Sino-Forest Releases Final Report of the Independent Committee

Sino-Forest Corporation

yesterday announced that it is publicly releasing the Final Report of the Independent Committee of the Company's Board of Directors. On June 2, 2011, in response to a report issued by Muddy Waters, LLC, the Board of Directors appointed a committee of independent directors to examine the allegations in the MW Report, and report back to the Board of Directors. On August 11, 2011, the IC delivered its First Interim Report to the Board of Directors. On November 14, 2011 the IC delivered its Second Interim Report to the Board. The findings of the IC, as set out in the two reports, were described in a press release issued by the Company on November 14, 2011. At the same time, redacted versions of the two reports were filed on SEDAR and posted on the Company's web site. With the delivery of its Second Interim Report to the Board, the IC believed its work was substantially complete, but indicated there remained certain further steps it intended to take as follows: (i) review the information and analysis which it had recently received from Management relating to certain relationship issues; (ii) in cooperation with Management, engage an independent valuator to conduct a valuation process with a scope and parameters acceptable to the IC; (iii) take such other steps as the IC, in its judgment, deemed advisable in the discharge of its mandate; and (iv) submit its final report and recommendations to the Board. On January 12, 2012, Sino-Forest announced that holders of a majority in principal amount of its Senior Notes due 2014 and its Senior Notes due 2017 agreed to waive any defaults arising from the Company's failure to release its 2011 third quarter financial results on a timely basis. As disclosed in the Company's January 12, 2012 press release, pursuant to the waiver agreements, the Company agreed that the IC would deliver its final report and that such report would be made public by January 31, 2012. As described in the Final Report, while the IC has reviewed information and analysis received from Management relating to certain relationship issues, including additional information received following the Second Interim Report, for the reasons described in the Final Report the IC is not able to reach definitive conclusions regarding the relationship issues under consideration. Subsequent to the release of the Second Interim Report, the IC requested that an independent forestry expert undertake a proof of concept exercise to determine if two compartments in particular purchase contracts could be located and quantified by such party. A "compartment" is a forestry term used to indicate an area of trees, usually contiguous. The Company retained Stewart Murray (Singapore) Pte. Ltd. and Indufor Asia Pacific Limited as third-party consultants. The proof of concept exercise was confined to two compartments. The selection criteria limited the sample to purchased timber assets located in Yunnan province. The candidate assets were acquired prior to the allegations in the MW Report. They were listed as being held by British Virgin Island entities and not by Wholly Foreign Owned Enterprise entities. At the IC's request, the Consultants selected a shortlist of 10 possible compartments meeting the criteria above, avoiding any prospect that the sampling involved personnel from the Company. Multiple county forestry bureaus were represented in the shortlist, and the IC made the final selection of compartments to ensure more than one county forestry bureau was represented. One of the selected compartments, Compartment 11, was located in Jianchuan County, near the township of Ma-teng, within the jurisdiction of the Jianchuan County Forest Bureau. It had a stated area of 1145 mu (76.3 hectares). The second, Compartment 44, was in Heqing County, near the township of Beiya, within the jurisdiction of the Heqing County Forest Bureau. It had a stated area of 957 mu (63.8 hectares). Within the proof of concept exercise, the maps of the two compartments were provided by the Company to Indufor, which were borrowed by the contracted survey company from forestry bureaus. These showed the extent of each compartment's boundary that corresponded to those in surveys related to the purchase contracts. The Consultants then geo-referenced and digitized these boundaries, and entered them into a Geographic Information System. The Consultants located and physically inspected the two forest compartments. The inspection procedure included documenting certain qualitative characteristics of each compartment. The Consultants confirmed that the compartments were forested, but did not undertake an assessment of standing timber volume. The geo-referenced compartment boundaries were superimposed on recent high resolution satellite imagery and this allowed measurement of each compartment's forest cover. This process allowed the removal of areas lacking forest cover from the assessment of compartment net stocked area. The Consultants compared the net stocked area of forest cover that they assessed for each compartment with that stated in the Sino-Forest purchase contracts and forest survey reports. The Consultants found that the net stocked area of forest cover in each compartment was within six percent of that stated in the relevant purchase contracts and forest survey reports. The analysis and findings from the area verification test are limited solely to the two compartments that were the subject of the proof of concept exercise. While the Company plans to broaden its area verification to other Sino-Forest forestry assets, as described below, no extrapolation of the findings to Sino-Forest's broader forestry assets is possible or is implied. As a proof of concept study, the area verification exercise was successful subject to the provision of maps meeting certain standards. This Consultants' engagement will now expand to include a verification and validation process of the key components that underpin forest value. The exercise will involve a highly structured process that will, over time, systematically assess the area of forest cover and merchantable volume across the Sino-Forest estate. The Company has also engaged Stewart Murray to assist the Company in compiling a full forest description and implementing a forest asset valuation framework. Stewart Murray will work in cooperation with the Company to value its forest assets as at December 31, 2011. The Board of Directors has adopted a resolution instructing the IC to cease its investigative, review and oversight activities. Any issues that remain outstanding, as identified in the Final Report or earlier reports of the IC, will be referred to the Audit Committee or Special Restructuring Committee.