He's giving Cube recipes and tips.
A1 normal Smith -> Catalyst Of Disenchantment (COD); Unique + COD = Arcane Shard (AS); 5x AS = Arcane Crystal (AC)
Get the Catalyst of Disenchantment from the Smith in Act 1 Normal. Use it to turn Unique items into Arcane Shards, which you can then turn into Arcane Crystals.
Tiered Item (1-4) + 2xAC + Oil oF Enhancement (Vendor) = Unique item; any tier Unique + AC + any rune = +1 tier of Unique
Tiered Uniques have 4 tiers now. To create a Tiered Unique, cube any Tiered item with 2 Arcane Crystals and an Oil of Enhancement (which you purchase from a vendor). To uptier a Tiered Unique to the next highest tier, cube it with an Arcane Crystal and any Rune.
Act boss A1-2 normal = 1 Unique; Act boss A3 normal = 2x Unique, Act boss 4-5 normal = 2x Unique + 1-5 AS; Nm-Hell = 1-5 AS
Act 1 and Act 2 bosses (Andariel and Duriel) on Normal drop 1 Unique item, guaranteed. Act 3 Normal boss (Mephisto) drops 2 Uniques. Act 4 and Act 5 bosses (Diablo and Baal) drop 2 Uniques and 1-5 Arcane Shards. Nightmare and Hell Act bosses drop 1 to 5 Arcane Shards.