Your assumptions are correct - head can be treated as a verb, meaning to move in a specified direction. For example.
After we got to the beach, we headed south.
After work, we all headed to the pub.
It's getting late, I think I'll head home.
... and to head on in this context simply means to continue on.
From that, we get head on back. Although it seems counterintuitive (and it is), head on back has become an idiomatic expression meaning to turn around and go back the way you came, or to some previous waypoint on your route.
After the hike, I headed back home.
I headed back down the river as the sun began to set.
You should head back home before the sun sets.
Go on back could also be used in your example:
Well, then go on back! Put that stone up there.
It seems equally counterintuitive, but is also commonly used in this context.