The Dwarven ancestor spirit is what is left behind when a Possessed pickaxe is killed. Speak to him to receive 10% extra mining experience (in the Lava Flow Mine) for 10 minutes. This bonus stacks with a Clan ring charged for mining. As he is a ghost, a Ghostspeak amulet or Cramulet is required to understand what he is saying. However, you don't need the amulet to receive the reward.
The spirit used to be the best miner in Keldagrim several centuries ago but one day he became only second in a competition and he was killed by a lava monster shortly after. Due to his inability to accept loss, the miner was unable to move on and remained in the mine. Currently, he is trying to have some fun by possessing pickaxes.