The stocks of Osisko Gold (OR 0.65%) and Franco-Nevada (FNV 1.19%) have both been moving higher of late. That's not shocking given the concerns about financial stability in the banking system, Both precious metals streaming and royalty companies. However, some important differences between these two companies help explain why Osisko's recent advance has been roughly twice as strong as Franco-Nevada's rise.
The core
Mining for gold and other precious metals is an expensive and complex business, which is why neither Osisko nor Franco-Nevada tries to do it. Instead, they provide capital to gold miners in exchange for the right to buy gold at reduced prices in the future.
This also allows the companies to invest in larger portfolios of precious metals projects, since they can work with multiple miners. For example, Osisko has investments in more than 180 projects, while Franco-Nevada's list is even larger at 419. By comparison, most miners have only a handful of operating assets, if that.
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Precious metals are viewed as safe-haven assets. In light of the bank runs that have occurred over the last week or so, investors are heading for cover and choosing gold. This is part of the reason Osisko Gold's stock has rallied so strongly. But why hasn't Franco-Nevada's stock had quite as good a run?
There are a couple of reasons for that. But don't think the laggard relative performance is a sign that you shouldn't own stock in Franco-Nevada. In fact, in some ways, it is a more desirable company.
Similar but different
One key difference between Osisko and Franco-Nevada is size. Franco-Nevada's market cap is roughly $27 billion. Osisko is an order of magnitude smaller at roughly $2.7 billion. While it wouldn't exactly be fair to call Osisko a runt, it generally doesn't take as much to move the needle at a small company as it does at a larger one.
So investor sentiment shifting in favor of precious metals companies is logically having a bigger impact on a smaller player. The problem is that when the tide turns, the downside could be just as outsized.
In addition to this, Osisko's portfolio is nearly all precious metals -- 99% of its commodity exposure. So as gold and silver rally, the company's top and bottom lines will very directly benefit.
Franco-Nevada has taken a much more balanced approach with its portfolio, which is roughly 55% gold, 11% silver, and 4% platinum group metals. The rest is other metals and -- here's the big one -- oil and natural gas at a combined 26%. All in all, only about 70% of Franco-Nevada's business is tied directly to precious metals. Inherently, then, a precious metals rally will be less beneficial to Franco-Nevada.
If you are looking to leverage yourself to gold prices, Osisko would be the better option. However, if you understand the benefits of diversification for your own portfolio, you'll appreciate the structure Franco-Nevada has chosen.
Note, too, that Franco-Nevada has increased its dividend annually for 16 consecutive years despite the volatility inherent in the precious metals space. It clearly has a plan that works well for investors, though the dividend yield is pretty miserly at just 1%.
Osisko is a younger company whose dividend history isn't nearly as strong, but its dividend yield is slightly higher at 1.15%.
Which is better?
If you are worried about the financial stability of the global banking system and want to find a precious metals investment, Osisko is a far more direct play than Franco-Nevada. But it is also likely to be a more volatile option, given its smaller size and higher exposure to gold and silver.
Most investors, and particularly those with a conservative bent, will likely be better off with Franco-Nevada, which will still benefit from rising precious metals prices but has a much larger and broader portfolio. Indeed, what goes up will eventually come back down, or at least that's the long-term history in the gold space. When the tide does turn, Franco-Nevada is likely to hold up better.
