I did a mini-mash from AHS and I followed the directions, so I'm not sure how you'll do with adding more water to the recipe. Usually to get decent conversion, you use 1.2 qts per pound I believe. (I'm definitely NOT an expert on mini-mash).
You don't have to mash in your kettle- I used to do minimashes in my bottling bucket, just lining the bucket with a big mesh bag. Using a grain bag in your kettle sounds kind of difficult- sparging, etc. will be kind of a pain, I would think, unless you have a spigot on your kettle.
Edit- I just pulled out my directions for the AHS mini mash I did. The directions say to use 2.5 gallons of water, and there is 3 pounds of grain. They don't have you sparging, either. I probably wouldn't vary from the recipe, just do the mini mash in a different kettle or mashtun.
I would add a sparge, though- just rinsing the grains with 170 degree water into your brewpot. I would lift out the grainbag and put it in a colander over the pot and pour the sparge water over it and let it drain.
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