1) Materials that will cut fully hardened steel tend to be quite brittle, so cutting across you keyways is very likely to shatter a cutter that would otherwise cut such hard steel. (You can take a file to the face of the part and, if it slides across without cutting, this is the position you find yourself in.)
2) Roller chain sprockets are more commonly case hardened to reduce wear than full hardened. Thus, if you manage to cut away the "case," you are likely to be entering yet another world of hurt.
3) The real question is, What changed in the overall engine assembly that moved the sprocket .025 out of alignment? Is there space to have a (hard-drawn stainless steel) shim made to offset the sprocket on the other end of the assembly? Many of the "higher end" mechanics will have a punch set specifically for making such shims. A roll of such shim stock is quite pricey, but somebody who has such material on hand will (usually) let you have it on a "per square inch" basis that makes it a lot less unreasonable.