What you did initially was replace z in the first equation by the left side of the second equation. But there is no "z" in the second equation- in particular, it was NOT z= 4x^2y
Since 1= 4x^2y, x^2= 1/(4y). Replacing x^2 by that in the first equation, z= 4- x^2- y^2= 4- 1/(4y)+ y^2. Now project by letting z= 0: y^2- 1/(4y)+ 4= 0.
However, there really is no reason to project to the xy-plane. What you want is the derivative of z= 4- x^2- y^2 in the direction of the tangent to the curve x^2y= 1 in the xy-plane. What is the tangent vector to that curve? What is the derivative of z in the direction of that vector?