"Most of the land with good trees around Gengma is all sold out. Only lesser land is still available to buyers now," said Zhang Fuyin, a broker who said he sold 10,000 mu of timber in the area to Sino-Panel, a Sino-Forest subsidiary, several years ago. The deal with Gengma Forestry says the timber purchases will take place in "Lincang city and its surrounding areas," a likely reference to Lincang county, of which Gengma is the geographical heart.
Senior forestry officials in the province challenged the company's assertion that it controls about 200,000 hectares of forest in the region. Speaking on condition they not be identified, they said their records showed Sino-Forest manages far less than that and said the Yunnan Forestry Bureau would begin an investigation aimed at determining the company's true holdings.
In addition to the questions about Sino-Forest's disclosures on the size of its holdings, forestry officials, as well as local timber brokers who spoke to The Globe raised questions regarding the value Sino-Forest attributes to its Yunnan assets.
"It's very hard for anyone to say what the value of their property is," said one forestry official, adding that forested land in Yunnan needed to be evaluated by a special body jointly appointed by the Forestry Bureau and the Ministry of Finance. Sino-Forest has not requested such an official valuation of its land, he said. "(The valuation) must have two chops (official seals) and two forestry resource evaluation experts and two licensed evaluators… . Even I can't just go there and give it a value."
In an e-mail response to The Globe and Mail, Sino-Forest replied that because they own the trees, rather than the land, their holdings would not be registered with the provincial forestry bureau.
"As a matter of course, when we purchase trees only, we obtain a confirmation of our ownership from the local county or city Forestry Bureau for the local area in which we purchase, not the provincial Forestry Bureau. Sino Forest's ownership of its forestry assets in the Yunnan province is voluntarily documented in each case by the local or city Forestry Bureaus, not at the provincial Forestry Bureau level. As a result, officials at the provincial Yunnan Forestry Bureau would not have an official record about Sino-Forest's local forestry assets."
Born from a reverse takeover of a shell company trading on the Alberta Stock Exchange in 1994, Sino-Forest grew to a market capitalization of more than $6-billion. Its largest shareholder is Paulson & Co., run by John Paulson, who is among the world's best-known hedge fund managers and whose flagship fund owns 14 per cent of Sino-Forest's shares, according to regulatory filings.
Before the Muddy Waters report was published, seven out of seven Canadian equity analysts who covered Sino-Forest rated the company a buy.
With reporting by freelance writer Carolynne Wheeler in Beijing.
March 23, 2007: Sino-Forest announces a deal to acquire 200,000 hectares of standing timber in Yunnan province over a 10-year period for $700-million (U.S.) to $1.4-billion. The company says it will acquire the trees through "purchase agreements" with Gengma Dai and Wa Tribes Autonomous Forestry Co. Ltd. (Gengma Forestry).
At the same time, the company says it will sell $200-million in new shares to investors, with most of that going to Temasek Holdings, Singapore's sovereign wealth fund.
Dec. 31, 2007: By this date, Sino-Forest had acquired 10,438 hectares for $88.1-million under the Gengma deal, according to company disclosures.
2008: Sino-Forest acquires 64,562 hectares of Yunnan forest under the Gengma deal, according to company documents, for a total of 75,000 hectares purchased.
2009: Further acquisitions bring Sino-Forest's total purchases under the Gengma deal to 109,100 hectares, at a cost of more than $500-million.
2010: Sino-Forest has its busiest year yet in Yunnan, acquiring another 81,200 hectares through Gengma. As of Dec. 31, 2010, it had bought 190,300 hectares of Yunnan trees via the deal, for $925.9-million.
June 2, 2011: An obscure research firm, Muddy Waters LLC, alleges that Sino-Forest has overstated purchases from the Gengma agreement by $800-million.
Source: Company documents