I don't disagree with your analysis at all. But old racers used to throw crazy ideas out to throw the hounds off the trail of the real changes they made.
Blending magnesium into the fuel may be a possibility, but tossing some pulverized magnesium in a gas can to increase octane would not be a consistent way to make more HP.
The other thing is, higher octane, by itself, does not increase the output of an engine. Higher octane allows you to increase timing advance, increase compression ration, etc.....If the magnesium was added in a scientific manner, they still would of had to "cheat" to take advantage of the higher octane.
Smokey Yunick (Stock Car racer) used to get around rules, like gas tank limitations. Turns out, if you use large diameter fuel lines, for example, parts of the roll cage, for fuel line, you can get an extra gallon or 2 in the car. That may be enough to finish a race without a stop.
This sounds like shenanigans, IMHO.