You pretty much have two choices:

1- Buy a new engine
2- Replace the piston and sleeve. I would also look closely at the connecting rod bushings, crank pin and crank bearings. You'll also need new gaskets and o-rings.

As for the cause, I agree that it could have been run too lean. Fuel with too low of an oil content could also similar problems.

Generally, glow engines need to run slightly rich to make sure they stay cool and are well lubricated. Too often people try to squeeze every last RPM out of them. Do it once and you might just get a dead stick. Run it that way too much though and you'll end up with a serious failure like this.