Yes, it does collect the fine dust. On average, I only have to empty the bags once or twice a year, and when I do, there is only about six or seven inches of dust in the lower bag. The drum is only about 18" in diameter. It is mounted on a stand that is attached to the base of the collector, so it does not take up that much room.
One thing to consider is if the separate is to close to the impeller, it may not separate the dust into the drum. For what you are wanting to do, you may be better off buying a dedicated cyclone dust collector.