Streaming and royalty companies like Franco-Nevada Corporation (TSX:FNV) take a vastly different approach to investing in precious metals like gold and silver. Instead of operating mines, they provide cash to miners in exchange for the right to buy gold at reduced rates in the future. It's a safety-first model that makes streaming companies a great alternative to precious metals miners.

Franco-Nevada, however, takes the approach a little further than its peers. And the benefit of the company's extreme diversification is on display right now.

A lot more mines

Another streaming and royalty company, Wheaton Precious Metals Corp. (NYSE: WPM), focuses on making large investments in a small number of mines. It has streaming deals with 20 operating mines and eight development projects. Royal Gold, Inc. (NASDAQ:RGLD) uses a notably broader approach, with investments in 192 mines -- 39 operating, 22 in development, and the rest in earlier stages of their lifecycle.

Franco-Nevada takes that up a notch. It has investments in 51 producing mines, 35 development mines, and 209 mines in the exploration stage. That's a total of 295 mine investments.

A man standing at the mouth of a mine with the sun behind him

Image source: Getty Images

Investing in a lot of mines is only one chapter in the story here, however. All three of these streaming companies are also diversified by commodity in different ways. For example, Wheaton started out almost exclusively focused on silver mines, but a few years ago broadened its portfolio by including gold. More recently, it has invested in palladium and cobalt. Once all of its current deals start producing, gold is projected to account for 49% of production, silver for 46%, cobalt 3%, and palladium 2%. Royal Gold's portfolio breakdown is more focused on gold, with gold accounting for 77% of revenues, copper 11%, and silver 9%.

Commodity diversification, however, is another place where Franco-Nevada takes a vastly different approach. It has a heavy focus on precious metals, which is a stated corporate objective. Gold accounted for 67% of second quarter revenues, with silver coming in at 11%. A collection of other precious metals contributed 6%, and oil and natural gas added 14%.

A gold company with oil investments?

Franco-Nevada's goal is to generate at least 80% of revenues from precious metals through a widely diversified portfolio. However, the remaining 20% is more of an open book, as the company's unique exposure to oil and natural gas exploration highlights. The push into this space heated up following oil's deep price decline in mid-2014. That industry's troubles allowed Franco-Nevada to opportunistically ink royalty deals when drillers were most in need of cash. Basically, it applies the same model it uses in precious metals to oil and gas.

Now that oil prices have recovered from their lows, the deals aren't as plentiful. However, Franco-Nevada is still finding unique, one-off opportunities in the oil space. Franco-Nevada currently has investments in 57 producing oil and gas projects and 25 in the exploration stage on top of its mining investments.

The bigger takeaway, however, is that Franco-Nevada provides a level of diversification that its major streaming peers do not. The benefit of the company's oil and gas diversification is more than just theoretical: Because of a production shortfall at one of Franco-Nevada's larger mines (Candelaria, where lower ore grades have crimped production), precious metals revenues fell from $150.3 million in the second quarter of 2017 to $136.3 million in the second quarter of 2018, despite higher gold prices. Revenues from its oil and gas investments have helped to offset that decline, rising from $9.6 million to $22.7 million on a combination of increased production and higher commodity prices. Overall revenues only declined 1.4% year over year despite the difficulties on the precious metals side of the business.

That's just the top line. On the bottom line, widening margins, helped by higher gold and oil prices, led net income to rise nearly 18%. Earnings per share, meanwhile, advanced 16%. Pull out the oil and Franco-Nevada's results would have been very different. Clearly, the streaming company's energy investments have helped it to smooth over a tough patch while it waits for long-term precious metals developments to bear fruit.

This business will be important to watch over the next few years as well. Between 2017 and 2022 Franco-Nevada is projecting its gold equivalent ounce production to increase by around 17%. It is projecting revenue from its oil and gas royalty investments to increase 155% over that same span. To be fair, that's off a relatively small base, but it will push the company's revenue mix close to the 80% target level on the precious metals side. Oil and gas will be a key investment space to watch, and an even bigger diversifying asset in the years to come.

Not a pure play, but that's OK

If you want to invest in a streaming company that is focused only on precious metals, you should look at Royal Gold or Wheaton Precious Metals -- both are well-run companies. However, if you are interested in a diversified portfolio, Franco-Nevada is the stock to watch. Yes, you'll be getting exposure to commodities outside of the precious metals space, but the opportunistic investments management has made in the energy space appear to be working out quite well right now.

That's put the benefits of its more diversified approach front and center today, highlighting a key reason why more conservative investors looking for precious metals exposure might want to own widely diversified Franco-Nevada over its more metal-focused streaming peers.

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.