I'm definitely going to do that once i figure out how to get the PMG out of my way. I do need to get the rotor out of the stator yes? Can I take the retaining ring off and pull them both together? I got it to come out about an inch so far but my puller isn't correct. Can someone recommend the right puller fit the job? I've been searching like crazy.
Here are some more pics of the cylinder and head gasket. I looked pretty close but didn't think I saw any evidence of leaking through the gasket.
I'll circle the spot on the cylinder wall that looks wrong to me. I don't know how bad it has to be to cause problems but I'm thinking you might be correct 2pbfeet.
If you didn't have an issue, I might give it a miss, but yes to my eye, that is a sign of an issue. Do you have access to a dial bore micrometer (internal micrometer)? I'd be curious how deep that patch is. If it turns out to be necessary, one can get oversize pistons and rings for this engine. I think that the NSN is 2815014771358, Yanmar 714880-22580, available at the moment.
Again, from an armchair in a galaxy far, far away, I have the concern that worn (no honing marks) and black patch is a sign of broken rings that are causing slightly reduced compression, that in turn causes incomplete combustion and smoke. Blow by at that location might also explain why your oil was/is so black with so few hours.
All of this plus the rust does make me wonder if this was a hydrolock event. The fact the soot marks don't extend too far into the cylinder suggests that the connecting rod might be ok, and the lack of metal fragments in your oil change is also reassuring, to me at least.
So, yes, I do now really think that the time has come to have a look at the piston rings.
All the best,
2PbFeet