If I was wearing my 'cynical head', I would think there may be a mismatch of parts used in the rebuild, resulting in the internal timing within the mag being slightly out. Firstly, the points gap should be .012" on these old mags, and the plug gap .018". The mag will produce a much larger spark than that in the open air, but, under compression, the spark can become less reliable.
The fact that the spark is better with a larger points gap suggests that the points timing does not match the armature position. With the mag off the engine, and the points removed, as you turn the armature you should feel some drag as the poles of the armature approach the poles of the magnets. At the point of passing, the armature will try to overtake you - this is called the 'point of maximum flux' where the armature produces the biggest spark. With a timing disc on the mag, you should be able to mark this point - then refit the points and check that they open immediately after the point of maximum flux. If they are late opening, that is the reason the larger gap gives a better spark , but it also increases the time the points are open and extends the 'dwell' period - this adversely affects the mag's ability to produce a spark for the second cylinder as it alternately has to charge the condenser positive and negative for the 2 cylinders.
If the points timing is wrong, it may be down to a mismatch of points plate or the cam ring may be fitted out of position. With the mag set up correctly, it should easily produce a 4 - 5mm spark. Don't attempt to get any larger spark as that could result in a short across the windings.
Hope some of this helps,
Regards,
Eddie.
