Walk across the bridge - you'll come out on the other side of the Brewery. Turn right and head up the path - to bell tower (#1). Kill the dwarves there, take the spell and carry it to the waypoint. Now head toward the blood pit, near by the place where you killed the sheep and take the turn (#2) and follow the path around the hill. Then walk down, take the loot there on the right and go back to the other side. An elf will run out screaming that someone has taken over the mines.