I am guessing it is a similar method to what I use for my gauntlet remake - make terrain as normal with ground texture, create another texture and apply it on top using multiply blending and simply place the camera where the light source is, render to a smaller viewport the same size as the texture the scene with all shadow casting objects painted black while hiding the terrain and having the cameraclscolor set to 255,255,255 then copyrecting from the backbuffer to the texture buffer of the 'shadow texture' which is multiply blended with the terrain.
My Fake Stencil Shadow System
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