So this is a 3-wire sensor, ground, supply and an open-collector output (as far as I can see). I suggest powering it at 12V, and running a 1k resistor from its output to 5V rail.
Before connecting to Arduino check that the output switches from about 5V (no metal present) to about 0V (metal present) - any voltage higher than 5V means I'm wrong about its connection - don't connect it to Arduino!