I have never seen a machined out rear sight leaf but I have removed the rear sight leaf on several K98's.
First, you remove the drift pin. I can't remember if it only goes one way or not but I knocked it out with a punch towards the bolt side and it came out easy.
Second, slide the elevation marking up to like 400-500m. You will need this for leverage.
Thirdly, depress the front of the rear sight leaf (the part that connects to the rear sight assembly) and slide it forward towards the muzzle. You have to push the rear sight leaf spring far enough so the rear sight leaf can clear a retaining track and be released. It takes a far amount of strength to do this so I hope you ate your Wheaties! Some rifles are harder than others as well. You may have to play around with where the elevation marker is to get more leverage.
Once you get the rear sight leaf out you will see how to put the new one in by reversing the steps above.