After my trouble with the valve guides, and milling them down with a help of my mate, I finally got everything assembled back together and now the engine turns and the valves all open and close as they should. However, while setting up the valve timing I came up with the next problem. This engine just leaves me baffled...
As I tried to set up the valve clearances, two of the valves had enough clearance to adjust, one had only 0.0008", another two about 0.0003 and the rest absolutely no gap. So basically most of the rockers are laying on the valves with no gap left to adjust.
One possible explanation I have is that the previous owner must have skimmed the head and barrel so much that the whole head is now much lower reducing the gaps to nil, if that is even possible. Another possibility is that my gasket between crankcase and barrel (found among all the parts) is too thin. The head gasket was an Otto, so the thickness would be correct. This barrel gasket was paper thin, and looking at Simon Hollyfield's pics in his blog, his looks much thicker.
So now I'm thinking about lifting the barrel and head back up, and replacing the barrel-crankcase gasket with a thicker one. Before that though, I'd like to hear your thoughts and ideas on this.
I did check that all the push rods are resting properly on the cam followers, and the valve timing worked perfectly following Bruce Longman's method.