Iron ore. Image source: Cliffs Natural Resources.

When a stock has suffered greatly, sometimes all it takes to turn things around is the suggestion that things might not get any worse than they already are. That sentiment lifted iron-ore specialist Cliffs Natural Resources (NYSE:CLF) on Thursday as investors celebrated long-awaited signs in its third-quarter financial report of a possible turnaround for the much-beleaguered company.

Given global competition from Rio Tinto (NYSE:RIO) and other mining giants, Cliffs Natural has focused on the opportunities that its favorable location in the Great Lakes region gives it over its peers. Coming into Thursday's report, investors weren't expecting to see much progress, but narrower losses came as a pleasant surprise. Let's look more closely at how Cliffs Natural gave its investors some respite from the bad news they've had to suffer through for a long time.

Cliffs starts to turn the tide
Cliffs Natural's third-quarter results still showed a company struggling to find its way, but they weren't nearly as bad as some had feared. As expected, revenue got cut in half, falling to $593 million and ending roughly in line with what investors had looked to see from Cliffs. On the bottom line, though, the company dramatically narrowed its net loss attributable to shareholders to $15 million. That worked out to a per-share loss of $0.10 per share, which was less than half as much red ink as the consensus forecast had projected for Cliffs. When you take out losses from discontinued operations, Cliffs actually posted an adjusted profit for the quarter.

Still, the revenue hit Cliffs Natural has endured was evident throughout the company's results. In the U.S. iron ore segment, sales volumes fell 18% to 5.6 million long tons, while production volume fell an even steeper 30% to just 4.1 million long tons. Revenues per ton fell by nearly 25%, and falling cash production costs weren't enough to offset that decline, squeezing margins from their previous level of $32 per ton all the way down to $8.70.

The Asia-Pacific segment didn't see the massive sales and production volume drops that Cliffs Natural's domestic business endured, as production volume actually climbed about 5% during the quarter. However, huge declines in revenue per ton were only partially offset by the company's efforts to cut costs, and that sent sales margins down from their already razor-thin $3 per ton to just $2.20 per ton.

Nevertheless, the lengths Cliffs Natural has gone to in order to minimize costs paid off in lower losses. The company cut its overhead expense by more than half to just $22 million, and it reduced its capital expenditures by two-thirds, spending just $24 million during the quarter.

CEO Lourenco Goncalves emphasized the importance of Cliffs' cost-cutting measures: "Our performance this quarter illustrates how far we have come in our turnaround story," Goncalves said. "We have been able to deliver significant cost reductions in all areas of the business through disciplined execution of the strategy instituted last year."

Will Cliffs Natural follow through on its turnaround story?
Goncalves also remains optimistic about the future. "We expect the domestic steel market to improve in 2016," he said, "as trade actions reduce the pressure of imports and firm up steel pricing."

Still, Cliffs Natural's outlook includes plenty of uncertainty. The company is cutting its sales projections for the U.S. iron ore market by another 1.5 million tons to 17.5 million tons, reflecting the termination of its agreement with Essar Algoma. The company still expects cash costs on the production side of $55 to $60 per ton, and on the sales side of $60 to $65 per ton. Offsetting that drop is a 500,000-ton guidance increase in volumes for the Asia-Pacific region, where it now expects 11.5 million tons of production and sales, with production costs of $30 to $35 per ton, and costs per ton sold of $35 to $40.

That's consistent with the experience Rio Tinto is having with its Australian operations, but Rio Tinto's presence in a well-supplied global market is only one factor in why Cliffs can't afford to rely on international sales to pull it back from the brink.

Cliffs Natural shares soared after its announcement, reflecting the extent to which shareholders have had downbeat expectations drilled into them in the past. After many past false starts, though, Cliffs Natural needs to build up positive momentum over multiple quarters in order to demonstrate a true ability to rebound. Otherwise, Cliffs Natural could just as easily fall back into its past downtrend.