Kalay is Ivan's home town and important trading village in Angara. It is separated from the Karagol Sea by a chain of mountains and from Vault and Vale by a river. The bridge leading to Vault was smashed by rocks ejected from Mt. Aleph's eruption, but it is now repaired. You may want to pay a visit to these towns from the start of your journey to check for things that might have been missed.
Kalay is a fairly large town compared to most that you have visited so far on your journey. Most of the weapons here aren't significantly better than what you had before, but it's worth checking out. The Weapon seller even admits it himself that they aren't the best weapons. The armor shop, on the other hand, is significantly better. Most of the items sold here are better than what you have, so upgrade away. Near the Armor store is a nut hanging in a tree; use Catch to grab it.
Move to the north of town and pass through into a new map, containing Hammet's palace. The guards will stop you, but after seeing Ivan they take you inside. After a cutscene where, mercifully, you are spared from having to listen to the characters retell the whole story so far, another one begins that talks about Hammet and Ivan's history. Once it is finished, explore Hammet's palace a bit. There's a treasure chest in one room containing the Water Jacket. After you're finished, go back to the main town.
Talk to the residents, as they provide many useful hints on your future endeavors. As you go into the houses and wander the town, be sure to use Reveal to expose hidden items in barrels and boxes. Head to the northeastern corner of town, to the two story home, and walk up the stairs on the outside. Jump from the building to the grass on the cliff beside it. Take a few steps to the north, then use Move on the statue, and enter the door behind it.
As soon as you enter, you will see a statue, and a hole in the wall where water is pouring out. Push the statue in front of the water, and the pit it was going into will drain. Climb down the formerly submerged ladder and then up another to reach the Mars Djinni, Scorch. For now, exit the area, as you cannot currently reach the end. There is another entrance to the tunnel, but for now it is inaccessible.
This is the area to the south that lies on the Karagol Sea. The ship travels back and forth between Kalay and Tolbi, but recent attacks by the Kraken have greatly reduced the number of ships willing to go this route. You will need to buy a ticket to board the ship. For now, though, the ship is free to be explored at your leisure. They are waiting for a tour group from Kalay to arrive. To prompt their arrival, go to the Inn in Kalay after buying your ticket and go behind the counter to talk to the owner of the Inn, then try to exit the city again. The Tour group will come out and gather together, take roll call, and after a time, leave.
Kalay Tunnels (After Lunpa)
Spoiler warning! This section of the article contains spoilers, or hints about the game's storyline or progression.
You might want to skip down to the next heading if you do not want facts about the game's storyline or plot revealed to you.
Once you have returned Master Hammet, you will have full access to the tunnels. From Hammet's Palace, go through the right door and down the stairs; the gates that formerly blocked your path are now removed. Go through and down the stairs once more. You will see Bunza standing near you when you come out. South of him is a room with 4 treasure chests (containing Sleep Bomb, Lucky medal, Coins, and a Potion.) and a statue. Push the statue out of that area and in front of where the water is falling from to stop it, draining the area. Climb down the ladder, Frost the puddle, and then climb up the closest ladder and jump across to open the chest and get Spirit Gloves. Climb down, go back up near the statue and head north, up a set of stairs. Head south, then travel along the water to the left and up the north path to another set of stairs. Go up, and in that room up again. You are now in a cave-like area; run south. To the right is a treasure chest containing an apple. There is a door you can exit from here as well. Once outside, you can walk over to the tree and use Catch to grab the Nut off. You are now in the Kalay Tunnel "Entrance". Side down the ledge to your left to exit.