Hi Damian,
I think that your clutch may be out of adjustment with heat witness markings all over the black plastic thrust pad.
I'd say the there was still pressure on the pad while the cutter was running, but when correctly adjusted there should be none whatsoever.
Your key steel can have the burs filed off and reused but the issue is your clutch that isn't solidly attached due to one set screw being loose.
Now the next issue is whether that your clutch half is any good or is it due for replacement.
With your set screw not being able to be tightened you'll find that the thread will be stripped in the ally housing and thus would require a helicoil inserted to resolve the issue, but if the housing has been flogged out over time as they will do, it will no longer run totally true and as such the whole drive line has increased unbalanced stress placed upon it.
I would place the clutch half back onto the engine shaft and tighten the set screws, then take the spark plug out and pull the recoil starter rope slowly but evenly and note whether the clutch body rotates truly or wobbles left and right during its rotation. If it does wobble the a new clutch half is in order to resolve most issues along with a new thrust pad.
Cheers,
BB.