What happened?

Cliffs Natural Resources Inc (NYSE:CLF) watched its stock price rocket higher just before the company announced earnings in early February. However, since that time, the shares have been heading steadily lower. The painful 24.5% decline in March followed a roughly 6% fall between its earnings announcement on February 9th and the end of that month.

So what?

There are a couple of things going on. First, iron ore prices have been relatively weak lately. That's a headwind that a commodity producer like Cliffs can't easily avoid. Although iron ore prices are much higher than they were a year ago, the current pullback is clearly tempering investor expectations for Cliffs.  

Cliffs Natural Resources employee with a bucket.

Image source: Cliffs Natural Resources Inc.

That said, Cliffs' rally heading into its earnings announcement was likely built on investor hopes for a solid fourth quarter and full-year 2016 earnings update. On some level, the company didn't disappoint, returning to profitability for the year and projecting solid production numbers for 2017. The 2017 cash flow results it projected, though, were predicated on "the assumption that iron ore and steel prices will average levels consistent with the full month of January throughout 2017." With iron ore prices falling, that expectation looked increasingly like a stretch.  

The company also continued to work on its balance sheet, selling stock and using the proceeds to buy back more debt after it reported earnings. That's good on one hand, since it helps reduce indebtedness, but it also dilutes current shareholders. So, in the end, it's a mixed blessing and clearly not enough of a positive to offset falling iron ore prices -- particularly for a company with negative shareholder equity.    

Now what?

Cliffs has made a huge amount of progress in solidifying its finances after suffering through a deep commodity downturn, pushing out maturities and selling stock to buy back debt. That said, large one-time charges during the commodity downturn have left the company's shareholder equity deep in negative territory. That means debt remains at more than 100% of the capital structure...and a notable concern for investors.

Last year was a key turning point financially, but Cliffs still has more work to do. And volatile iron ore prices aren't helpful. Cliffs remains a turnaround situation into which only aggressive investors should venture.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Cliffs Natural Resources. The Motley Fool has a disclosure policy.