[Tyhm]

1) I recommend the blacksmith northwest of the mountain. It's quite a walk, but twice the size.
2) The blacksmith in the northwest town gives you SOME directions, but there's the whole thing -
Walk up to the stove, Press A
(If it wasn't lit, you'll light it with some coal - press A again to place the iron)
When the slab turns red, use the tongs (D, usually) and run it to the water barrel. If you take too long or water it too long it'll go back to your pack.
Walk up to the right side of the barrel - past the nozzle for no apparent reason, until you're basically under it - and use the tongs (D again). When it turns purple, head to the top of the anvil - you now have Hot Iron, but it won't last.
Use the tongs on the anvil (D again) and select what you want to make, usually a blade, press S or D to confirm. When it's done, walk back up to the top of the anvil and press A to pick it up before it goes public - you might be able to pick it up from the side too, I forget.

When you have at least 3 blades and 1 gold, go to the shiny anvil and press A to make your sword. No report yet on if the shiny swords do more, but they sure cost more.