I'll be darned, the cylinder looks great! Crank & bearings are all good. Piston is covered in this powdery white stuff on the exhaust side & the rings are stuck. TBH, if I cleaned up all this white crud, cleaned the ring grooves, cleaned/replaced rings, cleaned everything else up, and reassembled with some fresh cut gaskets, and maybe some new crank seals, this engine would probably run fine. Will definitely need some new prongs for the recoil though. Someone broke them trying to crank it while it was seized.
So, I'm wondering what caused this white powder. Obviously this thing sat on a concrete floor or something for way too long. Bottom of the handle assembly turned white & crusty with magnesium rot. I don't often see muffler boxes turn white from corrosion though... So, maybe it's a cast magnesium alloy too. But why would it's corrosion spread & coat half the the piston... just through moisture & proximity to the magnesium muffler box?
I'll add pics & details of the disassembly process later, but here's the white crud: