Yes, you also need to have Level 1 Smithing, i.e. to mine successfully about 10 times first. That's a good point! (You're one of the few people who has seen the (to me, hilarious) 'fail' dialogue, then.)

There are going to be dialogue 'skill checks' like that throughout the full game--there's never any penalty for failing, and you can always try again later. There's only the one in the demo, so it kind of stands out.

Very likely the exact wording is a result of trying to fit the text neatly in one message box.

I only use \nb for a few things, as a stylstic choice, actually. (The game is not super stylistically consistent in how it uses icons and text and textual widget, but I'm working on it; workshop descriptions use \nb, conversations don't.