I'm fine with iron nuggets because I see it more as a completionist thing. Gold nuggets exist, and 9 gold nuggets = 1 gold ingot, so why not make iron nuggets and iron ingots as a parallel structure?
Iron nugget recipes would be interesting (maybe change the tripwire hook to use iron nuggets instead of ingots?) But all I really want is for the smelting ratios to be better, for both iron and gold tools. It's probably too much effort to have a separate smelting recipe for every iron and gold tool, but if it went by durability and was slightly random, that would be reasonable. Make it so that smelting an undamaged tool or armor returns 1 gold or iron nugget + 0 to 1 nuggets per 30 durability. Yield would be:
Gold Tool: 1 to 2 nuggets
Flint and Steel: 1 to 3 nuggets, average 2
Gold Helmet: 1 to 3 nuggets, average 2
Gold Boots, Leggings, Chestplate: 1 to 4 nuggets, average 2-3
Iron Helmet: 1 to 6 nuggets, average 3-4
Iron Boots: 1 to 7 nuggets, average 4
Iron Leggings: 1 to 8 nuggets, average 4-5
Shears: 1 to 8 nuggets, average 4-5
Iron Chestplate: 1 to 9 nuggets, average 5-6
Iron Tool: 1 to 9 nuggets, average 5-6
This would make recycling of tools and armor dropped by zombies and skeletons more reasonable, although it would still be time-intensive.
AFAIK, the game's crafting and smelting mechanics don't seem to support such variation, so a new method may be needed.
As for recycling armor and tools from mobs, they could also drop a similar amount of nuggets if they don't drop their gear, so they would always provide better loot than the default unarmored and ungeared mobs.
It feels like a bit of a "joke" item, since in most cases, just plain using a near-broken tool to repair another tool is better, specially if neither is enchanted (Which means that the crafting grid can be used, which results in a tool with a bit more durability than the sum of both initial tools).
It's only real use in Vanilla right now is to get rid of Iron tools dropped by Zombies that the Player is unwilling to craft (For instance, if you think that iron shovels are a waste of iron because stone shovels are a lot cheaper) that are at a durability too low to be reused, and even then a zombie farm will allow them to somewhat-reliably get more of these items.