My guess would be that it's the result of hand sanding the old head gasket off with 200 grit sand paper and/or the mineral concretions that you described were clogging your water jackets. If you could see openings that were visibly obstructed then it's likely there were obstructions in other places out of view.
Did you do a good coolant flush afterward?

The head could probably be properly resurfaced at machine shop, but if you used the sand paper on the block too that might be a big problem. Otherwise, while these engines aren't immune to ringwear, they have a notoriously strong bottom end. Unless there was some kind of piston damage to those mentioned cylinders, a refurbished head, a new (carefully done, not hurried) head gasket and a thorough coolant flushing might bring it back to use again.
I think I remember you mentioning that you could see evidence of coolant leaking into a cylinder or two when you had the head off, was it the same cylinder/s that the shop say lost compression?

All that being said, if you can find a used M103 for $500 or less (and I agree that's very possible) it might be cheaper and easier to go that route. Be aware though that any used M103 you get might be just a few thousand miles from needing a new head gasket as well.