The only reason to come to Lennus is Carmine the Blacksmith, so before coming here make sure you have some unusual metal, which will show up in your Special Items inventory as Metal Lumps, and 1000 coins.
Just to cover the rest of the town, the two buildings in the northwest corner are rows of apartments. The northeastern apartments is actually a Bed and Breakfast run by Laverne, who will tell you about Carmine.
The builing in the northeast corner of the town is Carmine's smithy. To enter you should go through the one door in the building and then straight ahead, through the cobwebs to the door. Through this door is an empty room with a trapped floor, which will do magical damage as you try to cross it, so it's a good idea to cast Safe Travel if you don't have a very high pathfinder skill.
Check out the northwest corner of this room for a secret passage into Carmine's work area. Talk to Carmine and put up with his insults until you get the option to ask him if the metal you have is good enough. Give him the metal and the coins and then leave. You have to wait a long time for him to actually make the sword. Something like twenty or thirty days if I remember correctly. Once he's done you'll have the Mithril Sword, which is, in my opinion, the best sword in the game.