Stockhouse Short Report: Exec issues Sino-Forest warning

A Canadian forest industry executive says he feels sorry for shareholders of Sino-Forest Corp. (TSX: T.TRE, Stock Forum) (OTC: SNOFF, Stock Forum), who were left stranded with the Ontario Securities Commission suspended trading in the Chinese Canadian timber firm in August.

“This is a terrible situation,’’ said Eacom Timber Corp. (TSX: V.ETR, Stock Forum) President Rick Doman.

The son of Herb Doman, the late lumber baron who built Doman Industries Ltd. into one of British Columbia’s biggest forest companies, Doman says he is often asked for his opinion on Sino-Forest. He said he has avoided the stock because he felt he didn’t know enough about soil and timber growing conditions in China, where the company said it controlled 800,000 hectares of trees in nine provinces.

In a telephone interview with Stockhouse, Doman says he is baffled as to why New Zealand-born billionaire Richard Chandler began buying shares in the company in July and August (2011) at prices of between $4.05 and $7.50 a share.

“I don’t know what analysis he did.’’

According to Bloomberg News Service, Chandler’s Singapore-based private investment group is now Sino-Forest’s biggest shareholder with 49.9 million shares or 19.5% of the shares outstanding.

The outlook for Chandler and other large shareholders looks highly uncertain after Sino-Forest said Monday it would defer an interest payment on its convertible notes due today (December 15, 2011) and consider the sale of the company, after disclosing delays in two reports that investors hoped would restore confidence in the firm.

In a statement on Monday, Sino-Forest said it was deferring release of its third-quarter results until it could fully answer questions raised by Carson Block of Muddy Waters Research, which alleged that Sino-Forest had been fraudulently exaggerating its assets and earnings, and that the shares were essentially worthless.

The allegations, which appeared in a Carson Block short sellers report on June 2nd, sent Sino-Forest shares tumbling from a high of $25.85 in March to below $3, prompting U.S. hedge fund manager John Paulson to dump his entire stake in Sino-Forest after previously owning 14% of the stock or about 34.7 million shares in his Paulson & Co. fund.

The Ontario Securities Commission halted trading in Sino-Forest on August 26.

At that time, stock was trading at $4.81, giving Sino-Forest a market cap of $1.18 billion, based on 246 million shares outstanding. The 52-week range is $25.85 and $1.29.

Sino-Forest continued to be quoted on the U.S. grey market. But OTC Markets no longer displays the quotes after slapping a Caveat Emptor (Buyer Beware) warning on the stock. OTC cited a number of reasons for doing so, including the OSC trading halt and its view that insufficient information about Sino-Forest has been made available to the public. The last Grey market trade was on October 24, when the stock was quoted at US$1.37.

 While the cease trading order in Ontario was expected to expire on January 12, it appears highly likely that the order will remain in place for considerably longer.

“I feel badly for the investors,’’ said Doman, who is based in Montreal.

(His comments were made on Tuesday; just hours before Moody’s Investors Service said it will with draw the company’s debt rating. The move is a response to the announcement earlier this week that Sino-Forest will not make a $9.8 million interest payment on its convertible notes. The payment is due on December 15).

According to published reports, Chandler has asked Sino-Forest to rethink its decision to miss the interest payment. “It is disappointing and regrettable that the board has made this decision,’’ said Alan Kelly, a senior adviser to Chandler in a statement released on December 14 and published by Bloomberg News Service and others.

One long time lumber industry observer says she has been watching the situation, and doesn’t believe that Sino-Forest will recover from its current difficulties. “I don’t think that the company will be able to pull out of this,’’ said Keta Kosman, publisher of Madison’s Lumber Reporter in Vancouver. “They are too far gone.’’

“Because [Sino-Forest]  has $2.1 billion in debt outstanding, which we believe exceeds the potential recovery, we value its equity at less than $1,’’ Block said in the Muddy Waters report, which he said is based on two “man-years” of research.

For his part, Doman says companies like Fibria Celulose SA have had lots of success with fast growing trees in Brazil. But the Eacom President said he always felt that he didn’t know enough about soil conditions in China to offer an opinion when analysts and investors called to ask about Sino-Forest.

That’s why he said he was baffled to see so many analysts recommending the stock ahead of the Muddy Waters report.  Before it surfaced in June, seven Canadian analysts had a buy rating on Sino-Forest.

Doman wonders how many of those analysts had done proper due diligence on the company. “For me, you have to go and look at things with qualified people,’’ he said.

According to Bloomberg, other large shareholders include Davis Selected Advisers, which has 30.9 million shares or 12.6%, Wellington Management, with 28.4 million or 11.5%, and Ivy Management Inc., which has 15 million shares or 6%.

Canadian shareholders include Mackenze Financial Corp. with 885,997 or 0.39%, and CIBC Global Asset Management with 255,106 shares or 0.10%.