Once we got the cone or cover off the witches hat this is what we found.
The smell of burnt gear oil is very strong and inside the cone is this.
So what is this? What would cause this? Where might the problem be? Here are more pictures if that helps you help me!

The burnt oil is all over the witches hat but wipes off with a bit of effort.
This is pretty chunky but doesn't appear to be metal shavings, just crud. I guess I will drag a magnet over it today just to make sure.
There is some slop between the locker sleeve and gear, not major but more than I would expect.
So what am I dealing with here? There is nothing obvious yet but I can and likely will go deeper into the diff. Also there is a fair amount of oil in the intermediate tube between the two rear axles. Is this normal?
Cheers and thanks in advance for any suggestions or ideas.