This is flame cutting on a 357 Maximum Ruger SRM. It is from hot 357 Maximum loads and this is the reason Ruger stopped making the model. The 357 Max guys like myself are quite concerned about it problem.
The truth is that it is self limiting and yes pencil lead rubbed in the cut helps.
It can be minimized by the following steps though:
1) no light bullets
2) no ball powders
I have instituted these rules on my high pressure revolvers like my Max's or Mag's. The reason is the ball powders come out of the barrel cylinder gap at exceptionally high pressure and hot little orbs of blasting grit that does the bulk of the damage.
While I cannot link to the page right now, I came across a web page where a gun took a torch and tried to cut a frame apart. He found that straight heat and flame took a long time to impact the frame with a cutting torch. On the other hand, with his sand blaster he was able to cut the frame quite easily.
My DW model 40 (357 SuperMag) has never seen a light bullet, has never seen a ball powder round and has been shot extensively. It has a very very minor flame cut. My Ruger SRM has never seen a light bullet (less then 158's) but has seen ball powders and look what it did.
I turned down a really nice DW model 40 recently because of a really bad flame cut that was obviously from a light bullet and ball powders. Problem H110 or 296 and I am sure that the prior owner sold it for this reason.
Just some information to consider.