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RELAVE, Peru, March 4 (Reuters) - Tucked between two desert ridges in southern Peru, Relave looks like any of the hundreds of ramshackle mining towns that blight the landscape in the world's sixth-largest gold exporter.
Its name in Spanish means "tailings," a nod to the heaps of mining waste that the town, a sprawling collection of wooden shacks and simple concrete huts, sits upon.
But Relave is also home to Aurelsa, one of the first small-scale mines in the world to produce gold certified and marketed as "ethical" as part of a scheme aimed at reducing the harmful impact of illegal mining in mineral-rich developing countries.
"When we arrived we didn't have anything ... Now we're exporting internationally," said Juan Coronado, the chief executive at Aurelsa who came to Relave in the late 1980s to sift through what was left of an abandoned gold mine after leaving his family farm in the Andean highlands.
He used to collect the abandoned mine's tailings, mix them with mercury, and sell the amalgam to middlemen in a nearby town.
Then he joined forces with a small group of illegal miners to set up Aurelsa as a legal company in 2000, paying taxes and abiding by industry regulations.
It struggled at first to compete with illegal operations that had virtually no overhead but in 2011 it opened talks with the Alliance for Responsible Mining (ARM), an advocacy group that seeks to improve small-scale miners' working conditions through direct sales to overseas customers.
Aurelsa, with 45 employees, made its first direct international sale in June 2013, a 2.2-pound (1-kg) shipment of gold certified as "ethical" by ARM, and it has exported another 22 pounds (10 kg) of ethical gold since.
While Aurelsa still sells some gold to middlemen, it hopes that all of its production - currently at 4.4-6.6 pounds (2-3 kg) per month - will soon be marketed and sold as "ethical gold".
There are three other mines like Aurelsa in South America and last year they exported a combined 790 pounds (360 kg) of "ethical gold" to boutique jewelers in the United States and in Europe.
Miners at Aurelsa work in well-lit tunnels and take home regular paychecks, a vast improvement over other mines in Relave, a town of about 4,000 people.
Across from Aurelsa's active mineshaft, hundreds of illegal miners dig without protective gear at La Capitana, an imposing hunk of rock that locals say has been mined for more than two centuries.
"In any one of those, you'd have to crawl to get inside, and you wouldn't be able to see anything," said Daniel Arcos, an Aurelsa engineer.
As the price of gold soared to record highs over the past decade, hundreds of thousands of poor people from Peru to Indonesia have scoured rivers and mountains for the ore at makeshift mines that operate outside of the law.
Working without environmental and legal permits, they typically use large amounts of mercury to separate the precious metal from rock, often handling the neurotoxin with their bare hands and inhaling its fumes when it is burned off.
Miners sell their nuggets to middlemen and processing plants that refine the metal before shipping it abroad to refineries, where ore collected from all over the world becomes bullion.
Refineries source most of their gold from large mining firms that operate globally, though industry experts say there is no way to tell for sure where the ore originally came from by the time the bullion is sold to dealers and consumers.
The "ethical gold" initiative aims to change that by selling directly to wholesale consumers at a 10 percent premium in exchange for assurances that they are rewarding fair labor practices and a commitment to environmental protection.
"I was so frustrated with the industry before," said Amanda Li Hope, a London-based jeweler who was one of the first to buy ethical gold. "No bullion dealer could 100 percent guarantee where anything was coming from."
Li Hope markets her guilt-free gold rings, necklaces and earrings online, and has bought about 4.5 ounces (130 grams) of gold labeled "fairmined" or "fairtrade" since 2011.
Peru's government estimates that more than 100,000 illegal miners are now working in the country of 30 million, though others say the true number of wildcatters is closer to 500,000.
High gold prices have especially lured poor Peruvians to the Amazon, where more than 123,500 acres (50,000 hectares) of rainforest have been destroyed to make way for makeshift alluvial mines, according to researchers at the Carnegie Department of Global Ecology. The boom has resulted in more than 3,000 tons of mercury leaked or dumped into the country's rivers, according to the government.
In one area rife with wildcatting, nearly 80 percent of the population has dangerous levels of mercury in their bodies, researchers from the Carnegie Institution for Science found.
The gold rush is also tied to a host of social ills, from prostitution in boomtown brothels to child labor in the pits.
Peru's gold output was 151 tons last year but government statistics show that it exports roughly 20 percent more than it produces. Economist Elmer Cuba says it is a sign that illicit gold - the kind often linked to organized crime and deforestation - is regularly laundered into the export market.
While Peru tries to crack down on illegal mining, advocates of "ethical gold" say lasting solutions lie not in police operations but in business savvy and financial incentives.
ARM and another group, Fairtrade International, put their "fairmined" and "fairtrade" stamps of approval on gold in exchange for commitments by the small mining firms to adhere to environmental, social and labor standards.
Both use similar compliance guidelines and perform surprise inspections on miners whose products they endorse. They say they do not trade in gold or take a cut of exports.
The initiative builds on similar efforts to get big mining companies to source ore under tougher standards, and to prevent the international trade in "blood diamonds" from conflict zones.
Rosa Reyes, the mine manager at Aurelsa, said word is spreading that formalizing a mining operation as required by law can bring big benefits.
"Without being organized as a formal company, there is no legal way to buy inputs like dynamite and cyanide, there's no way to get financing," said Maria Rosa Reyes. "And without those things you can't produce" at an export scale.
Aurelsa's first batch of certified gold sold directly to an overseas buyer went to Ethical Metalsmiths, a U.S. boutique jewelry consortium.
Christina Miller, Ethical Metalsmiths' executive director, said the transaction took much longer than she expected - a potential obstacle for ethical gold producers new to exporting - but that she is still planning future purchases.
Aurelsa and the other certified mines in South America will probably produce more than a ton of gold by 2015, said Kenneth Porter, ARM's business liaison. That is a drop in the ocean of global supply, but would represent over $44 million in sales at today's prices.
Advocates say that as the supply of ethical gold increases, more buyers will learn it exists and ask for it.
Lina Villa-Cordoba, ARM's executive director, said the next step is get a big jewelry firm to commit to buying ethical gold. Ultimately she hopes to reach the banks and traders that buy gold as a financial instrument.
"We have to find a way to create industry-wide demand, to move the market," Villa-Cordoba said. (Editing by Kieran Murray and Tom Brown)