* Canadian National project backed by Quebec pension fund

* Railway needed for mine projects to proceed

* Junior miners fear transport costs may run too high

* Some miners discuss developing their own railway

* Project part of Quebec's 25-yr plan to develop north

By Susan Taylor and Julie Gordon

TORONTO, July 9 (Reuters) - Canada's biggest railroad wants to build a C$5 billion ($4.8 billion) rail line to ship iron ore from isolated northern Quebec to port, a crucial link that could transform Canada into the world's third-largest producer of steel's main component.

Canadian National Railway Co's 's 800-kilometer (500 mile) project, backed by Quebec's public pension fund, is still years away from becoming a reality. Indeed, the 2017 projected start-up date looks ambitious, given the complexity of negotiations that lie ahead.

The junior miners needed to fill the rail cars want to keep a lid on transport costs, and some have even floated the idea of building their own rail line rather than signing on to CN's plan.

The proposed railway also faces an intensive consultation process with governments and local native groups before work can begin. Assuming those talks are successful, construction over the rugged terrain would take three years to complete.

Stretching from the Port of Sept-Iles on the St. Lawrence River to north of Schefferville, on the border between Quebec and the province of Newfoundland and Labrador, the line will pass numerous mining projects in the Labrador Trough - a geological formation rich in iron ore.

There are already two rail lines in the region but their capacity is insufficient to meet demand from planned new mines in northern Quebec and Labrador.

The Quebec government says the region represents potential private investments of more than C$20 billion.

The privately funded rail project is just one piece of Quebec's far-reaching Plan Nord, a 25-year plan that targets C$80 billion in public and private investments to develop a resource-rich area of 1.2 million square km, roughly the size of South Africa, with mining, renewable energy and infrastructure.

The whole plan is contentious for Quebec's aboriginal Innu people, who last week blocked access to mines and development-stage projects in the Trough in protest against Plan Nord, which they say will damage the environment and their traditional way of life.

BIG POTENTIAL

For CN, the railroad could bring a huge boost to its annual revenue, said RBC Capital Markets analyst Walter Spracklin.

"If the contemplated mines do come through, this could be upwards of C$2 billion in annual revenue for Canadian National," the transportation analyst said.

CN needs to ship at least 75 million to 80 million tonnes a year for the project to be feasible. But Spracklin said his conservative estimate of 125 million tonnes translates into rail revenue of C$2.2 billion. In 2011, CN recorded C$9 billion in revenue.

"It's not a slam dunk," Spracklin said, pointing to heavy capital requirements, uncertainty around the planned mining projects and the sheer remoteness of the location. "It's not like there was this gem of an opportunity out there for anyone who wanted to pick it."

CN's partner in the plan is Caisse de depot et placement du Quebec, which manages the Quebec pension fund and will own a third of the railway.

"We're a long-term investor and infrastructure are the type of projects where we like to invest," said spokesman Maxime Chagnon. "We always want to have a partnership with businesses that are leaders in their sector."

BIG FEARS

The revenue numbers are big enough to stoke fear among junior miners, who need a railway to get ore to market but cannot operate mines profitably if transport costs run too high.

"Rail is definitely a service that the industry badly needs," said Sandy Chim, chief executive of Century Iron Mines Corp, which is developing the Attikamagen Lake iron-mine project near Schefferville with partner Champion Minerals Inc.

Chim worries that CN's plan, which asks miners to make minimum volume commitments and pay rates tied to the final project cost, is too profit focused and could hurt development.

He wants assurances that the railway is there to support the miners, rather than squeeze profits from them, with a long-term set rate system that ensures fair returns.

"To make Canada the third-largest producer, Canada has got to have some long-term competitiveness on a very major cost component - which is the infrastructure," he said.

Current Canadian output of the metal, which is too heavy to be transported by truck, is around 40 million tonnes a year, while top global producers Australia and Brazil have a combined output of more than 850 million tonnes a year.

Assuming the Labrador Trough projects go ahead, as well as the huge Mary River mine on Baffin Island in the Canadian Arctic, Canada could produce as much as 250 million tonnes a year by 2020, overtaking India as the world's No. 3 producer.

China is also a big producer, but the government does not release detailed production figures.

PROFIT FOCUS

The iron-rich Labrador Trough stretches some 1,500 km along the border between Quebec and Labrador.

Mines were first developed there in the 1950s, but many closed or were sold during the 1980s and 1990s as demand fell. With the recent rise in iron ore prices, driven by rapid urbanization in China and India, the Trough is booming again.

Companies such as Century, Alderon Iron Ore Corp, and New Millenium Iron Corp are all developing projects there. Add expansions from current producers like ArcelorMittal and Cliffs Natural Resources Inc, and all eyes are on the region's limited infrastructure - especially rail.

The new production will easily surpass capacity on the region's two existing railways, one of which is privately owned by Arcelor and unlikely to be contracted out to other miners.

The second rail line, owned by Rio Tinto's Iron Ore Co of Canada, has extra capacity. But it is expected to fill up over the next three to five years as new mines start producing.

"At the end of the day, it is only one line with 80 million tonnes of capacity," said Tayfun Eldem, chief executive of Alderon. "Once you get to 80 million tonnes, that's it."

Alderon is in talks with Rio's common carrier line to ship material from its Kami project to port, but some other junior miners have held preliminary talks on building their own railway. Without a third railway, many of the new mines will simply not be built.

Century's Chim floated a plan earlier this year for a shared rail line with Adriana Resources Inc and Champion. China's deep-pocketed Wuhan Iron and Steel Co Ltd is a strategic investor in both Century and Adriana.

Chim has stepped back from that plan since then, saying he hopes talks can bring Canadian National, the miners and government together. The railway said it has been talking with customers and feels its project is robust.

"We believe in the great economic potential for the northern region of Quebec," said CN spokeswoman Julie Senecal.

A China-financed plan would also have less political appeal than the "made in Quebec" partnership of Montreal-based CN and the Caisse, the province's pension fund.

"We have a very good opportunity here to go from a region of untapped potential and to start tapping that potential and to realize the value from it," said Adam Low, a mining analyst with Raymond James in Toronto.