I would turn a nice fitting slug of steel for the bore. Use the set-screw to secure the slug. Use a regular drill of correct size and drill a hole with the center right at the intersection of the sprocket ID line and the slug OD line. Remove the slug. Use square file to file out the rest of the key way. Or use the mill or lathe with a cutting tool (as has been suggested above) to square the key way. With the drill removing the bulk of the material, the other tools should have a relatively easy time to finish it off.