Enter the Ulkan Mines and go to Watts' shop. Talk to him and he will ask you to find his hammer, which begins the event. Go back to the mine entrance and take the Dudbear Express (the blue pole in the middle of the screen). You will find Watts' hammer close to the fireplace. Get it and follow these directions:
You are now back at Watts' shop. Talk to Watts to give his hammer back.