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We just played our first game of Small World: Underground, and we're not sure if we played the Iron Dwarves right.

The Iron Dwarves can get Silver Hammer tokens for occupying Mine regions, and it sounds like those hammer tokens are permanently gained, not used up when the dwarves use them for conquest.

The rules state:

Take your Silver Hammers back in hand and place them off the board, in front of you, where they will wait until the start of your next Conquest phase.

This sure sounds like they earn the 7 Hammers and then have 7 to use every turn as long as they feel like staying active. We played it this way, but the Iron Dwarves dominated heavily because they were also Immortal.

If we played it correctly, my next question for BGSE is going to be: "How do you counter Immortal Iron Dwarves?"

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Yes

You are playing this correctly. Perusing the rules and the BGG forums (where the designer posts occasionally) there isn't any doubt that the hammers accumulate to their maximum of 7 every turn.

It is also noted that the races and particularly race/power combinations are not meant to be balanced in Small World: Underground. Players should be expected to have to overpay when powerful combos show up and to be teamed up on in 3+ player games when they do get the powerful combo.

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