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Analysis

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

In the long run, perhaps Mandra’s assets would do exactly that. But an examination of financial documents filed with the State Administration for Industry and Commerce (SAIC) offices in China point to a struggling company – one whose supposedly bright prospects contrasted sharply with its unsuccessful past.

Mr. Chan and his executives certainly knew the asset they were buying. Mandra Forestry was launched in 2005 as a timber firm with big ambitions to acquire 270,000 hectares of plantations in Anhui province, according to a report by forestry consultants Jaakko Poyry Consultants. Sino-Forest had provided some money to get Mandra going and was a 15 per cent shareholder of Mandra from the start.

The two companies had also signed a so-called “master sales” agreement in 2005 that would see Sino-Forest buy all cut logs harvested from Mandra’s plantations for five years as well as manage the company’s forests in Anhui.

But it’s not clear whether Sino-Forest ever purchased any logs from Mandra. What is clear is that Mandra’s business never flourished.

Of three Mandra subsidiaries investigated by The Globe, only one appeared to have conducted any significant business at all by 2009, the year before Mandra was purchased by Sino-Forest. It lost about $600,000 that year, according to filings made with the Chinese government.

Another Mandra subsidiary appears to have essentially ceased operations in 2006, having informed Chinese authorities that its “plan to purchase forest land could not be carried out,” due in part to “improper management.” The third subsidiary was deregistered in 2008.

By May, 2009, Mandra was so strapped for cash that it missed an interest payment due on $195-million (U.S.) worth of its senior bonds. In July, Sino-Forest announced that Mandra had terminated its sales and management agreement with the company.

Bay Street wasn’t fazed. Sino-Forest analyst Richard Kelertas of Dundee Securities told Reuters that despite the loss of the Mandra sales agreement, “there is no impact whatsoever on Sino-Forest.”

Several months later, Sino-Forest came along with a substantial offer: It would pay up to $9-million in stock for Mandra and would exchange $187-million of its own debt for Mandra’s bonds. (Not surprisingly, Mandra’s bondholders agreed to the deal, en masse.)

The deal added close to $200-million in debt to Sino-Forest’s balance sheet, a rich price to pay for a faltering enterprise. At the time, however, the stock market was pricing Sino-Forest shares in part based on the company’s vast holdings of forest and the Mandra acquisition simply gave Sino-Forest more timber, regardless of its actual worth.

That, in turn, helped Sino-Forest raise more money. The Mandra deal was announced in conjunction with a massive debt and equity sale by Sino-Forest that saw the company issue $460-million in convertible notes and $367-million in new stock.

Announcing plans to acquire more forest assets in conjunction with debt or equity offerings was a common tactic for Sino-Forest. In June, 2009, Sino announced a stock sale that ended up raising $380-million at the same time it announced plans for a new forest purchase agreement in Jiangxi province. Similarly, in March of 2007, Sino-Forest raised $200-million from a private placement stock sale that was announced in conjunction with a deal to buy forestry assets in Yunnan province.

A deal with a vice-president

Around the same time that it was pursuing Mandra, Sino-Forest unveiled another acquisition that appears to have enriched a company insider, according to documents obtained by The Globe.

When Mr. Chan announced the purchase of a company called Homix Ltd. in January, 2010, for $7.1-million, he stressed its research and development capabilities, asserting it had “developed a number of new technologies with patent rights.”

He also stressed environmental benefits. China, he explained, is too inefficient in its use of wood. By using the technology of Homix, a wood manufacturer with operations in Guangdong and Jiangsu provinces, Sino-Forest could begin producing “quality lumber” from six-year-old eucalyptus trees instead of 30-year-old trees of other species. “We believe that this will help preserve natural forests as well as improve the demand for and pricing of our planted eucalyptus trees,” he said.

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