The Mystical Source is a legendary crafting material used by the Blacksmith Haedrig Eamon to craft the Sage's Journey set.
The Mystical Source has chance to drop off rare purple ponies in Whimsyshire. You must have the Infernal Staff of Herding in order to open the portal to Whimsyshire in Torment mode at the rift located west of Old Tristram (by the cow skeleton).
I have played about 60-70 runs in Normal mode clearing everything that moves. No luck. I have now done over 20 Torment 1 runs killing only purple rare spawns. No luck. However, based on other materials and that they drop from rare spawns, I'm going with that.
Update: Mystical Source dropped for me in beta from Midnight Sparkle. The way to go to farm this item is to get a skill build that allows you to speed run. If you have a healing ability get it in. Load Whimsyshire Torment I. Explore the entire map without killing a single thing. Your aim here is to kill Purple named ponies. Don't forget to search for the random Diablo piñata. I saw many of these. Got a legendary Horadric Hamburger dagger and a two-handed Sword named Maximus.
Midnight Sparkle is not the only purple pony, there are other rare spawns named Creampuff, Team Unicorn, and Nightmarish (Not sure if that's the name, I killed him too fast in normal). There is another purple rare spawn named Tubbers (a big cuddle bear).
Purple Rare Spawns
Midnight Sparkle (Nightmare is Magic)
My Mystical Source dropped from Midnight Sparkle and this purple pony is a super rare spawn. I killed him in Torment I mode. After over 80 runs in normal mode, I shifted to Torment and ran another 20-30 runs and he spawned. It is unclear if it only drops from him or if it was just a random purple pony. There are 4 rare purple ponies so far seen by me (some shown below).
I found these extremely rare purple unicorns. They were a pack of four or five really tiny pigmy unicorns. Some died too fast for me to see their name. I was able to take a screenshot of two of them: R'Lyeh and Maulin Sorely.
Maisie the Daisy