From StrategyWiki, the free strategy guide and walkthrough wiki

The goal here is to find the Cave of Sha Mori.

The person standing at Pax Tharkas is Gilthana, who takes the party to the Elven village to heal them. A short cutscene ensues. Cool castle in the background though. Afterwards, he will accompany you to the cave entrance and open the door for you. Far to the north west there is a blacksmith who will provide your party (except Raistlin) with better armor. The cave can be found almost directly South West of the Elven village. Take a walk as far South as you can go, and then turn West for a bit to find the cave. True to his word, Gilthana will open the door for you but will decline to enter it himself. It looks like your back on your own but that's all right, I'm still here to help you. =)