Cliffs Natural Resources Inc. (NYSE: CLF) has recovered massively from the lows of 2016. It has also managed to stay afloat during a period of time when many investors may have previously wondered whether Cliffs was financially viable. Now there is a rather large share price gain after word that Cliffs is offering a lot of stock and new debt to help pay down debt.

After taking a look at the filing for a share sale and after looking at the 2016 annual report for Cliffs Natural Resources, this would look like a company that is just drowning in debt on the surface. The problem with that statement is that it looks backwards rather than forward. And more good news is that Cliffs shares rose after news of a dilutive stock offering that is being used to pay down debt.

As of December 31, 2016, Cliffs had an aggregate principal amount of $2.2588 billion of long-term debt. Of that debt, $1.1886 billion was secured (excluding $106.0 million of outstanding letters of credit and $55.8 million of capital leases) — versus $323.4 million of cash on its balance sheet.

The company’s annual report showed that no loans were drawn under the ABL Facility as of December 31, 2016 and they had total availability of $333.0 million as a result of borrowing base limitations. As of December 31, 2016, the principal amount of letters of credit obligations and other commitments totaled $106.0 million, thereby further reducing available borrowing capacity on its ABL Facility to $227.0 million.

What else has happened in recent days is that Cliffs has issued $500 million in senior notes due in 2025 at a 5.75% rate. S&P raised its rating to ‘B’ and Moody’s assigned a rating of ‘B3’ to the new notes while raising its corporate family rating to ‘B2’ in the call. S&P even outlined how it is expecting solid earnings ahead and see the debt overhand no longer being an issue, and its equity group has an $18.00 share price target. S&P said:

We forecast 2017 EPS of $1.93, growing to $2.00 in 2018. We think 2017 net debt to trailing EBITDA will improve to 0.8 times, down from 8.2 times at yearend 2015 and 4.8 times at year-end 2016. We no longer see a debt overhang on Cliffs shares following its February 2017 equity offering.

Our 12-month target of $18 implies an enterprise value of 7.0 times our 2017 EBITDA estimate, a discount to Cliffs’ three-year average forward EV/EBITDA multiple of 10.4X, warranted by Cliffs’ high financial leverage which adds risk to Cliffs if iron ore prices fall from recent levels, partly offset by significant upside potential from higher domestic steel volumes and prices, and the potential near-term catalyst from infrastructure stimulus.

Cliffs Natural Resources has warned on numerous points that its debt is massive. The company said in its annual report for 2016, again which looks backwards rather than forward:

Although we reduced the principal balance of our outstanding debt by $639.4 million and our annual interest expense by $28.0 million during 2016, our substantial level of indebtedness has required us to dedicate a significant portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund capital expenditures, acquisitions or strategic development initiatives, and other general corporate purposes. Moreover, our level of indebtedness could have further consequences, including, increasing our vulnerability to adverse economic or industry conditions, limiting our ability to obtain additional financing in the future to enable us to react to changes in our business, or placing us at a competitive disadvantage compared to businesses in our industry that have less indebtedness.

Our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms or at all for working capital, capital expenditures, acquisitions or strategic development initiatives, and general corporate purposes. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance and many other factors not within our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt. However, we may not be able to obtain any such new or additional debt on favorable terms or at all.

The share filing will help pay down debt and bolster the balance sheet. The company said under its use of proceeds:

We intend to use a portion of the net proceeds of this offering to fund the purchase of the tender notes in the tender offers… We intend to use the remaining net proceeds for general corporate purposes, including the redemption of a portion of our Secured Notes.

Cliffs dates back to 1847 and the company considers itself as being the largest and oldest independent iron ore mining company in the United States. Needless to say, this has been a tough sector to thrive in during a  period of global competition, slowing market trends, and deep regulations and environmental issues.

When companies issue stock, investors should pay close attention to what this means when shares rise rather than fall. In the case of Cliffs, it implies that the greater dilution is worth getting rid of the debt so that the company is healthier.

The company further outlined some of its debt maturities coming due ahead:

• Our 5.900% 2020 Notes bear interest at a rate of 5.900% per year and mature on March 15, 2020.
• Our 4.80% 2020 Notes bear interest at a rate of 4.80% per year and mature on October 1, 2020.
• Our 2021 Notes bear interest at a rate of 4.875% per year and mature on April 1, 2021.
• As of December 31, 2016, $225.6 million, $236.8 million and $309.4 million aggregate principal amount of our 5.900% 2020 Notes, 4.80% 2020 Notes and 2021 Notes, respectively, remained outstanding.
• Our First Lien Notes bear interest at a rate of 8.25% per year and mature on March 31, 2020.
• Our 1.5 Lien Notes bear interest at a rate of 8.00% per year and mature on September 30, 2020.
• Our Second Lien Notes bear interest at a rate of 7.75% per year and mature on March 31, 2020.
• As of December 31, 2016, $540.0 million, $218.5 million and $430.1 million aggregate principal amount of our First Lien Notes, 1.5 Lien Notes and Second Lien Notes, respectively, remained outstanding.

If Cliffs shares rallied 7% to $11.91 by Monday’s closing bell knowing about this dilution from a stock sale and newer debt issuance, imagine how well off the company just raised even more capital to just wipe out all of its outstanding debt. That may seem like a stretch, but that is sometimes what investors think.

Cliffs traded a whopping 66 million shares on Monday, and its 52-week trading range is $1.72 to $12.36.

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