Investors in Franco-Nevada (TSX:FNV) have seen strong results over the past nine years, enjoying average annual gains of more than 15% since early 2008. Yet what's particularly confusing for some investors is that much of Franco-Nevada's gains have come even during periods when gold's performance was lackluster at best. The answer lies in the particular business model Franco-Nevada has adopted, using streaming deals and royalty interests to get its exposure to the gold mining industry rather than taking on the direct obligations of mining operations itself. Below, we'll look more closely at how that has led to success even when gold and silver prices didn't fully cooperate.

Silver bars.

Image source: Getty Images.

How Franco-Nevada makes money

Franco-Nevada has produced its growth by structuring deals in two main ways. First, royalty interests involve Franco-Nevada paying money in exchange for a right to future royalty payments from a particular mine. When the mine produces metal, the royalty holder receives a monetary payment equal to a percentage of its net smelter return, or net revenue from the sale of the metal reduced by transportation and refining costs. Some of Franco-Nevada's precious metals royalty interests have come from acquisitions of other companies holding those assets, and Franco-Nevada has also made royalty interest agreements with energy producers to diversify its portfolio.

More recently, though, Franco-Nevada has favored entering into streaming arrangements with mining companies. Under such arrangements, the mining company agrees to sell a certain amount of future production at a set percentage of the prevailing spot price of the precious metal in exchange for the financing the streaming specialist offers. In some cases, streaming obligations end after certain production targets have been reached, while other streaming agreements call for perpetual stream-related sales for as long as the mine is operational and producing.

The effect of structuring precious metals streams

The value of Franco-Nevada's royalty interests and streaming agreements has a relationship with the price of the metals produced by the mines that are subject to the agreements. As a result, one would expect the price of Franco-Nevada stock to track precious metals prices fairly closely.

Yet over the years, Franco-Nevada has managed to grow despite the major oscillations in gold prices:

FNV Chart

FNV data by YCharts.

In particular, the chart above shows two key cases in which the streaming and royalty specialist's stock diverged from commodity prices. First, in 2012 and 2013, Franco-Nevada stock was able to climb dramatically even as gold prices topped out and eventually moved sharply lower. Thereafter, even in a falling gold market, Franco-Nevada held its own.

Over the past year, Franco-Nevada has spiked higher. Gold has recovered some of its lost ground over that time period, but the streaming company's performance has been far better.

The reason is simple: Franco-Nevada has continued to do deals that have increased the amount of revenue and profit it has been able to generate. In early 2016, for instance, Franco-Nevada's deal with Glencore dramatically increased its potential for future receipts of gold and silver from Glencore's Antapaccay mine in Peru. More metal means more profit, even when metals prices stay constant.

What to expect going forward

In some ways, it's even better for Franco-Nevada when gold prices do fall. Under those situations, many mining companies get into difficulty, and it's easier for Franco-Nevada to structure deals with terms that are extremely favorable, because its mining partners have little choice but to agree in order to receive much-needed financing.

Franco-Nevada will continue to look for good streaming and royalty deals, and its past track record of success shows that it's likely to keep finding them. As long as miners seek capital, Franco-Nevada will be in a good position to capitalize.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.