The sensor works using a iron cored coil with a magnet attached to one end. When a peice of ferrous metal is moved towards the end of the sensor it changes the shape of the magnetic field in the coil, this changing magnetic field then induces current to flow in the windings of the coil resulting in a small amount of electricity being generated.
This sensor only detects movement of ferrus objects near the sensor so is typically used for speed sensing (for example a wheel sensor in an ABS system) usually in combination with a toothed steel wheel.
They are very rugged sensors and are not affected by dirt and have a very high signal output making them less sensitive to noise (ideal for automotive applications)
For example the sensor I have made will generate a sine wave of 50Vp-p into a 1Kohm load (that is a peak of 50mV)