LKAB Malmberget is a Swedish mining site located at Malmberget, Sweden. Seven boiler centers are located in the north part of Malmberget. There are no connections in between these boiler centers, meaning that it is a decentralized heating system. The heat generated is used to heat up buildings and for mine ventilation air mainly during the cold periods. The heat is mainly provided from electric and oil boilers. However, most boilers under use are over 20 years old, and it is time to retrofit the boiler system and infrastructure. The purpose of this work is to design and optimize the heating system by introducing an integrated concept to minimize the heat production cost.An optimization model based on the mixed integer linear programming (MILP) has been developed. Several technical options have been considered in a new centralized heating system. The optimization principle is based on two kinds of perspectives: current price and external costs. With consideration of environmental and health damage from society concerns point of view, instead of environmental taxes in the current price perspective, the monetary values of externalities due to pollutants such as CO2, NOx, SO2 and particulates emitted from the heating system are included. On the basis of data input and assumptions, modeling results indicate that a lower cost could be achieved when a waste heat recovery boiler is installed at the older pelletization plant to recover sensible heat from flue gas. This technical option is the best solution or at least contributes to the best solution in all optimization results. Including the externality cost is useful for making fair evaluation of the social-environmental impacts of the alternatives.