If both transactions close, Magma, which raised $100 million (US$90 million) in an initial public offering last month, would hold a 43.1 percent stake in HS Orka. It will have an option to increase this to 48.1 percent.
No price was given for the deal.
The transaction prices announced for the 10.8 percent stake value HS Orka at around $232 million, meaning a 32 percent interest could be worth $74 million, said Matt Gowing an analyst at Research Capital in Toronto.
"That's a huge chunk of the money they raised," Gowing told Reuters.
Magma, which was founded by well-known Vancouver-based mining entrepreneur Ross Beaty, was not immediately available for comment.
The company's stock ended unchanged at $1.85 on the Toronto Stock Exchange. Gowing said the stock would likely have risen had the overall market not been down nearly 3 percent.
Magma said in a statement it was selected as the preferred bidder for HS Orka through an auction process carried out by Reykjavik Energy on behalf of itself and two other HS Orka shareholders.
Magma, which is seeking to boost its geothermal power production capacity, said the two sides expect to conclude negotiations this month and close the deal in September.
"Assuming completion of the acquisitions, Magma's direct and indirect installed gross geothermal power production will increase to 86.4 megawatts immediately," Beaty said in a statement.
Gowing said about 20 percent of Iceland's electricity comes from geothermal power, which comes from hot water and steam produced deep below the earth's surface. It is piped to the surface and used to drive turbines to produce electricity.