Hagerman, although no longer the President but still a director, was disturbed by the heavy deficit of 1888, and the extremely small surpluses in 1889 and 18890. By May 1890, Hagerman had decided to attempt to sell the Midland to a large connecting railway as a way to secure a good return on investment for the roads financial backers. The Santa Fe was greatly interested in the Midland and in September 1890 took over control of the Colorado Midland. In fact, the Santa Fe operated the Midland as an owned subsidiary with only a small name change to Colorado Midland Railroad (from Colorado Midland Railway).
The Santa Fe, interested in the recent gold discoveries at Cripple Creek, decided to cash in on the new traffic possibilities from this area. In August 1892, the Midland Terminal was incorporated to tap this new traffic potential from a C.M. tie-in at Divide. Although originally started as a narrow gauge line, the standard gauge Midland Terminal reached Victor in December, 1894 and Cripple Creek itself just a year later. This tie-in greatly increased the Colorado Midland's traffic volume. With large quantities of outbound ore and inbound freight of merchandise, lumber, mine timbers, coal and mining supplies adding to the traffic, two daily passenger trains were also added with through sleeper service to Denver.
No one could deny that the Colorado Midland crossing of the Continental Divide at Hagerman Pass was spectacular. Though tourists and writers applauded this outstanding feat of 19th Century railway engineering, the Midland's management was increasingly unhappy about the high costs of running trains up and down 3% grades and around the many 16-degree curves between Leadville and Basalt. Maintaining the right-of-way was also expensive with the wild Hagerman Pass winters of howling blizzards and roaring slides keeping the rotary outfit on the move from November to March; tying up as many as six hard-working locomotives to shove the Leslie plow through the snow. In addition, the high amounts of moisture caused ties and bridge timbers to rot much more quickly than elsewhere on the railroad.
As early as 1888, surveys were undertaken to locate a long tunnel site at a lower elevation. Plans for this major line relocation were completed in November, 1889 and on June 16, 1890, the Busk Tunnel Railway Company was incorporated. The total length of the Busk Tunnel Railway was to be 2.9 miles. Its eastern end lay at Busk station where the railroad began to reverse direction in the first great loop up the face of the Sawatch Range. The western end was situated on the northern shore of Lake Ivanhoe. The line was to be connected by a 9,394.7 feet tunnel under the Continental Divide which become know as the Busk-Ivanhoe Tunnel.
The Colorado Midland bondholders who were backing the Busk Tunnel Railway Company secured a contract for its use from the Colorado Midland Railway Company before construction was allowed to start. A toll of 25 cents per ton of freight and 25 cents per passenger carried through the tunnel was agreed upon. This was necessary to raise the capital for construction of the tunnel line estimated at $782,000.
The Colorado Midland, already burdened with a tremendous debt load, did not wish to add to its indebtedness; moreover financiers were more likely to invest in an independent tunnel company with an assured income than to loan further sums to an already debt-burdened railroad. This decision, although entirely logical at the time, would come back to haunt the Colorado Midland in the not to distant future.
On July 25, 1890, the contract for digging the tunnel was awarded to Keefe & Company of Butte, Montana. Starting the next day, a small group of men with picks and shovels began excavating the approach cut of the future west portal. While this work was going on, Keefe began hiring men to drill the tunnel simultaneously from both portals and the CM set out freight car loads of construction machinery at both the Busk and Ivanhoe sidings.
No pumps were installed at the east end of the tunnel as the bore was to descend a 1.4% grade from west to east. Since water accumulation was going to be a big problem in the west portion of the tunnel, three big pumps were installed. Muck was to be hauled out of the tunnel from each heading over temporary narrow gauge trackage with Keefe securing two 20-inch gauge Porter locomotives. Coke was used for fuel and not apparent inconvenience was caused to workmen in the tunnel.
By September 15, 1890 all machinery was in place at the Busk end and work commenced. Work on the Ivanhoe end didn't start until October 8, 1890, the very same day that the bench was started at Busk. The bench at the Ivanhoe end finally got started on October 30, 1890.
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