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Sino-Forest results point to rough ride for investors

Photo of one of their Gaoyao Particle Board operation in the city of Gaoyao, province is Guangdong and country is China .

Not even a personal video from chief executive officer Allen Chan could stop Sino-Forest Corp.'s slide.

The embattled forestry company took the unusual step of putting its low-profile CEO in front of a camera on Tuesdaytoexplain how its business works and respond to claims that the company has inflated its assets. Those allegations, levelled by research firm Muddy Waters LLC, have knocked more than $3-billion off the company's market capitalization.

But it wasn't enough. The company's shares plummeted 32 per cent after the release of weak first-quarter financial results that included a $22-million loss.

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The stock's decline suggests that investors could be in for a rocky ride as they await the release of an independent audit committee review by PricewaterhouseCoopers in two to three months. In the meantime, analysts and investors are asking Sino-Forest to release the names of its closely guarded authorized intermediaries, who serve as brokers that buy and sell wood for the company.

"China is not North America and it is not the U.S.," chief financial officer Dave Horsley said in an interview. China is a highly competitive market and Mr. Horsley said Sino-Forest is extremely wary of both foreign and domestic players "who can get into the business if they know where our trees are and they know how we move them to market."

"If it is disclosed to PwC and they run down and do all the work, then isn't that sufficient?" he asked. "We are telling you it will have an impact on the company's strategic position and the competition and that is the reason" the company can't disclose the names, he said.

As head of the independent audit committee, Bill Ardell is one of the few people who will be privy to these names. "We are using every resource available to provide a clear and thorough response," he said on Tuesday, adding that he personally has been in China since Thursday and that PwC met with Mr. Chan for three hours in Hong Kong on Friday and then visited mainland China over the weekend.

He said Sino-Forest has handed over its data and that PwC is trying to get independent confirmation of Sino-Forest's bank balances. That task is proving to be difficult. Because of the way Chinese banks are set up, PwC must visit every single bank that Sino-Forest and its subsidiaries use.

Mr. Ardell said investors shouldn't expect any bit of information until independent auditor PricewaterhouseCoopers is finished its job because small bits only lead to "continuing questions."

Some investors, like Claymore Investments Inc., are willing to wait it out. "I don't know what the fair value of Sino-Forest is," said founder and chief executive officer Som Seif. "I don't know if it's worth $4, $0 or $20. And I don't think anyone really knows at this stage. I think you're betting by making a call either way."

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But he isn't too concerned, either. Sino-Forest represented only about 0.4 per cent of his total portfolio before the share price plummeted. "Things happen. The reality is that financial messes like that occur. The only way to avoid them in all honesty is to diversify the risk from a single holding."

Sino-Forest posted a loss of $22.1-million (U.S.), or 8 cents per share for the first quarter, but that included a new $53-million charge stemming from its change to reporting under International Financial Reporting Standards (IFRS). Profit in the first quarter of 2010 was $15.9-million, or 7 cents per share.

The company also posted yet another negative cash flow from operations, this time worth $122-million, a point that has largely been overlooked to date. Asked why these persist, Mr. Horsley said negative cash flow can be expected of such a young company.

"We are in a growth mode and we chose to add more fibre to inventory than our operating cash flows allow us to," he said. "It really gets back to the strategy of laying down footprints in different provinces and locking up the best land that we can."

With files from Tara Perkins and Paul Waldie

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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

Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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