Welcome to the mountain of the dwarves, Mt. Duergar. Go up north and enter the room. Take all the money from the two chests. Give the Nitro Powder to a dwarf that's in the lower portion of the mines. He'll blow a big hole in the dirt, allowing your ship to get through. Now, leave this place, and go back to your boat and through the newly made hole!
Go a little bit to the west and you'll come upon a new town!