When oil stumbled, gold picked up the slack.
In the uncertain autumn of 2020, Canadian investors confronted a timeless dilemma: how to seek shelter in commodities without surrendering to their volatility. Two royalty companies listed on the Toronto Stock Exchange — Franco-Nevada and PrairieSky Royalty — offered contrasting philosophies for navigating a world where gold soared and oil stumbled. Their divergence was not merely financial but reflected a deeper question about how human beings manage uncertainty: through diversification, or through the discipline of commitment to a single bet.
- Gold's pandemic-era surge and oil's prolonged slump created a rare split in commodity markets, forcing investors to choose between asset classes that were moving in opposite directions.
- Franco-Nevada's stock had more than doubled from its March 2020 lows, but a price-to-earnings ratio near 120 signaled that optimism was already baked in — leaving little room for disappointment.
- PrairieSky's 2.95% dividend yield tempted income-seeking investors, but a year-over-year revenue shortfall of nearly $77 million exposed the fragility beneath that payout.
- Both companies leaned on the royalty model's structural advantage — collecting income without bearing operating costs — yet neither could fully insulate investors from the commodity cycles driving their fortunes.
- The choice crystallized into a trade-off: Franco-Nevada's global diversification across gold and energy at a premium price, or PrairieSky's higher yield concentrated in a pressured Canadian energy sector.
By late October 2020, Canadian investors were searching for footing in a commodity landscape split in two: gold climbing steadily through the pandemic, oil still struggling to find its floor. Two royalty stocks on the TSX offered different maps through the same uncertain terrain.
Franco-Nevada had made a striking recovery from its March lows, rising from roughly $106 to over $220 before settling near $179 at the time of analysis. Its royalty portfolio spanned six continents and two asset classes — precious metals and energy — giving it a natural hedge when one faltered. That balance showed in the numbers: second-quarter revenue grew to $136.6 million from $105.9 million a year earlier, carried largely by gold's strength. CEO Paul Brink noted that nearly all of the company's temporarily shuttered mining assets had restarted, and that the firm carried no debt. Third-quarter results were due within days. The complication was valuation — a price-to-earnings ratio near 120 suggested the market had already rewarded much of the good news.
PrairieSky Royalty offered a narrower proposition: Canadian oil and gas royalties, a higher dividend yield of 2.95%, and a stock still well below its pre-pandemic levels. Sequential improvement in funds from operations — up 78% from the second quarter — gave CEO Andrew Phillips grounds for cautious optimism, and he pointed to emerging plays in the Clearwater and Duvernay formations as long-term growth drivers. But the nine-month revenue shortfall of nearly $77 million compared to 2019 was hard to overlook, and the broader Canadian energy sector remained under structural pressure.
Neither stock offered certainty. Franco-Nevada asked investors to pay a premium for diversification and global scale. PrairieSky asked them to accept concentrated risk in exchange for income. The decision, in the end, depended less on spreadsheets than on conviction — about where commodities were headed, and how much uncertainty an investor was willing to carry.
It was late October 2020, and Canadian investors faced a familiar puzzle: where to put money when the world felt uncertain. Gold prices had climbed steadily through the pandemic while oil languished. Two royalty stocks on the Toronto Stock Exchange offered different answers to the same question—how to bet on commodities without betting the farm.
Franco-Nevada had staged a remarkable recovery. The stock had bottomed at $105.93 in the March 2020 crash and climbed to $222.15 by autumn, settling around $178.72 per share when this analysis was written. The company operates a sprawling portfolio of gold and energy royalty interests across six continents—the United States, Canada, Latin America, Australia, Europe, and Africa. Because it collected royalties from both metals and oil rather than betting everything on a single commodity, it offered a kind of built-in hedge. When oil stumbled, gold picked up the slack. In the second quarter of 2020, Franco-Nevada's revenue had grown to $136.6 million from $105.9 million in the same period the year before, a gain that reflected the strength of gold prices even as energy remained depressed.
The company's CEO, Paul Brink, sounded cautiously optimistic in his mid-year remarks. Of Franco-Nevada's 56 cash-generating mining assets, fifteen had experienced temporary shutdowns during the pandemic's initial shock. All but one had restarted. The firm carried no debt and was accumulating cash. Brink expected gold equivalent ounces to grow in the years ahead, and he believed stabilizing oil prices would help the energy side of the business recover. Franco-Nevada was scheduled to report third-quarter results on November 4th, just days after this analysis was published.
But there was a catch. The stock's price-to-earnings ratio had ballooned to around 120—a steep multiple that suggested investors had already priced in considerable optimism. Buying at such a valuation meant accepting that much of the good news was already reflected in the share price.
PrairieSky Royalty told a different story. The company owned crude oil and natural gas royalty interests scattered across Canada, a narrower geographic and commodity focus than Franco-Nevada. Its stock had fallen to $6.24 during the March panic and recovered to $8.09 by late October. The dividend yield was substantially higher at 2.95 annually, compared to Franco-Nevada's 0.79 percent. For income-focused investors, that was tempting.
Yet the fundamentals were troubling. In the third quarter, PrairieSky reported funds from operations of $37.9 million, up 78 percent from the second quarter—a sign of sequential improvement. CEO Andrew Phillips emphasized the resilience of the company's low-cost royalty model and pointed to long-term growth potential from secondary recovery projects and early-stage oil plays in the Clearwater and Duvernay formations. He suggested the company could grow without needing to raise capital or issue new shares.
The problem was the longer view. For the nine months ended September 30, 2020, PrairieSky's revenue had fallen $76.9 million short of the same period in 2019. The entire Canadian energy sector was under pressure, and a higher dividend yield could not erase that reality. The question for any investor considering PrairieSky was whether the income was worth the risk of further energy sector deterioration.
For those wanting exposure to commodities, the choice came down to diversification versus yield. Franco-Nevada offered a global portfolio spanning two asset classes, but at a premium price. PrairieSky offered higher income but concentrated risk in a single commodity and geography at a time when that sector faced structural headwinds. Neither was a slam dunk. Both required conviction about where commodity prices were headed—and neither offered certainty.
Citações Notáveis
Franco-Nevada is debt-free, has a growing cash balance, and expects good growth in our gold equivalent ounces over the next few years.— Paul Brink, CEO of Franco-Nevada, in Q2 2020 remarks
PrairieSky's Q3 2020 results demonstrate the resiliency of our high margin, low cost royalty model with funds from operations of $37.9 million, an increase of 78% compared to Q2 2020.— Andrew Phillips, President & CEO of PrairieSky Royalty
A Conversa do Hearth Outra perspectiva sobre a história
Why would someone buy Franco-Nevada at a price-to-earnings ratio of 120? That seems like you're paying for a story, not a business.
You're right to be skeptical. But the story matters when you're buying royalties. Franco-Nevada doesn't have to dig the gold or pump the oil—it just collects a percentage. So the earnings multiple reflects what investors believe about future gold prices and the company's ability to grow its royalty base. At 120, yes, you're betting gold stays elevated.
And PrairieSky? It's paying nearly 3 percent in dividends. That's real cash in your pocket.
It is, but you have to ask whether you're being paid enough to own a Canadian energy company in 2020. Revenue was down year-over-year. The dividend is attractive only if you believe oil and gas prices will recover enough to sustain it. If they don't, that yield could get cut.
So Franco-Nevada is the safer play?
Safer in the sense that it's diversified. Gold and oil don't move in lockstep. But safer in price? No. You're paying a lot for that diversification. PrairieSky is cheaper, but you're taking on more sector risk.
What would make you choose one over the other?
If you believe gold prices will stay high and oil will recover gradually, Franco-Nevada. If you need income now and can stomach energy sector volatility, PrairieSky. But honestly, neither is a no-brainer. Both require you to have a view on commodities.
And if you don't have a view?
Then maybe neither. A diversified fund that holds both gold and energy stocks, without concentrating on royalties, might be the smarter move.