EXHIBIT 4.06

                          Archangel Diamond Corporation

                                                               December 19, 2002

Mr. Gerald E. Davis
34 Lark Bunting LN
Littleton, Colorado
80127


Dear Mr. Davis:

     The  purpose  of  this  letter  is to set  forth  the  arrangement  between
Archangel Diamond Corporation (the "Company") and Gerald E. Davis ("Davis") with
respect  to (a)  certain  options  to  purchase  common  shares  of the  Company
("Options") that were previously issued to Davis under the Company's 1999 Equity
Incentive  Plan,  as Amended and  Restated in 2001 ("the  Option  Plan") and (b)
certain deferred compensation  ("Deferred  Compensation") payable to Davis under
the terms of his Executive  Employment  Agreement  with the Company,  as amended
January 1, 2002 (the "Employment Agreement").

The parties acknowledge and agree that:

     (a)  Davis has  agreed to resign as a director  and office of the  Company,
          effective December 19, 2002 and to terminate the Employment Agreement;

     (b)  under the Option Plan, all Options held b y Davis would expire 30 days
          from the date on which  Davis  ceases to be an officer or  director of
          the Company, unless otherwise determined by the Board of Directors;

     (c)  on December 19, 2002 the Board of Directors agreed to waive the 30-day
          expiry  period of the Options  referred to in (b) above and permit the
          Options to expire on the final expiry date provided when those Options
          were first issued;

     (d)  as of the date  hereof,  Davis holds  75,000  Options  exercisable  at
          C$0.23/share and expiring October 9, 2007, 200,000 Options exercisable
          at  C$0.50/share  and expiring  February 18, 2004 and 900,000  Options
          exercisable  at  C$0.11/share  and expiring  November 25, 2006,  for a
          total of 1,175,000 Options (the "Davis Options"); and

     (e)  the  Deferred  Compensation  payable  to Davis  under  the  Employment
          Agreement is US$50,322.30

In  consideration  of Davis agreeing to resign as an officer and director of the
Company  and  for  other  good  and  valuable  consideration,  the  receipt  and
sufficiency of which are acknowledged, the parties agree as follows:



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1.   Davis shall be permitted to keep all of the Davis Options, at their current
     exercise price,  until their  respective  final expiry dates stated in such
     Options.

2.   Davis  agrees to defer his right to  payment of the  Deferred  Compensation
     under the Employment Agreement as provided in paragraph 4 below.

3.   If at any time Davis  chooses to  exercise  any of the Davis  Options,  the
     Deferred  Compensation shall be used to pay the exercise price and shall be
     automatically  reduced by an amount equal to the funds required to exercise
     such Options.

4.   On the earlier of (a) the date on which Davis has  exercised  all the Davis
     Options and (b) the date on which Davis's Options expire, the Company shall
     pay Davis the balance of the  Deferred  Compensation  after all  reductions
     referred to in paragraph 3 above.

5.   Davis agrees that he hereby  relinquishes  all rights to any other payments
     that may be payable by the Company under the Employment Agreement.

6.   This agreement  shall be binding upon and shall enure to the benefit of the
     parties hereto and their respective  successors and assigns,  provided that
     Davis may not  assign  this  agreement  without  the prior  consent  of the
     Company.

7.   This  agreement  shall  be  subject  to,  governed  by,  and  construed  in
     accordance with the laws of the Province of Ontario and the federal laws of
     Canada applicable therein.


                                      ARCHANGEL DIAMOND
                                      CORPORATION


                                      By: /s/ Michael J.M. Farmiloe
                                          --------------------------------------
                                            Name:
                                            Title:

                                   **********

Agreed to and accepted by the undersigned this 19th day of December, 2002.

                                            )
                                            )
                                            )
/s/ Christopher Bent                        )            /s/ Gary E. Davis
--------------------                        )            -----------------------
Witness                                     )            Gary E. Davis
                                            )