Here's a good tutorial: https://www.youtube.com/watch?v=5a1bLBcagA8
I wouldn't think that using pallet wood for a fireplace surround would meet fire code specifications. Any building inspectors out there who might know if this would not pass inspection?
I don't think I would, unless it's just on the exterior as a decorative element.
Can we assume you are talking about a faux fireplace?
hometalk has some ideas: