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Analysis

The roots of the Sino-Forest mystery Add to ...

But a former company executive involved in the project told the Globe it never produced a single panel.

According to Qi Shuxiong, who in 1994 retired as director of the Leizhou Forestry Bureau to join Sino-Forest’s board of directors, Sino-Forest invested $1-million into the joint venture, but it never got anywhere near the point where it could start generating revenues. Mr. Qi said the joint venture came to an abrupt halt in 1995 when the provincial Guangdong Forestry Bureau pulled rank on the smaller Leizhou office and cancelled the operation in favour of another, bigger project – a pulp mill that would draw trees from the same eucalyptus plantation.

“The ($60-million in sales) information must be incorrect,” Mr. Qi, who retired from the Sino-Forest board in 2003, said in an in-person interview conducted in the Chinese city of Guangzhou. “We didn’t produce a log. There was no warehouse or factory. … It was only in the planning stage.”

Less than a week later, Mr. Qi e-mailed and phoned The Globe and Mail asking to change his account. Despite being one of the seven signatories on the agreement that eventually wound down the joint venture in 1998, he said he had only been a technical adviser, and thus couldn't be sure what had or hadn't been produced by the factory.

Mr. Qi said he had received an angry phone call from Mr. Poon shortly after The Globe had tried to contact the Sino-Forest president for comment on this article.

The Leizhou Forestry Bureau filed a letter in 1999 that attacked Sino-Forest for misusing funds and alleged it had siphoned off some of the $1-million it had originally invested. It now says it has no one on staff who can remember the details of the 17-year-old enterprise or why it failed.

“I don’t know how [Sino-Forest] grew so quickly. I wasn’t involved any more. I’m a scientist, anyway. ... the CEO [Allen Chan] is in charge of the financing,” Mr. Qi said.

The shifting stories and details lost in time – as well as the company's apparent effort to control what is said by whom – highlight the difficulties faced by those looking to find the truth about Sino-Forest. The company’s independent committee recently said its investigation, initially scheduled to wrap up by September, may take until the end of the year because the job of gathering the data is so complex.

The mystery of Mandra

Even though the Leizhou joint venture failed to produce a single board, Sino-Forest kept growing. From 1994 until 2010, the company reported profit increases in every year but one.

In addition to raising their social status in China, Sino-Forest’s rising share price helped line the pockets of its co-founders. According to Bloomberg, since 2006 alone, Mr. Chan has sold $3-million (Canadian) worth of Sino-Forest shares and Mr. Poon has unloaded more than $30.1-million worth of company stock.

As Sino-Forest’s profits and assets continued to increase, Canadian and international investors clamoured to get in on a series of stock and debt offerings in the belief that the company was a proxy for China’s surging economic growth. Mr. Chan and his partner Mr. Poon didn’t disappoint. They used proceeds from these sales to snap up more trees and sign deals with suppliers to buy more timber. Sino-Forest soon dwarfed its competitors, and was, by far, the largest owner of forestry assets in mainland China.

There are questions, however, about the quality and validity of some of the assets Sino-Forest was buying. For example, the company completed in February, 2010, a deal to buy Mandra Forestry Holdings Ltd. At the time, Mr. Chan hailed the acquisition in glowing terms. But considering Mandra’s shaky financial position, it’s unclear what the benefit of the acquisition was other than to inflate Sino-Forest’s timber reserves and enable it to raise more money from investors.

Sino-Forest said Mandra would add more than 150,000 hectares of trees to its holdings, an increase of more than 30 per cent. Mr. Chan raved about the location of the trees, in eastern China, not far from economically vibrant Shanghai. “Mandra’s plantations will be sustainably harvest[ed], while generating substantial cash flow,” he said.

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