We do this all the time.
Yes your right diamond tool grinding is the way to go.
Not surprising the coating comes off the tool. Depending on the size and what features your trying to put into it.
You can cut it with a diamond blade and coolant on a surface grinder.
You can feature cut it on cnc mill or lathe using the right diamond cutter.
Speed & feeds are real slow compared to regular machining.
Hope this helps,