Oh my, thanks a lot! I'm really glad there's people enjoying it even today!
Sadly I finished working on this game years ago, so I forgot a lot of things... (I know it's been 4 days but I'll reply anyway)
From what I remember, the northern village gives you two quests:
One you unlock as soon as you arrive there, and ends with you fighting the frost spirit and unlocking the ability to extract mithril and make weapons with it;
While the other you should only unlock at the very end of the game. I THINK to unlock it you should have beaten the previous quest too, since it's supposed to be a sequel, involving Skam'mer and has you fighting the fire spirit's "ghost" this time, but it's possible I messed something up and you can trigger it from just reaching it at the end of the game.
Those fights are indeed really difficult tho, and you're supposed to be at a pretty high level, probably with some mithril gear too.