you can't drop tools, they equip and overwrite old ones at this time.
to equip a new version of a tool (whether for better or worse) (Copper -> iron -> copper (start -> better -> worse)) - you must select that tool, then hit e on the new tool
if you're not selected on the same tool, hitting E will do nothing.
the only time this doesn't apply is at the beginning when you have no tools to select - you can hit E while on any other tool as long as the slot the tool being equipped goes in is unselectable/empty
Empty -> any
Filled -> must be selected