Embattled Sino-Forest Corp. , once Canada's biggest publicly-traded timber company, appears to have substantially overstated the size and value of its forestry holdings in China's Yunnan province, according to figures provided by senior forestry officials and a key business partner there.
During two weeks of on-the-ground reporting that included interviews with Chinese government officials, forestry experts, local business operators and brokers, The Globe and Mail uncovered a number of glaring inconsistencies that raise doubts about the company's public statements regarding the value
of the assets that lie at the centre of the company's core business
of buying and selling Chinese timber rights.
Once a stock market favourite, Sino-Forest has had a spectacular fall since a short seller's report, published June 2, alleged that the company engaged in large-scale fraud and is inflating the value of its timber assets. The shares are down 82 per cent since the release of that report, written by Carson Block of Muddy Waters LLC, representing a paper loss of $3.7-billion to investors in little more than two weeks.
The company has denied all wrongdoing and the board of directors formed a committee to probe the allegations raised by Muddy Waters. The investigation is expected to last months and has begun with representatives from PricewaterhouseCoopers checking Sino-Forest's bank accounts to verify the more than $1-billion (U.S.) the company says it holds in cash at Chinese banks and other financial institutions.
The Globe's investigation raises particularly hard questions about a key agreement in March, 2007, that Sino-Forest says gave it the right to buy timber rights for up to 200,000 hectares of forest in Yunnan over a 10-year period for between $700-million (U.S.) and $1.4-billion. The trees were to be bought through a series of agreements with an entity called Gengma Dai and Wa Tribes Autonomous Region Forestry Co. Ltd., also known as Gengma Forestry.
The company says it has fulfilled virtually all of the agreement with Gengma and now owns more than 200,000 hectares in Yunnan.
But officials with Gengma Forestry, including the chairman, dispute the company's account of the deal, telling The Globe and Mail that the actual numbers are much smaller.
Xie Hongting, the chairman of Gengma Forestry, said in an interview that the transactions carried out so far by Sino-Forest amounted to less than 14,000 hectares.
Asked how many deals Gengma had conducted with Sino-Forest, Mr. Xie said: "I've told you that we sold them almost 200,000 mu." (Mu is a Chinese unit of land measurement; 15 mu equals one hectare.)
Mr. Xie's account corroborates the assertions of senior forestry officials in the province. Speaking on condition of anonymity, these officials challenged the company's statements that it controls more than 200,000 hectares of Yunnan trees, and said they are now investigating.
In a written response to questions from The Globe, Sino-Forest said it stands by its public statements regarding its Yunnan holdings. The company said it has purchased about 13,300 hectares of "forestry assets and leased land" directly from Gengma Forestry, and another 180,000 hectares of "forestry assets only" from other sellers, using Gengma as a purchasing agent.
"The agreement has not been yet fulfilled as we have not completed the purchase of 200,000 hectares," the company said.
That statement from Sino-Forest appears to contradict its own publicly filed financial reports. In its first quarter 2011 report, the company said that "under the master agreement entered in March 2007 to acquire 200,000 hectares of plantation trees over a 10-year period in Yunnan, the Company has actually acquired 230,200 hectares of plantation trees for $1,193,459,000 as at March 31, 2011."
The company's 2010 annual information form filed with regulators earlier this year said that as of December 31, 2010, Sino-Forest had "acquired approximately 190,300 hectares of plantation trees for $925.9-million (U.S.) under the terms of the master agreement."
The Globe's investigation of the company's dealings and holdings in Yunnan points to inconsistencies in the company's accounting of its timber rights and raises broader questions about its business practices.
In dispute is just how much the company really controls of the dense oak, pine and birch forests that cover the rippling mountains of southern Yunnan, which is close to China's border with Myanmar.
Sino-Forest's core business consists of buying timber assets in China, holding these plantations for two or three years as they appreciate in value, and then selling them at a profit. Sino-Forest also has a log trading business. Combined, these operations account for about 95 per cent of the company's current revenue. Sino-Forest also plants trees for harvest, but these holdings are not expected to generate revenues for five or six years.