Ummm pretty much, yeah. I mean you can't exactly just walk about in a custom level (not that we've found a way to do so, at least) but yes, you can recreate Mario 64 levels. Now that you mention it, it doesn't sound difficult at all. Just time-consuming.
I am actually finding the object creation to be a little lacking. It works a lot like Little Big Planet only WITHOUT a corner editor. Once you complete a 2D shape/profile you can adjust its thickness. The completed object can than be rotated in all three dimensions. You can place a lot of unique objects together with multiple rotations to make a more 3D shape. The system works but isn't that great. It is like a simple CAD program without the ability to extrude it around an axis (to make spherical shapes) or extrude following a specific path. There is also no way to tweak the size of the 2D profile as it increases in thickness (to make cone like shapes).
My Modnation Tracks: Christmas in the City, Wildcard's Stadium, Drillbit's Construction Yard, Carey's Castle, Sacred Grove, Sailor's Point City and more!!
Only thing you can do to make real 3D shapes like cones and such is put multiple shapes of materials onto each other. For example I made my own cone using several triangles rotated at 45 degrees followed by a circle at the cone end
Little King of LBP Level Recordings http://www.youtube.com/user/JHKthree