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The Alchemical Furnace is required to produce Alchemical Alloy. Alchemical Coal must be placed in the inventory so that the Alchemical Furnace can be fired up.
To reach the desired temperature, the Alchemical Furnace is then shot with the fire spell. Beware, animals placed behind the furnace could take damage.
To be able to produce Alchemical Alloy, you must first find blueprints for it. You will find most of them in Haunted Land Chest's find.
The following items can be produced in the Alchemical Furnace:
Bronze Ingot
Corundum Ingot
Electrum Ingot
Palandium ingot
Steel Ingot
Veridium ingot
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