Go to the Goblin Village, and ask the two generals what food they like. Run through all the questions, but they will argue and be of no help. Go into the building south-east of the generals, and climb down the ladder. There you will meet Mudknuckles, a goblin cook. He tells you he needs charcoal and "burnt trees (burnt trees aren't needed) they good too, smash em up with hatchets (only found in wilderness) and Mudknuckles too afraid to go there!" You need these to finish a cooking recipe that he overheard two dwarves talking about. Give him the charcoal, which he will then use with sulphur and potassium nitrate to create gunpowder. He will add this mixture to his cauldron, which will explode in a cutscene. Miraculously, you both will survive.