on Monday of the Santa Ana decision. "But it's not anything that hasn't happened before."

While Bear Creek is fighting the decision and holding out hope for a political solution, analysts say it could be the start of more controversy as a new government takes power in Peru.

"The probability of success is uncertain as political power in Peru moves toward a more socialist agenda, given the recent presidential election of Humala," BMO's Mr. Kaip said in a note to clients on Monday.