When a vertical chasm of disconnect separates the earnings performance of your company's two products, then "Cliffs" might just belong in your company name.

Cliffs Natural Resources (NYSE: CLF) climbed its way to a highly profitable third quarter, setting company records for revenue, net income, free cash flow, and other key metrics. Cliffs attained a consolidated sales margin of 37%, thanks to margins for iron ore (per tonne) of 36% (North America region) and 57% (Asia-Pacific region).

Revenue more than doubled to $1.3 billion for the quarter, and diluted earnings per share skyrocketed 384% to $2.18 (for net income of $297.4 million).

Astonishingly, Cliffs achieved all this with a million-ton weight tied to its ankles. I've scaled my own share of vertical cliffs in my day, but never under such challenging conditions. The weighty culprit remains Cliffs' North American coal operations, which suffer from (frankly) unacceptably high cash costs of production.

I can easily forgive non-recurring items like the $10-per-ton cost increase from adverse geological conditions encountered at the Pinnacle mine. But given the very attractive pricing environment for metallurgical coal this year, I find it troubling that Cliffs has recorded a negative sales margin through the entire first nine months of 2010.

Now, I happen to think that met coal prices will remain strong (and likely increase) over the long term. I'm further encouraged by Cliffs' "continued strategic efforts to increase our business' exposure to seaborne markets." As I have noted, pan-Asian demand for met coal has grown sufficiently to make even the long journey from the U.S. eastern seaboard an economical proposition. CONSOL Energy (NYSE: CNX), Massey Energy (NYSE: MEE), and Patriot Coal (NYSE: PCX) have each shipped met coal tonnage directly to China or India during 2010.

As Cliffs looks to expand North American coal production by a breathtaking 80% for 2011 (to 6.5 million tons), I believe that the company will need effective penetration into that seaborne market to ensure a positive sales margin while it labors to reduce those underlying cash costs.

Shares of Cliffs have appreciated nearly 200% since I urged investors not to jump off the cliff back in February 2009. Until the miner gets those coal costs under control, I prefer Peabody Energy (NYSE: BTU) for met coal exposure at this stage. Likewise for iron ore, where a producer like Rio Tinto (NYSE: RTP) offers expanding production without the weight of an unprofitable business unit. On the other hand, if declining costs accompany this major production growth spurt, Cliffs' shares could be in for another climb. At the very least, this is one stock for Fools to watch closely, which is why I recommend you add it to your watchlist.

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned.

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