I used a flexible 320 grit disc to clean the mating surfaces. There is a great deal of opinion out there regarding what and what not to use to clean the mating surfaces. I tried a razor blade but the gasket was so stuck I could not get it off with the razor blade without being to aggressive and scratching the head so I went with the 320 flexible disc which worked well and left minimal swirl.
My goodness, 320 grit!? On the head/block mating surfaces? That's likely your problem. You need to work your way up to about 1500 grit to give the those surfaces a nice finish.
What color is the smoke right now, after all this work? Is it constant? I'd say you might even have a cracked head or block which is only coincidental to the fire. I seriously doubt the fire actually caused this problem if it didn't even melt the valve cover, it's probably just one of those things that happens at the same time as something else and makes a guy say "huh?"