Although Scarlett will receive this quest before leaving San Pasquale early in the story, she will only be able to fulfill this quest once she gets to the Inner City of Venice. (So get used to seeing it on the Active Quest list.) In the Inner City, she can talk to Ulrik, the former Smith in the Inner City (he can be found outside the Old Cathedral) Scarlett can pay him the transfer fee and Mattheo will move to Venice automatically.
Or, instead of paying Ulrik, once Scarlett has learned to speak with the dead (gained The Whisper skill by completing the Of Cursed Chapels Quest), she can return to San Pasquale (she will, eventually, anyway, for other reasons), go to the Forest Hut where Scarlett found the Moonblade and talk to the ghost of Tarka Gor (the skeleton in the forest hut) using The Whisper skill. He will tell her he was once a blacksmith, about his many awards, and that Mattheo was his apprentice. (Among other interesting tales.) After talking to him, the golder plates which were attached to the walls beside the fireplace will fall and Scarlett can pick them up and use them as proof that she knows a skilled blacksmith; Ulrik will then give her / Mattheo the Smithy for free. Then she needs just to fetch Mattheo.
- Note: You don't have to go back to San Pasquale once you give Ulrik the golden plates, Mattheo will just appear there. (If he doesn't right away, rest in a bed for a while and come back to the smithy. It's then called Mattheo's smithy).
By completing this quest, Scarlett may continue to avail herself of Mattheo's skills as an armorer. This is useful should she want some plate mail fitted to her.