This is the first puzzle and the clue is found in the Wizard's Lab in Blackmarsh. If you walk up to the lecturn you will read:
"You need the Bone Dust of Loric to complete the spell and create the Potion of Mithril Transmutation"
Before getting Loric's Bone Dust you must first find his bones, these are in the Blackmarsh Dungeon not surprisingly in the Tomb of Loric. You now have to do a bit of further exploring in the Mill and the Barbican but eventually you will be able to walk to the grinding machine in the Mill and crush the bones. Tou will gert the message:
"The bones are crushing nicely go outside to gather the dust"
If you go outside the Mill house you can collect the dust at the duct getting the message:
"You possess the dust og Loric"
If you now go back to the Wizard's Room and jump into the golden Pool you get the message:
"You have created a potion of Mithril Transmutation"
Before you go pick up th potion and get the message:
"You have acquired the Mithril Transmutation"
Job done, now take the potion back to the Barbican jump into the first moat and swim down to find a brownish mithril wall as you go up to it you will get the message:
"You have transmuted the Mithril Wall to wood"
If you break down the wooden wall you will find the Castle Key.