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Photos supplied by Sino-Forest. Photo of one of their Gaoyao Particle Board operation in the city of Gaoyao, province is Guangdong and country is China . Their mission is to supply quality, wood based products, in a sustainable and socially responsible manner. Handout

Sino-Forest Corp. is trying a new strategy to reverse the crisis of confidence in its financial statements, taking the extraordinary step of releasing bank statements and land agreements as proof that its assets are legitimate.

The move worked, at least for a time. The release of the documents, along with the announcement that the company would hold a tour of its Chinese tree plantations for analysts next month, sent the shares up more than 60 per cent in early trading. They eventually drifted lower again, but closed at $6.16, up 17.8 per cent from Friday's close.

At that price, Sino-Forest, until recently the largest forestry company on the Toronto Stock Exchange by stock market value, is worth $1.5-billion - or nearly $3-billion less than before an obscure research analyst named Carson Block raised a sensational set of allegations that the company vastly overstates the value of the forestland it owns and that it concocts revenues.

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On Monday evening, the analyst warned in a conference call that he intends to release further research on Sino-Forest's accounting and on a subsidiary named Greenheart. "We have a lot of other material," said Mr. Block, whose firm is called Muddy Waters Research.

The question now is whether or not the documents released by Sino-Forest hold enough weight to push back against negative market sentiment. Though the company has set up an independent committee to probe the allegations raised in the Muddy Waters report, and has released two written statements denying those allegations, its management team has so far been elusive.

The company is run out of Hong Kong, but there were no signs of life at the company's Canadian office in Mississauga, Ont., on Monday afternoon. Tenants on either side of Sino-Forest said they did not know the employees of the company. Another tenant on the same floor said that Sino-Forest officials are almost never there: "It doesn't really look like a real office." Chief financial officer David Horsley, the top-ranking Canadian on the management team, did not return calls and e-mails Monday.

Some say the investing public's growing distrust of Chinese companies could engulf Sino-Forest as well.

Michael Smedley, chief executive officer of Morgan Meighen and Associates, is one of the investors who is already making this link. Although his firm continues to hold on to its stock, despite seeing a good chunk of its $8-million stake dwindle away, Mr. Smedley admits that he has grown wary of Chinese companies with North American listings.

Sino-Forest is the second such firm to come back to haunt Morgan Meighen. Another North American-listed Chinese company it owned was battered by allegations of wrongdoing. "It is characteristic of the difficulties one often has with Chinese companies," he said.

One of the key sets of documents that Sino-Forest has released is a package containing the original long-term purchase agreement that permits it to buy land in China's Yunnan province. These assets were specifically questioned by Mr. Block, the writer of the Muddy Waters report, who claimed their value was overstated.

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The Yunnan documents show that Sino-Forest entered into a long-term agreement in 2007 to purchase 200,000 hectares of "non-state-owned commercial standing timber." The original Chinese agreement has been uploaded, as well as an English translated version and the company's press release at the time.

The package also includes subsequent purchase agreements in the province, as well as forest and woodlands rights certificates. However, none of them have been translated. (English translations are expected to be available on Tuesday morning.)

Yunnan province is a crucial geographic region for Sino-Forest. As of December 31, 2010. the company owned and managed 711,000 hectares in China. Of those, Yunnan's 186,700 hectares were the most of any province.

Sino-Forest has also uploaded bank documents in the data room to prove that its cash and short-term investments physically exist. The statements were obtained from about 20 different banks in China and around the world and the cash and short-term investments add up to around the $1.09-billion (U.S.) value that Sino-Forest disclosed as of March 31.

Sino-Forest has promised to provide the sources and uses of its cash when the company releases its quarterly financial statements on June 14.

It also received some external support on Monday, as RBC Dominion Securities analyst Paul Quinn said he has visited the company frequently to look at their operations.

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"Over the last five years, I have visited Sino's Chinese forest operations on four separate occasions for about a week per visit," Mr. Quinn said in an e-mail to The Globe and Mail. "I have seen Sino-purchased trees and planted trees, manufacturing operations, other operations that purchase Sino's logs, Sino's nursery operations and tree-improvement project. I have been in numerous meetings with government forestry bureau representatives and Sino's operational staff."

Still, Mr. Block isn't backing down. In an interview with Bloomberg Television on Monday he had some harsh words for Sino-Forest. "The company perpetually issues securities in order to fund itself … Were the company unable to issue additional securities to fund itself, it would collapse."

He also said he is still short the stock, which means he'll benefit from any future price declines.

"As we stated on the front page of our research report, we were short and we continue to be short Sino-Forest shares. This is basically just another day at the office for us."

However, some of the claims that Mr. Block made in his original report have been proven to have no merit. For instance, Mr. Block argued that Sino-Forest overstated its revenues because there is no way the company could have physically transported as many logs as it would have needed to move in order to generate that kind of money.

That claim does not match with the company's business profile. More than 95 per cent of Sino-Forest's revenues come from buying and selling standing timber, which means the company buys lots of land with trees, and then sells those same lots. The company made this clear in its 2010 annual information form, long before Mr. Block's report came out.

"Historically, we have not ourselves transported logs and wood-based products to customers, as we mainly engaged in sales of standing timber from our planted and purchased plantations. For these sales transactions, customers are responsible for harvesting and transporting the logs out of the forested areas."

With files from Tara Perkins and Jacquie McNish

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About the Authors
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

National correspondent, Vancouver bureau

David Ebner is a national correspondent based in Vancouver. He joined The Globe and Mail in 2000 and worked in Toronto and Calgary before moving to Vancouver in 2008. He has reported on a wide range of stories – business, politics, arts, crime – and has covered sports since 2012. More

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