Find a way to open up the rusty door leading to the machine room of the Iron Castle.
Activate the event by talking to the man standing next to the rusty door inside the Iron Castle. Then head over the the Lumberjack Factory and talk to the man in green to activate the I Need a Bomb event. That event must be cleared in order to progress in this event.
Once the I Need a Bomb event is cleared, head back to the Iron Castle and select the Bomb from the Item Screen. Head outside to blast open the rusty door and go back inside to clear the event.