Grey buildup in engine block

From your question, it appears you are completely rebuilding the engine. Part of the process of rebuilding an engine is to check the cylinder deck and head to ensure they are within flat tolerance. You do this by using a machined straight edge. If these areas are within tolerance, then you don't need to have then milled, just clean them up and Bob's your uncle.

The other thing you do is to have block completely cleaned, usually by hot tanking. This is a caustic solution which strips the block (if iron based) of all the years of crap which have built up on it, inside and out. You will also need the freeze (core) plugs replaced in the process. If the block is aluminum, then you can send it through a parts cleaner, which throws hot water with detergent at it. This doesn't work as well as a hot tank, but does a pretty good job and should clean the block pretty well.

I have no clue what the grey stuff is or what might be the cause. With 235k miles on the engine, there's a large chance for coolant contamination to occur. I do know it needs to be cleaned up before reassembly. It will interfere with cooling. Not that it will cause overheating, it's just with the layer of "stuff" on there, cooling will not happen as efficiently as it would without it being there.