Fools’ Gold

Mother Lode of Mining Scams

by Paul O’Rourke

Lucien Lucius Nunn was both pleased and strangely agitated. Over the course of just a few weeks during the summer of 1890, gold bullion produced from the Gold King Mine (located in Alta Basin southwest of Telluride) were delivered, with exhilarating regularity, to Nunn’s office for shipment to Mr. James Campbell, the mining company’s owner in St. Louis. That close to $80,000 in gold had accumulated in such a short span of time might have been more than sufficient cause for high celebration in most mining camps, but Nunn, then general manager of the Gold King, wasn’t nearly content.

First, there was the matter of the company’s balance sheet. The gross proceeds from the gold were offset by the high costs of transportation and supplying power to the mine and mill. And second, Nunn was convinced an “inexhaustible” bonanza of valuable, albeit low-grade, gold ore existed in the vicinity of Bear Creek (just south of Telluride) and in Prospect and Turkey Creek Basins, not far from the Gold King. It was there for the taking if someone would commit the funds to extract and process it. Nunn was a dreamer, and some would say a genius. No question, he was a “doer,” and he had an idea—an ambitious series of plans, actually—that could not only solve the Gold King’s financial woes but might just make Nunn wealthy beyond belief.

Nunn knew the Rio Grande Southern Railroad was scheduled to arrive in Telluride by late fall of 1890. He had already convinced Campbell and the principal Gold King shareholders in St. Louis that a novel plan to transmit alternating current (AC) electricity (conceived by Nikola Tesla and backed by George Westinghouse) from a hydroelectric power plant at Ames—2.6 miles east and up to the Gold King Mill—would not only rescue their investments, but would revolutionize the mining industry. With an inexpensive source of power, Nunn reasoned, the milling of low-grade ore would not only become feasible, but immensely profitable. Mining investors were attracted to Colorado and the Telluride district, intense speculation having been spurred by the initiation of the Sherman Silver Purchase Act in 1890. And Nunn wanted to be in on the action.

On February 11, 1891, The New York Times announced, “A gigantic mining deal has just been carried through, in which St. Louis, Chicago, and New York capital is invested.” The Times went on to report that the object of San Miguel Consolidated Gold Mining Company (SMC) “is to buy up and control all the free gold claims of the San Miguel mining district, together with water rights, mills, and mill sites.” Gigantic, indeed! On page three of its February 13 edition, the Telluride Republican casually announced SMC’s incorporation, and named the new company’s board of directors, among whom were retired Civil War General Benjamin Butler of Boston; James Gilfillan, ex-treasurer of the United States, of New York City; James Campbell of St. Louis; and Lt. Governor William Story of Ouray. At its first meeting, held in Boston, the board appointed Nunn SMC’s general manager for a term of 10 years at an annual salary of $15,000. It was, after all, his vision that had brought the new company into being.

SMC was to be capitalized at $15,000,000 (1,500,000 shares at $10 par value), a staggering amount, considering that the Smuggler-Union Mining Company, a proven producer and dividend payer, was reorganized in the same year at $5,000,000. And perhaps more curious, the mining properties up Bear Creek and in Turkey Creek and Prospect Basin that Nunn and SMC’s directors considered for inclusion in the consolidation were, at the time, little more than speculations. In offering a fairly extravagant prediction, or what Nunn called a “moderate estimate,” that the gross output of SMC might reach “$10,000 per day, with a net profit of over half that amount, or over $1,500,000 yearly,” Nunn appeared to be setting himself up for disappointment, if not unwanted scrutiny.

Nunn seemed less concerned about working or acquiring quality mining claims and more interested in extending power lines from the Ames power plant to the mills in Prospect and Turkey Creek Basins, to the town of Telluride, and then up Bear Creek to the Golden Group Mill. In his mind, electric power was the key to the company’s ultimate success; the quality and extent of the ore was only a secondary consideration. Of the 30-or-so mining claims associated with SMC by the fall of 1891, six were part of the minimally successful Ilium Mining and Milling Company (owned by Nunn since 1888) and 12 were associated with what was known as the Golden Group.

Incorporated in 1878 with capital stock pegged at a suspiciously high $6,000,000, the J.H. Haverly Golden Group Mining Company’s properties, located up Bear Creek, were sold to SMC to “satisfy a comparatively small indebtedness,” according to Nunn. On April 17, 1891, the Telluride Republican, in what sounded like a sales pitch, claimed “a gentleman whose opinion is worth something was heard to say that Bear Creek would become one of the best mineral-producing sections this summer. To be sure the ore is of a low grade, but with the Golden Group mill repaired and put in proper condition and with electric power to run it, ore can be milled at $1.00 per ton, thus making $6 and $8 ore a bonanza.” Assuming Haverly and associates were simply ignorant of proper mining techniques may explain the Golden Group’s relatively unproductive 13-year history, but what the “gentleman whose opinion is worth something” (Nunn, more than likely) may have overlooked was the possibility that the Golden Group was little more than a stock promotion devised by Haverly to consolidate prospect holes, perform minimal assessment and development work, sell stock to Eastern investors, construct a small mill, and then get the hell out of Dodge.

Setting aside the dubious quality of SMC’s mining properties, how the company represented what it did or didn’t control was of greater concern, as David Day, editor and publisher of Ouray’s The Solid Muldoon newspaper, saw it. SMC’s stock prospectus listed one set of properties under management; newspapers, both local and in the East, printed something different, altering their reports from one week to the next based on what they had heard might be the focus of operations. While Nunn had stated publicly that San Miguel Gold Placers Company—a business he managed that was then under Day’s ever-watchful eye for questionable stock promotion and a lack of any real production—was not to be acquired by SMC, The Solid Muldoon reported that the company’s prospectus claimed otherwise.

The New York Times article of February 11, and the company prospectus issued not long afterward, claimed Gold King Mining Company was included in SMC’s holdings, when in fact it was recapitalized in April 1891. Though Nunn continued to manage the properties, it was never part of the consolidation.

What really caught Day’s attention, however, were the duplicitous promises of “guaranteed” dividends used by SMC in marketing its stock, especially in the Eastern press. Day latched on to the reports like a bulldog takes to a soup bone, and in November 1891, the Muldoon launched a series of editorials that read like crusading investigative journalism on the one hand, and a vitriolic smear campaign on the other. Between Day and Nunn there was, apparently, no love lost. And had Day had his way, Nunn and the entire directorship of SMC would have spent their remaining days in the hoosegow.

Boldly characterizing SMC as “a vile, villainous steal” and its officers as nothing more than “thieves,” the Muldoon reported, “The prospectus, in addition to claiming absolute ownership of properties listed, when records of San Miguel County show no titles of record, claimed immense outputs and guaranteed monthly dividends.” The newspaper continued with a stab at the New York Financial and Mining Record, “SMC has never made a penny and yet, through methods its editor has not yet explained, the New York Financial and Mining Record lists the outfit as having paid $525,000 in dividends, when the local manager, L.L. Nunn, claims that less than $100,000 in stock has been sold.”

Day quoted the Troy Daily Times, New York, as having provided enticing yet erroneous representations of SMC: “The properties owned by the company are the largest deposits of free gold in the West…. The property ranks with the famous Comstock Lode of Nevada…and…net revenues will be $10,000 per day and dividends of 20 percent will be paid,” all of the claims having been made prior to the accomplishment of any real mining work. The headline in the December 11, 1891, edition of the Muldoon said it all: “THE SAN MIGUEL CONSOLIDATED GOLD MINING COMPANY…A Fraudulent Concern Whose Officials Have Flooded the New England and Other States With Their Worthless Stock.” Day’s muckraking and mudslinging attracted attention. Editorials from Aspen, Lake City and Leadville roundly condemned SMC.

Guilty of misrepresentation and false advertising, at the least, SMC, as Nunn freely admitted, discontinued the sale of stock, except to the company’s directors and associates. Yet, unlike most illicit mine promotions—which, when exposed quickly, disappear—SMC remained in business, and Nunn persisted in the pursuit of his objectives, if perhaps on a slightly less aggressive track. If accusations by Day and other detractors—and there were many—had blunted his optimism for the company and its vision, Nunn’s public actions belied any such negative effects.

In early spring 1892, construction began on SMC’s $250,000, 120-stamp Bear Creek Mill, a huge enterprise when taking into account that the Sheridan and Mendota Mill at Pandora, the largest in the district at the time, had only recently been expanded from 20 to 40 stamps. To accommodate the new mill’s size, deemed necessary for the profitable treatment of large amounts of low-grade ore, Nunn ordered (presumably from George Westinghouse) a 750-horsepower electric generator, the largest machine of its kind at the time, to be installed at the Ames power plant. On March 11, 1892, the Telluride Republican predicted, “When the work is all done and the machinery in place, those who have spent months in denouncing the undertaking will be loudest in their praise of the company for opening up a territory which has been idle for years.” The Solid Muldoon, recently relocated to Durango, was, in the months following construction of the mill, noticeably quiet.

Nunn’s fervent belief that inexpensive electric power could transform low-grade ore into immense profit delivered only disappointment. The $6 to $8 ore that Nunn so confidently expected to find in the basins south of Telluride ultimately held values no greater than $2 per ton, barely enough to cover expenses.

The Bear Creek Mill treated gold ore until 1914, though values seemed always to fall somewhat short of wishful predictions. According to plan and, more than likely, to Nunn’s great satisfaction, the mill served as a classroom, an “institute” as he would call it, for training electric equipment operators and offered one of the first electrical engineering programs on alternating current. Though his much-heralded work with electric power facilities in upstate New York and Utah brought him a degree of wealth and notoriety in the years after SMC reorganized into the Telluride Power Transmission Company in February 1896, Nunn never lost touch with Telluride and his conviction that he would, one day, hit the “mother lode.” As most miners will tell you: Once infected, gold fever stays with you for life. In the spring of 1902, Nunn, along with his longtime associate, James Campbell, acquired the Ella and Nellie Mines in Bear Creek Basin. The mines and the Bear Creek Mill were only marginally successful, and Nunn and the company’s legitimate business operations stayed mostly out of the public eye.

San Miguel Consoli dated wasn’t the first mining stock “promotion” to visit Telluride, and it certainly wasn’t the last. Who knows? With gold now hovering around $900 an ounce, even the author might be tempted to take a flyer on a gold mining “expedition.” After all, when recently asked if there’s still valuable reserves of gold in the mountains around Telluride, veteran miner Billy Mahoney, Sr., got a twinkle in his eye and exclaimed, “There’s a fortune in there—a fortune!”