Aonikenk Chief Papon, who died a poor drunkard in 1892, had been in his heyday the supreme Chief of all the native groups that lived between the Santa Cruz River and the Strait of Magellan.
At the end of his life he was so poor that he sold at Punta Arenas a set of boleadoras that he believed were made of brass but were actually pure gold.
When asked about where he found the nuggets, Papon said that he found them by an ancient city that was buried under the recent lava flows of a nearby volcano (some believed that the city was the famous lost City of Caesars, mentioned in the previous chapter). This city, according to Papon was inhabited by dwarfs. 
His tribe occupied the area by Dinamarquero River and being nomads could also be found in the “interior zones of Ultima Esperanza” and after Papon’s death, at Valle del Zurdo.  I have marked these three areas with “light blue dots” on the map above.
The city that he mentions must have been located in that area, and the volcano that erupted near it, must be one of the active volcanoes shown within the “green triangle” on my map.
The volcanoes are marked with black triangles and the lava fields are shaded blue.
Some active Patagonian volcanoes
Viedma Volcano (49°21.5', 73°17'). Argentina, Santa Cruz. 1500 m .
Erupted in 1988 and is located under the ice sheet of the Southern Patagonian Ice Fields Northwest of Lake Viedma. It has four large craters or calderas. I doubt that this volcano could be the one mentioned by Papon.
Pali Aike Basalt Field (52°0', 70°0'). Argentina, Santa Cruz and also in Chile. 282 m.
It covers 3,000 km2 (1,170 sq.mi.) of basalt fields of “modern origin” (that is in a geological sense, as they date to Pleistocene or Holocene times). The youngest flows are in the Southeastern tip of the field.
The name in Aonikenk language means "country of the devil" and shows that they feared this area. It is protected by a Chilean National Park.
Regarding this field, Musters during his trip through Pali Aike in 1869, remarked that they had probably been formed not too long ago and was told by chief Casimiro (of the Aonikenk) about an active volcano belonging to that range whose eruption shook the ground and knocked down the natives’ tents and poisoned the water of some stream close to it. This may be Diablo volcano which has had “recent activity”.
Another report by the Chilean authorities based in Punta Arenas, dated 1847, stated that these same Indians (among which was Casimiro) reported an active volcano which has been identified as Mount Burney. Which “made the earth shake continuously”.
This seems to be a likely candidate for Papon's volcano.
Some recently recorded eruptions of Chilean volcanoes (there is a blank before the 1870s though as there were no settlements in the area): 
- Lautaro (49°01’S, 73°33’W) Chile, 1878-79, 1934-35, 1959-60, 1995, 1998.
- Burney (52°29’S, 73°24’W) Chile, 1910, 1970. ca. 3970 and 1500 BP
- Diablo (52°07’S, 73°24’W) not older than 15000 BP.
- Aguilera (50°20’S, 73°45’W) Chile, ca. 6300, 3345 BP
- Reclus (50°57’S, 73°35’W) Chile, ca. 14990 and 3345 BP
Any of these or even the Cerro del Fraile basalt field could have erupted in historic times and be remembered by Papon. However I am inclined to believe that we can reduce our search to Diablo volcano or to some small flows in the Basalt Fields close to Papon's tribal range.
I will keep researching on this matter and also look into lost cities in that area.
The original quote on Papon's city (23. Sept. 2010)
Below I copy the translated text regarding Papon's city.
the Aonikenk chief had told, with signs and words, about the existence of a city squashed by the volcanic lavas of very old eruptions. Besides, rcent eruptions completely covered the remains that until shortly before, marked the evident signs of the buried city. At the site indicted as the city's layout, chief Papon had picked up the piece of gold used to make his boleadora [...] there in the area that Papon had pointed out, was a site where fruit trees had been planted, and many have gathered petrified fruits 
Comments and possible "cities"
As you can see, the text states that the city was buried not once but twice (once long ago, the other burial recent). The petrified fruits and the fruit trees are interesting and may indicate a failed European colony.
But there were only two settlements in the area, both by Sarmiento de Gamboa, the failed Port Famine -actually its name was "Rey Felipe" close to current Punta Arenas, and "Nombre de Jesús" at the entrance to the Strait of Magellan, at Cape Virgenes.
There was another failed attempt to settle the Straits, and it was attempted by Captain de Gennes, under the auspices of the French crown in 1696. His fleet of six vessels however returned from the Straits without establishing a settlement.
It is noteworthy that the Spanish towns (1584) did plant some crops and also "vines and quince and other plants brought from Rio de Janeiro". Later, in 1699, Gouin de Beauchesne, a Frenchman, "sowed some seeds [...] which grew into healthy and vigorous plants" (we do not know if they were fruit trees or just garden vegetables.  Could these be the origin of the fruit trees mentioned by Papon?
What is a city?
We should consider what Papon would consider as a city. He had seen Punta Arenas (then a very small town - actually a village) but he had also been to Buenos Aires which at the time was a very big city with over one million inhabitants. The natives lived in mobile camps, with tents (toldos) made from sown guanaco skins. The mere notion of a town implies that its inhabitants were not Indians.
So, setting aside the absurd notion of Templar knights in Patagonia, or survivors of Atlantis, then the inhabitants of this city must have been Europeans perhaps shipwrecked survivors of some of the expeditions that explored the region and never returned home (i.e. Bishop of Plasencia).
In fact, this was believed true by the Spanish conquistadors, who believed that there was a mysterious city of Caesars in Patagonia. I will post on this enigmatic legend soon.
Last but not least, the "city" may have been some camp of rival natives that lived in the region maybe in caves and were destroyed by the eruption of a volcano (this is reflected in the Tachwull myth, dwarves who died in a cataclysm or the Chelep cave men.
There seems to be a lot of quotes based on articles published by Mateo Martinic Beros. Well I guess it is due to the fact that he has written many papers about the Strait of Magellan's history.
 Martinic B, Mateo, (2007). Los Cesares De La Patagonia, ¿Otra Fuente Indígena Para La Leyenda O Una Hasta Ahora Desconocida Creación Del Imaginario Aónikenk?Magallania, (Chile), 2007. Vol. 35(2)7-14.
 Martinic B, Mateo, (1995). Los Aonikenk Historia y Cultura. Punta Arenas: Vanic, Punta Arenas. pp. 153
 Grupo de Estudio y Seguimiento de Volcanes Activos. University of Buenos Aires.
 Map by Austin Whittall ©, based on Servicio Nacional de Geología y Minería, Chile and pp. 166 of The geology of Chile, Teresa Moreno, Geological Society, 2007.
 Martinic B, Mateo, (2008). Registro Historico de Antecedentes Volcanicos y Sismicos en la Patagonia Austral y La Tierra del Fuego. Magallania, Punta Arenas, v. 36, n. 2, nov. 2008.
 Martinic B, Mateo, (2000). El establecimiento de la agricultura en Magallanes (1843-1880). Historia (Santiago) v.33 Santiago.
 Payró Roberto, (2008). La Australia Argentina. Biblio Bazaar. pp. 97.
Patagonian Monsters - Cryptozoology, Myths & legends in Patagonia2010 International Year of Biodiversity Copyright 2009-2010 by Austin Whittall ©