107 engine: what happened? Should I run it? Or swap it?

[Cubcadet_107]

So I got to work on my 107 changing the slightly watery oil (still cannot figure out how moisture keeps building up inside the crankcase!) and it was going well, but as it turns out this engine has sludge built up in the bottom of it. Now the thing did sit for 30 years, but the trouble I'm having is figuring out whether or not there's metal shavings inside the sludge.

I have not run this engine at all with water in the crankcase, or at least not with enough water to turn the oil white, which should be zero water. The drained oil does not seem to have any oil shavings in it at all. I've even rinsed it out a bit with some fresh 30wt and still no signs of metal shavings in the bucket. When I stick the dipstick down through the hole on the camshaft side of the block where the fuel pump would've mounted if it was needed, I can scrape up the black colored sludge. Upon wiping the sludge onto a paper towel, I find what MIGHT be a few shavings, or no signs of anything. The sludge also turns to a very dark gray color when spread onto the paper towel.

Further analysis reveals that a magnet will not pick it up, and nor will a metal detector detect it. The con rod cap does have the oil hole facing toward the camshaft like its supposed to, and where the con rod and cap meet, there's 2 small notches on the edges of either side where I can just see bits of the rod journal through the holes. In those spots everything looks fine, although of course you can't see the middle at all. There is almost no play at all between the con rod and crankshaft, although there is a slight bit of play between the conrod and piston.

So, all in all, I'm at a loss on what to do here. Run it? Or swap it? I have the basis of a K301 laying around minus all the outer additions, should I swap it in and dismantle my k241? I know the sludge turns to a dark gray when spread out, but any in engine I've seen that's definitely got aluminum shavings in the oil, the gray color is a lot lighter. Plus it only shows up near the bottom of the sludge, and not in the actual oil. Perhaps this is some break-in shavings from when the engine was being broken in 30 years ago, that then sat and settled into the sludge in the bottom of the pan? Or maybe its actually pieces of the piston because it has so much slop in all directions? I'm at a loss here, and I don't want to find out what it is by having the rod go on me. Anyone have any ideas or suggestions?