you can rebuild the 3126, not a problem if it has a good block. It is not like a wet sleeved engine, ISC for example so if you drop a valve or break a ring, the cylinder will either have to be machined or a dry sleeve put in or get a new block.
However, I talked to someone this past weekend who dropped a valve in his FL60 with a 3126, took the engine out of the truck which was scrapped. He was determined to learn about Cat engines so he built a neat engine test stand, pulled it all apart, sanded the cylinder wall down, put in a new used piston, new used valve and put it all back together. He started the thing up and it ran better then it did in the truck. go figure. He is going to use it as a generator, a little overkill in my mind but he is using my ideas on a slow turning generator.