The proximity sensor will sense the presence of both ferrous and non-ferrous objects; the presence of an object will cause a 0.4V swing on the output lead.
In order to use the sensor, you need to hook the read lead to +5 and the black lead to GND; the voltage output comes out of the white lead. Connect the white lead to an input of the A/D converter on the 6811, and you're ready to rock 'n' roll.